Europe's Philosophy of Failure

In France and Germany, students are being forced to undergo a dangerous indoctrination. Taught that economic principles such as capitalism, free markets, and entrepreneurship are savage, unhealthy, and immoral, these children are raised on a diet of prejudice and bias. Rooting it out may determine whether Europe's economies prosper or continue to be left behind.

Millions of children are being raised on prejudice and disinformation. Educated in schools that teach a skewed ideology, they are exposed to a dogma that runs counter to core beliefs shared by many other Western countries. They study from textbooks filled with a doctrine of dissent, which they learn to recite as they prepare to attend many of the better universities in the world. Extracting these children from the jaws of bias could mean the difference between world prosperity and menacing global rifts. And doing so will not be easy. But not because these children are found in the madrasas of Pakistan or the state-controlled schools of Saudi Arabia. They are not. Rather, they live in two of the world's great democracies -- France and Germany.

What a country teaches its young people reflects its bedrock national beliefs. Schools hand down a society's historical narrative to the next generation. There has been a great deal of debate over the ways in which this historical ideology is passed on -- over Japanese textbooks that downplay the Nanjing Massacre, Palestinian textbooks that feature maps without Israel, and new Russian guidelines that require teachers to portray Stalinism more favorably. Yet there has been almost no analysis of how countries teach economics, even though the subject is equally crucial in shaping the collective identity that drives foreign and domestic policies.

Just as schools teach a historical narrative, they also pass on "truths" about capitalism, the welfare state, and other economic principles that a society considers self-evident. In both France and Germany, for instance, schools have helped ingrain a serious aversion to capitalism. In one 2005 poll, just 36 percent of French citizens said they supported the free-enterprise system, the only one of 22 countries polled that showed minority support for this cornerstone of global commerce. In Germany, meanwhile, support for socialist ideals is running at all-time highs -- 47 percent in 2007 versus 36 percent in 1991.

It's tempting to dismiss these attitudes as being little more than punch lines to cocktail party jokes. But their impact is sadly and seriously self-destructive. In Germany, unemployment is finally falling after years at Depression-era levels, thanks in no small part to welfare reforms that in 2005 pressured Germans on the public dole to take up jobs. Yet there is near consensus among Germans that, despite this happy outcome, tinkering with the welfare state went far beyond what is permissible. Chancellor Angela Merkel, once heralded as Germany's own Margaret Thatcher, has all but abandoned her plans to continue free-market reforms. She has instead imposed a new "rich people tax," has tightened labor-market rules, and has promised renewed efforts to "regulate" globalization. Meanwhile, two in three Germans say they support at least some of the voodoo-economic, roll-back-the-reforms platform of a noisy new antiglobalization political party called Die Linke (The Left), founded by former East German communists and Western left-wing populists.

Many of these popular attitudes can be traced to state-mandated curricula in schools. It is there that economic lessons are taught that diverge substantially from the market-based principles on which the Western model is based. The phenomenon may hardly be unique to Europe, but in few places is it more obvious than in France and Germany. A biased view of economics feeds into many of the world's most vexing problems, from the growth of populism to the global rise of anti-American, anti-capitalist attitudes.

Economics À La Carte

"Economic growth imposes a hectic form of life, producing overwork, stress, nervous depression, cardiovascular disease and, according to some, even the development of cancer," asserts the three-volume Histoire du XXe siècle, a set of texts memorized by countless French high school students as they prepare for entrance exams to Sciences Po and other prestigious French universities. The past 20 years have "doubled wealth, doubled unemployment, poverty, and exclusion, whose ill effects constitute the background for a profound social malaise," the text continues. Because the 21st century begins with "an awareness of the limits to growth and the risks posed to humanity [by economic growth]," any future prosperity "depends on the regulation of capitalism on a planetary scale." Capitalism itself is described at various points in the text as "brutal," "savage," "neoliberal," and "American." This agitprop was published in 2005, not in 1972.

