The Revenge of the Europoors, or How Europe Will Win the 21st Century
Spoiler: it won’t be by working harder
The original (Spanish) version of this article can be found here.
In case you hadn’t heard, the political hit of the moment goes like this: Ever since Trump began steering the United States further and further from Europe — and especially since European countries refused to join the war against Iran — the Trumpist hive mind has set its sights on the old continent. As if anticipating the coming conflict, which will almost certainly threaten death and destruction between the US and the EU, thousands of users have spent months flooding social media with the idea that we Europeans are poor, lazy, and incapable of surviving on our own on the global stage. They’ve even given us a name. We’re no longer “Europeans” — we’re “Europoors.”
Last week, in that charged atmosphere, a debate broke out among the global economic elite about Europe’s future — and, by extension, yours and mine. I had planned to spend the weekend out in the meadows — it’s San Isidro in Madrid — but I couldn’t help myself and ended up buried in articles by Paul Krugman, Luis Garicano, Noah Smith, and Branko Milanovic ovic so I could tell you about it.
Because my gut feeling — which I’m sure you’ll share by the time you finish reading — is that this topic is far more than an economic technicality. It’s an all-out battle over which model of civilization will prevail in the 21st century. Economics is the method, as Margaret Thatcher would say; the goal is to change the soul and heart of Westerners.
Here we go.
This has been building for a while. For a decade now, the Calvinist soul of the European establishment has been disowning the continent’s… let’s say epicurean drift. Europe isn’t trying hard enough — they warn — it has given in to habits typical of a decadent society, it isn’t productive, and it’s falling behind. So much so that former ECB governor Mario Draghi, in a report commissioned by the European Commission on the competitiveness of the eurozone, warned that Europe is not simply in an economic rough patch but at an existential crossroads:
“My concern is not that we will suddenly become poor and subordinate to others, but that, over time, we will inexorably become less prosperous, less equal, less secure and, as a consequence, less free to choose our own destiny.”
Our destiny. Nothing more, nothing less. With stakes this high, it was only a matter of time before every major player on the continent joined the debate.
And so they did. In February, German Chancellor Friedrich Merz, returning from a trip to China, stepped forward as the choir’s soloist and declared that “Germany — read ‘Europe,’ by extension — needs to work longer hours.”
“The overall productivity of our national economy is not high enough. Put even more plainly: work-life balance and the four-day workweek will not be enough to maintain our country’s current level of prosperity in the future. That is why we need to work harder.”
Merz is German and belongs to the European People’s Party. You’d expect him to champion that culture of hard work. What nobody anticipated was that within days, one of the great economists of the left, Branko Milanovic, would echo the Chancellor’s words:
“The world is a competitive place. Countries that fail to develop economically don’t just quickly fall behind their competitors — they become second- or third-rate economic and military powers, and their populations end up emigrating to work elsewhere. Their technologies become obsolete. It is a well-established fact, noted by economists and political scientists of all stripes, that economic power correlates with political and military power. So if many European citizens continue to choose going to the opera and having picnics with friends while Chinese and Indians do so less and less, Europe will decline.”
And since part of the American establishment has always had a soft spot for ideas so conveniently useful for justifying the absurdity of choosing to live in Washington rather than Barcelona, a couple of weeks ago the Wall Street Journal poured more fuel on the fire with a piece titled “What Will Happen When Europeans Realize How Poor They Are?”
Since 2007, the argument goes, the per capita GDP of the United States has been pulling away from the eurozone’s and is on track to be double that of some countries we consider “rich.” The authors don’t shy away from equating that per capita GDP with “prosperity” and conclude that Europe is becoming less prosperous. But the worst part isn’t even that — as the headline screams, the real problem is that Europeans refuse to realize it!
You could almost feel the journalists’ frustration. Around that time, many Europeans had been busy trolling the Trumpist mob on social media with photos of Parisian terraces and some very funny videos featuring two middle-aged men who looked like they’d never seen the inside of a gym — showing off their dad bods in t-shirts and shorts — spinning music outdoors while balancing a cigarette and an Aperol Spritz in the same hand
Oh, Twitter. What a laugh.
Back to the serious men: in recent days, Paul Krugman has come out in defense of the European model in a series of articles where he argues that the gap between American and European GDP is a statistical illusion stemming from how technological improvements are measured in GDP.
It turns out that technology improves at a dizzying pace: a computer from twenty years ago had a fraction of the capacity of one today. At the same time, computer prices have never stopped falling. But on the surface, and for the user, it’s still “a computer.” If GDP simply counted how many computers are sold each year, it would be unable to capture the quality improvements perceived by the user and the dramatic price drops that come with them. The result would be absurd: an economy producing machines a thousand times better would appear stagnant, simply because it’s selling “the same thing” in terms of physical units.
To solve this problem, econometricians — not only American ones, but especially American ones — resort to what are known as hedonic adjustments. Instead of counting computers, they break the product down into its technical characteristics (processor gigahertz, gigabytes of memory, screen resolution, energy efficiency) and estimate how much each one contributes to the price. When those characteristics improve, even if the nominal price stays the same, they record that change as if the price had fallen and sales had increased. In other words, when technology improves, GDP reflects a surge in the real quantity of technology produced, even if no one has bought more physical units.
Since virtually the entire world’s tech industry is concentrated in the United States, this hedonic adjustment disproportionately benefits American GDP. Although Europeans and Americans alike enjoy the same technology, that adjustment doesn’t show up in Europe’s figures as a consumer. That’s why European GDP stays flat while America’s shoots up. And yet, in terms of real wellbeing, the difference is far smaller than the numbers suggest.
