23 Things They Don't Tell You About Capitalism

This argument has been very influential. In the 1970s, a popular explanation of Britain’s then lacklustre economic performance was that its welfare state had become bloated and its trade unions overly powerful (which is also partly due to the welfare state, insofar as the latter dulls the threat of unemployment). In this reading of British history, Margaret Thatcher saved Britain by putting unions in their place and reducing the welfare state, even though what actually happened is more complicated. Since the 1990s, this view of the welfare state has become even more popular with the (allegedly) superior growth performance of the US to those of other rich countries with bigger welfare states.[2] When governments in other countries try to cut their welfare spending, they frequently cite Mrs Thatcher’s curing of the so-called ‘British Disease’ or the superior dynamism of the US economy.

But is it true that greater job security and a bigger welfare state make an economy less productive and dynamic?

As in our Korean example, a lack of job security can lead youngsters to make conservative choices with their career, favouring secure jobs in medicine or the law. This may be the right choice for them individually, but it leads to a misallocation of talents and thus reduces economic efficiency and dynamism.

The weaker welfare state in the US has been one important reason why trade protectionism is much stronger there than in Europe, despite a greater acceptance of government intervention in the latter. In Europe (of course, I am ignoring national differences in the details), if your industry declines and you lose your job, it is a big blow but not the end of the world. You will still keep your health insurance and public housing (or housing subsidies), while receiving unemployment benefits (up to 80 per cent of your last pay), government-subsidized retraining and government help in your job search. In contrast, if you are a worker in the US, you’d better make sure you hold on to your current job, if necessary through protectionism, because losing your job means losing almost everything. Unemployment insurance coverage is patchy and of shorter duration than in Europe. There is little public help with retraining and job search. More frighteningly, losing your job means losing your health insurance and probably your home, as there is little public housing or public subsidies for your rent. As a result, worker resistance to any industrial restructuring that involves job cuts is much greater in the US than in Europe. Most US workers are unable to put up an organized resistance, but those who can – unionized workers – will, understandably, do everything they can to preserve the current job distribution.

As the above examples show, greater insecurity may make people work harder, but it makes them work harder in the wrong jobs. All those talented Korean youngsters who could be brilliant scientists and engineers are labouring over human anatomy. Many US workers who could – after appropriate retraining – be working in ‘sunrise’ industries (e.g., bio-engineering) are grimly holding on to their jobs in ‘sunset’ industries (e.g., automobiles), only delaying the inevitable.

The point of all the above examples is that, when people know they will have a second (or third or even fourth) chance, they will be much more open to risk-taking when it comes to choosing their first job (as in the Korean example) or letting go of their existing jobs (as in the US– Europe comparison).

Do you find this logic strange? You shouldn’t. Because this is exactly the logic behind bankruptcy law, which most people accept as ‘obvious’.

Before the mid nineteenth century, no country had a bankruptcy law in the modern sense. What was then called bankruptcy law did not give bankrupt businessmen much protection from creditors while they restructured their business – in the US, ‘Chapter 11’ now gives such protection for six months. More importantly, it did not give them a second chance, as they were required to pay back all debts, however long it took, unless the creditors gave them a ‘discharge’ from the duty. This meant that, even if the bankrupt businessman somehow managed to start a new business, he had to use all his new profits to repay the old debts, which hampered the growth of the new business. All this made it extremely risky to start a business venture in the first place.