When French students are not getting this kind of wildly biased commentary on the destruction wreaked by capitalism, they are learning that economic progress is also the root cause of social ills. For example, a one-year high school course on the inner workings of an economy developed by the French Education Ministry called Sciences Economiques et Sociales, spends two thirds of its time discussing the sociopolitical fallout of economic activity. Chapter and section headings include "Social Cleavages and Inequality," "Social Mobilization and Conflict," "Poverty and Exclusion," and "Globalization and Regulation." The ministry mandates that students learn "worldwide regulation as a response" to globalization. Only one third of the course is about companies and markets, and even those bits include extensive sections on unions, government economic policy, the limits of markets, and the dangers of growth. The overall message is that economic activity has countless undesirable effects from which citizens must be protected.

No wonder, then, that the French default attitude is to be suspicious of market forces and private entrepreneurship, not to mention any policies that would strengthen them. Start-ups, Histoire du XXe siècle tells its students, are "audacious enterprises" with "ill-defined prospects." Then it links entrepreneurs with the tech bubble, the Nasdaq crash, and mass layoffs across the economy. (Think "creative destruction" without the "creative.") In one widely used text, a section on technology and innovation does not mention a single entrepreneur or company. Instead, students read a lengthy treatise on whether technological progress destroys jobs. In another textbook, students actually meet a French entrepreneur who invented a new tool to open oysters. But the quirky anecdote is followed by a long-winded debate over the degree to which the modern workplace is organized along the lines imagined by Frederick Taylor, the father of modern scientific management theory. And just in case they missed it in history class, students are reminded that "cultural globalization" leads to violence and armed resistance, ultimately necessitating a new system of global governance.

This is a world apart from what American high school students learn. In the United States, where fewer than half of high school students take an economics course, most classes are based on straightforward, classical economics. In Texas, the state-prescribed curriculum requires that the positive contribution of entrepreneurs to the local economy be taught. The state of New York, meanwhile, has coordinated its curriculum with entrepreneurship-promoting youth groups such as Junior Achievement, as well as with economists at the Federal Reserve. Do American schools encourage students to follow in the footsteps of Bill Gates or become ardent fans of globalization? Not really. But they certainly aren’t filling students with negative preconceptions and suspicions about businesses and the people who run them. Nor do they obsess about the negative side effects and dangers of economic activity the way French textbooks do.

French students, on the other hand, do not learn economics so much as a very specific, highly biased discourse about economics. When they graduate, they may not know much about supply and demand, or about the workings of a corporation. Instead, they will likely know inside-out the evils of "la McDonaldisation du monde" and the benefits of a "Tobin tax" on the movement of global capital. This kind of anticapitalist, antiglobalization discourse isn’t just the product of a few aging 1968ers writing for Le Monde Diplomatique; it is required learning in today’s French schools.

Learning to Love the Dole

Germans teach their young people a similar economic narrative, with a slightly different emphasis. The focus is on instilling the corporatist and collectivist traditions of the German system. Although each of Germany's 16 states sets its own education requirements, nearly all teach through the lens of workplace conflict between employer and employee, the central battle being over wages and work rules. If there's one unifying characteristic of German textbooks, it's the tremendous emphasis on group interests, the traditional social-democratic division of the universe into capital and labor, employer and employee, boss and worker. Textbooks teach the minutiae of employer-employee relations, workplace conflict, collective bargaining, unions, strikes, and worker protection. Even a cursory look at the country's textbooks shows that many are written from the perspective of a future employee with a union contract. Bosses and company owners show up in caricatures and illustrations as idle, cigar-smoking plutocrats, sometimes linked to child labor, Internet fraud, cell-phone addiction, alcoholism, and, of course, undeserved layoffs. The successful, modern entrepreneur is virtually nowhere to be found.

German students will be well-versed in many subjects upon graduation; one topic they will know particularly well is their rights as welfare recipients. One 10th-grade social studies text titled FAKT has a chapter on "What to do against unemployment." Instead of describing how companies might create jobs, the section explains how those without jobs can organize into self-help groups and join weekly anti-reform protests "in the tradition of the East German Monday demonstrations" (which in 1989 helped topple the communist dictatorship). The not-so-subtle subtext? Jobs are a right to be demanded from the government. The same chapter also details various welfare programs, explains how employers use the threat of layoffs as a tactic to cut pay, and concludes with a long excerpt from the platform of the German Union Federation, including the 30-hour work week, retirement at age 60, and redistribution of the work pie by splitting full-time into part-time jobs. No market alternative is taught. When fakt presents the reasons for unemployment, it blames computers and robots. In fact, this is a recurring theme in German textbooks -- the Internet will turn workers into "anonymous code" and kill off interpersonal communication.

Equally popular in Germany today are student workbooks on globalization. One such workbook includes sections headed "The Revival of Manchester Capitalism," "The Brazilianization of Europe," and "The Return of the Dark Ages." India and China are successful, the book explains, because they have large, state-owned sectors and practice protectionism, while the societies with the freest markets lie in impoverished sub-Saharan Africa. Like many French and German books, this text suggests students learn more by contacting the antiglobalization group Attac, best known for organizing messy protests at the annual G-8 summits.

One might expect Europeans to view the world through a slightly left-of-center, social-democratic lens. The surprise is the intensity and depth of the anti-market bias being taught in Europe’s schools. Students learn that private companies destroy jobs while government policy creates them. Employers exploit while the state protects. Free markets offer chaos while government regulation brings order. Globalization is destructive, if not catastrophic. Business is a zero-sum game, the source of a litany of modern social problems. Some enterprising teachers and parents may try to teach an alternative view, and some books are less ideological than others. But given the biases inherent in the curricula, this background is unavoidable. It is the context within which most students develop intellectually. And it's a belief system that must eventually appear to be the truth.

Can Old Europe Do New Tricks?

This bias has tremendous implications that reach far beyond the domestic political debate in these two countries. These beliefs inform students' choices in life. Taught that the free market is a dangerous wilderness, twice as many Germans as Americans tell pollsters that you should not start a business if you think it might fail. According to the European Union's internal polling, just two in five Germans and French would like to be their own boss, compared to three in five Americans. Whereas 8 percent of Americans say they are currently involved in starting a business, that's true of only 2 percent of Germans and 1 percent of the French. Another 28 percent of Americans are considering starting a business, compared to just 11 percent of the French and 18 percent of Germans. The loss to Europe's two largest economies in terms of jobs, innovation, and economic dynamism is severe.

Attitudes and mind-sets, it is increasingly being shown, are closely related to a country's economic performance. Edmund Phelps, a Columbia University economist and Nobel laureate, contends that attitudes toward markets, work, and risk-taking are significantly more powerful in explaining the variation in countries' actual economic performance than the traditional factors upon which economists focus, including social spending, tax rates, and labor-market regulation. The connection between capitalism and culture, once famously described by Max Weber, also helps explain continental Europe's poor record in entrepreneurship and innovation. A study by the Massachusetts-based Monitor Group, the Entrepreneurship Benchmarking Index, looks at nine countries and finds a powerful correlation between attitudes about economics and actual corporate performance. The researchers find that attitudes explain 40 percent of the variation in start-up and company growth rates -- by far the strongest correlation of any of the 31 indicators they tested. If countries such as France and Germany hope to boost entrepreneurship, innovation, and economic dynamism -- as their leaders claim they do -- the most effective way to make that happen may be to use education to boost the cultural legitimacy of going into business.

The deep anti-market bias that French and Germans continue to teach challenges the conventional wisdom that it's just a matter of time, thanks to the pressures of globalization, before much of the world agrees upon a supposedly "Western" model of free-market capitalism. Politicians in democracies cannot long fight the preferences of the majority of their constituents. So this bias will likely continue to circumscribe both European elections and policy outcomes. A likely alternative scenario may be that the changes wrought by globalization will awaken deeply held resentment against capitalism and, in many countries from Europe to Latin America, provide a fertile ground for populists and demagogues, a trend that is already manifesting itself in the sudden rise of many leftist movements today.

Minimal reforms to the welfare state cost former German Chancellor Gerhard Schröder his job in 2005. They have also paralyzed modern German politics. Former communists and disaffected Social Democrats, together with left-wing Greens, have flocked to Germany's new leftist party, whose politics is a distasteful mix of anticapitalist demagoguery and right-wing xenophobia. Its platform, polls show, is finding support even among mainstream Germans. A left-leaning majority, within both the parliament and the public at large, makes the world's third-largest economy vulnerable to destructive policies driven by anticapitalist resentment and fear of globalization. Similar situations are easily conceivable elsewhere and have already helped bring populists to power in Latin America. Then there is France, where President Nicolas Sarkozy promised to "rupture" with the failed economic policies of the past. He has taken on the country's public servants and their famously lavish benefits, but many of his policies appear to be driven by what he calls "economic patriotism," which smacks of old-fashioned industrial protectionism. That's exactly what French schoolchildren have long learned is the way the world should work.

Both the French and German cases show the limits of trying to run against the grain of deeply held economic ideology. Yet, training the next generation of citizens to be prejudiced against being enterprising and productive is equally foolhardy. Fortunately, such widespread attitudes and the political outcomes they foster aren't only determined by tradition and history. They are, to a great extent, the product of education. If countries like France and Germany hope to get their nations on a new economic track, they might start paying more attention to what their kids are learning in the classroom.


The Coming Financial Pandemic

The U.S. financial crisis cannot be contained. Indeed, it has already begun to infect other countries, and it will travel further before it's done. From sluggish trade to credit crunches, from housing busts to volatile stock markets, this is how the contagion will spread.

For months, economists have debated whether the United States is headed toward a recession. Today, there is no doubt. President George W. Bush can tout his $150 billion economic stimulus package, and the Federal Reserve can continue to cut short-term interest rates in an effort to goose consumer spending. But those moves are unlikely to stop the economy's slide. The severe liquidity and credit crunch from the subprime mortgage bust is now spreading to broader credit markets, $100 barrels of oil are squeezing consumers, and unemployment continues to climb. And with the housing market melting down, empty-pocketed Americans can no longer use their homes as ATMs to fund their shopping sprees. It's time to face the truth -- the U.S. economy is no longer merely battling a touch of the flu; it's now in the early stages of a painful and persistent bout of pneumonia.

Meanwhile, other countries are watching anxiously, hoping they don't get sick, too. In recent years, the global economy has been unbalanced, with Americans spending more than they earn and the country running massive external deficits. When the subprime mortgage crisis first hit headlines last year, observers hoped that the rest of the world had enough growth momentum and domestic demand to gird itself from the U.S. slowdown. But making up for slowing U.S. demand will be difficult, if not impossible. American consumers spend about $9 trillion a year. Compare that to Chinese consumers, who spend roughly $1 trillion a year, or Indian consumers, who spend only about $600 billion. Even in wealthy European and Japanese households, low income growth and insecurities about the global economy have caused consumers to save rather than spend. Meanwhile, countries such as China rely on exports to sustain their high economic growth. So there’s little reason to believe that global buyers will pick up the slack of today’s faltering American consumer, whose spending has already begun to drop.

Because the United States is such a huge part of the global economy -- it accounts for about 25 percent of the world's GDP, and an even larger percentage of international financial transactions -- there's real reason to worry that an American financial virus could mark the beginning of a global economic contagion. It may not devolve into a worldwide recession, but at the very least, other nations should expect sharp economic downturns, too. Here's how it will happen:

TRADE WILL DROP: The most obvious way that a U.S. recession could spill over elsewhere in the world is through trade. If output and demand in the United States fall -- something that by definition would happen in a recession -- the resulting decline in private consumption, capital spending by companies, and production would lead to a drop in imports of consumer goods, capital goods, commodities, and other raw materials from abroad. U.S. imports are other countries' exports, as well as an important part of their overall demand. So such a scenario would spell a drop in their economic growth rates, too. Several significant economies -- including Canada, China, Japan, Mexico, South Korea, and much of Southeast Asia -- are heavily dependent on exports to the United States. China, in particular, is at risk because so much of its double-digit annual growth has relied on the uptick of exports to the United States. Americans are the world’s biggest consumers, and China is one of the world's largest exporters. But with Americans reluctant to buy, where would Chinese goods go?

China is also a good example of how indirect trade links would suffer in an American recession. It once was the case that Asian manufacturing hubs such as South Korea and Taiwan produced finished goods, like consumer electronics, that were exported directly to American retailers. But with the rise of Chinese competitiveness in manufacturing, the pattern of trade in Asia has changed: Asian countries increasingly produce components, such as computer chips, for export to China. China then takes these component parts and assembles them into finished goods -- say, a personal computer -- and exports them to American consumers. Therefore, if U.S. imports fall, then Chinese exports to the United States would fall. If Chinese exports fall, then Chinese demand for component parts from the rest of Asia would fall, spreading the economic headache further.

A WEAK DOLLAR WILL MAKE MATTERS WORSE: Already, the economic slowdown in the United States and the Fed's interest rate cuts have caused the value of the dollar to drop relative to many floating currencies such as the euro, the yen, and the won. This weaker dollar may stimulate U.S. export competitiveness, because those countries will be able to buy more for less. But, once again, it is bad news for other countries, such as Germany, Japan, and South Korea, who rely heavily on their own exports to the United States. That's because the strengthening of their currencies will increase the price of their goods in American stores, making their exports less competitive.

HOUSING BUBBLES WILL BURST WORLDWIDE: The United States isn't the only country that experienced a housing boom in recent years. Easy money and low, long-term interest rates were plentiful in other countries, too, particularly in Europe. The United States also isn’t the only country that has experienced a housing bust: Britain, Ireland, and Spain lag only slightly behind the United States as the value of their flats and villas trends downward. Countries with smaller but still substantial real estate bubbles include France, Greece, Hungary, Italy, Portugal, Turkey, and the Baltic nations. In Asia, countries including Australia, China, New Zealand, and Singapore have also experienced modest housing bubbles. There's even been a housing boom in parts of India. Inevitably, such bubbles will burst, as a credit crunch and higher interest rates poke holes in them, leading to a domestic economic slowdown for some and outright recession for others.

COMMODITY PRICES WILL FALL: One need only look at the skyrocketing price of oil to see that worldwide demand for commodities has surged in recent years. But those high prices won't last for long. That's because a slowdown of the U.S. and Chinese economies -- the two locomotives of global growth -- will cause a sharp drop in the demand for commodities such as oil, energy, food, and minerals. The ensuing fall in the prices of those commodities will hurt the exports and growth rate of commodity exporters in Asia, Latin America, and Africa. Take Chile, for example, the world’s biggest producer of copper, which is widely used for computer chips and electrical wiring. As demand from the United States and China falls, the price of copper, and therefore Chile’s exports of it, will also start to slide.

FINANCIAL CONFIDENCE WILL FALTER: The fallout from the U.S. subprime meltdown has already festered into a broader and more severe liquidity and credit crunch on Wall Street. That, in turn, has spilled over to financial markets in other parts of the world. This financial contagion is impossible to contain. A huge portion of the risky, radioactive U.S. securities that have now collapsed -- such as the now disgraced residential mortgage-backed securities and collateralized debt obligations -- were sold to foreign investors. That's why financial losses from defaulting mortgages in American cities such as Cleveland, Las Vegas, and Phoenix are now showing up in Australia and Europe, even in small villages in Norway.

Consumer confidence outside the United States -- especially in Europe and Japan -- was never strong; it can only become weaker as an onslaught of lousy economic news in the United States dampens the spirits of consumers worldwide. And as losses on their U.S. operations hit their books, large multinational firms may decide to cut back new spending on factories and machines not just in the United States but everywhere. European corporations will be hit especially hard, as they depend on bank lending more than American firms do. The emerging global credit crunch will limit their ability to produce, hire, and invest.

The best way to see how this financial flu spreads is by watching global stock markets. Investors become more risk averse when their economies appear to be slowing down. So whenever there's bad economic news in the United States -- say, reports of higher unemployment or negative GDP growth -- there are worries that other economies will suffer, too. Investors sell off their stocks in New York and the Dow Jones plunges. You can expect a similarly sharp fall when the Nikkei opens in Tokyo a few hours later, and the ripple effect then continues in Europe when opening bells ring in Frankfurt, London, and Paris. It's a vicious circle; the market volatility culminates in a kind of panicky groupthink, causing investors to dump risky assets from their portfolios en masse. Such financial contagion was on prime display when global equity markets plummeted in January.


Optimists may believe that central banks can save the world from the painful side effects of an American recession. They may point to the world’s recovery from the 2001 recession as a reason for hope. Back then, the U.S. Federal Reserve slashed interest rates from 6.5 percent to 1 percent, the European Central Bank dropped its rate from 4 percent to 2 percent, and the Bank of Japan cut its rate down to zero. But today, the ability of central banks to use monetary tools to stimulate their economies and dampen the effect of a global slowdown is far more limited than in the past. Central banks don't have as free a hand; they are constrained by higher levels of inflation. The Fed is cutting interest rates once again, but it must worry how the disorderly fall of the dollar could cause foreign investors to pull back on their financing of massive U.S. debts. A weaker dollar is a zero-sum game in the global economy; it may benefit the United States, but it hurts the competitiveness and growth of America's trading partners.

Monetary policy will also be less effective this time around because there is an oversupply of housing, automobiles, and other consumer goods. Demand for these goods is less sensitive to changes in interest rates, because it takes years to work out such gluts. A simple tax rebate can hardly be expected to change this fact, especially when credit card debt is mounting and mortgages and auto loans are coming due.

The United States is facing a financial crisis that goes far beyond the subprime problem into areas of economic life that the Fed simply can't reach. The problems the U.S. economy faces are no longer just about not having enough cash on hand; they're about insolvency, and monetary policy is ill equipped to deal with such problems. Millions of households are on the verge of defaulting on their mortgages. Not only have more than 100 subprime lenders gone bankrupt, there are riding delinquencies on more run-of-the-mill mortgages, too. Financial distress has even spread to the kinds of loans that finance excessively risky leveraged buyouts and commercial real estate. When the economy falls further, corporate default rates will sharply rise, leading to greater losses. There is also a "shadow banking system," made up of non-bank financial institutions that borrow cash or liquid investments in the near term, but lend or invest in the long term in nonliquid forms. Take money market funds, for example, which can be withdrawn overnight, or hedge funds, some of which can be redeemed with just one month's notice. Many of these funds are invested and locked into risky, long-term securities. This shadow banking system is therefore subject to greater risk because, unlike banks, they don't have access to the Fed’s support as the lender of last resort, cutting them off from the help monetary policy can provide.

Beyond Wall Street, there is also much less room today for fiscal policy stimulus, because the United States, Europe, and Japan all have structural deficits. During the last recession, the United States underwent a nearly 6 percent change in fiscal policy, from a very large surplus of about 2.5 percent of GDP in 2000 to a large deficit of about 3.2 percent of GDP in 2004. But this time, the United States is already running a large structural deficit, and the room for fiscal stimulus is only 1 percent of GDP, as recently agreed upon in President Bush’s stimulus package. The situation is similar for Europe and Japan.

President Bush's fiscal stimulus package is too small to make a major difference today, and what the Fed is doing now is too little, too late. It will take years to resolve the problems that led to this crisis. Poor regulation of mortgages, a lack of transparency about complex financial products, misguided incentive schemes in the compensation of bankers, wrongheaded credit ratings, poor risk management by financial institutions -- the list goes on and on.

Ultimately, in today's flat world, interdependence boosts growth across countries in good times. Unfortunately, these trade and financial links also mean that an economic slowdown in one place can drag down everyone else. Not every country will follow the United States into an outright recession, but no one can claim to be immune.