Put simply: much of the divergence between the United States and Europe isn’t real — it’s an accounting artifact. If you measure it differently (the details, here), it turns out that the eurozone’s GDP and that of the US don’t differ all that much. Or even more to the point, if you factor in the quality of life and social achievements Europe has attained that don’t show up in GDP, as Thomas Piketty also notes these days, it becomes very hard to claim that the United States has a model worth copying.
All of this might sound like a crushingly dull technical matter, but it isn’t. This is such a hot-button topic that Luis Garicano , by his own account, dropped everything when he came across Krugman’s article to fire back: “This is enormously important. The divergence with the United States is the most compelling evidence of the need for reforms in Europe.”
And that’s the crux of the matter. The wounded-competitiveness debate is the battleground — a moral one — over Europe’s future in the world. One faction of European intellectuals longs for a shift in economic model that would bring us much closer to the American one, while another argues that no such productivity gap exists and that… well, it’s not entirely clear what they propose instead.
Garicano, in his article, contests the premise outright, argues that Krugman would have agreed with him a few years ago, and maintains that the stagnation is real and that it’s not just prices that matter, but the capacity to produce:
“US output growth has been concentrated in technology, where prices have fallen enormously as productivity has risen. In terms of the volume of things produced, the United States has pulled away from Europe.”
For his part, Noah Smith , one of the influencers (?) in today’s economic landscape, takes the middle path and argues that while quality of life in both regions is broadly comparable — as evidenced by the fact that net migration between them is nearly zero — the fact remains that the United States is pulling ahead.
“Honestly, this is not a great result for Europe. Ideally, rich countries would converge toward similar income levels; Europe’s failure to catch up with the United States is a real failure, even if it isn’t falling further behind. And the much faster growth in output per hour in the United States should set off all the alarm bells.”
Lies, damned lies, and the productivity myth
So much for the soap opera summary and the cast of characters.
What’s driving me mad — as someone who has always observed economics from a considerable distance — is yet another example of how this supposedly rigorous discipline abandons all its principles and turns to alchemy, even at the highest level, the moment it touches certain subjects that strike at the moral heart of its assumptions. This productivity debate is the paradigmatic case.
Here’s the thing: the little drama I just described, involving a Nobel laureate and some of the world’s most respected economists, is built on an assumption that any first-year economics student should be able to dismantle. Specifically, on the premise that a country is wealthy because it produces a lot. That national prosperity is a matter of productive capacity, and that if Europe worked harder — manufactured more chips, more cars, more servers, more things in general — it would be more prosperous.
And yet today we know that what you produce is irrelevant.
It wasn’t always this way. In the early days of capitalism, it was believed that the value of things derived from labor: the price of something could be calculated by adding up the hours of effort invested in making it. So producing a lot made you very prosperous, because the value of what you had produced was a constant, an obvious truth, a universal certainty. But toward the end of the 19th century, what became known as the “Marginalist Revolution” took place — a Copernican shift in economics with colossal consequences for civilization.
What its authors observed was that the labor invested in producing something and the price that good reached in the market did not go hand in hand. Some products require enormous amounts of work and cost very little — potatoes, for instance — while others demanding less effort sell for a fortune, like barnacles. It can even happen that two goods with exactly the same labor input — two paintings produced over the same number of hours, say — fetch two different prices, or different prices for different people. What is worth a fortune to one person may be worth nothing to another. Value, the marginalists observed, does not come from the workshop; it does not emanate from labor. It is subjective, variable, and in the eye of the beholder.
Value theories are my Roman Empire. My particular obsession. I believe they are the keystone of human thought systems for one reason: we use the same mechanism to assign value to things… and to people. So the value theories that dominate a society are the manual that allows us to place ourselves and others on the mental map we use to navigate social life. That’s why the marginalist theory of value, abstract and technical as it sounds, was a bomb containing a radical challenge to our civilization. And that’s why this issue lies behind the whole can of worms about Europe’s competitiveness.
Here’s the thing: for millennia — probably since we became capable of thinking of ourselves as a human group — we had believed that all people had intrinsic value. They were valuable because they were devoted to God. With different nuances, every religion held the same idea. Faith gave you value, and lack of faith took it away. Easy peasy.
Capitalism in the 19th century took over from religion in assigning that value. It would no longer be faith, but labor and thrift that made people valuable. But although these seemed like two different things, faith and work operated in the same way: both stemmed from each person’s own will, so being valuable still depended on oneself — there was an intrinsic value in people.
The Marginalist Revolution breaks with that paradigm. For the first time — I would venture to say in human history — it asserts that there is no intrinsic value in things, nor by extension in people. That we are not valuable in and of ourselves: not for our faith, not for our work, not for anything we do. We are only valuable if others think we are, and only to the extent that they do.
And this is where one throws up their hands: “But how monstrous! How cruel and inhuman, the idea that no one is worth anything unless someone else is willing to pay for them!”
And yet it’s a conclusion so simple, so self-evident, that you could reason it through with an eight-year-old. If you think about it for a moment, to maintain that people have intrinsic value, there must be someone to confer it. A “universal value” cannot exist without an authority whose judgment overrides that of individuals. For millennia, that someone was God. The religious wars and the Counter-Reformation were disputes about who that value-dictating authority was. But if we assume that God does not exist — or that, if he does, he has been relegated to the privacy of each person’s conscience — the source of value evaporates along with him. In my heart of hearts, I believe everyone is valuable and I conduct myself as if that were true. But I cannot compel anyone else to share my valuation. I have nowhere to anchor it. Value, whether we like it or not, is subjective. It could only be objective if we were to believe again — or create anew — in a higher authority.
This truth is so violent — we are so terrified by the idea that no authority exists to recognize our absolute worth — that, despite the marginalist theory becoming hegemonic among economists after its publication around 1870, it took another century to take hold in mainstream thinking. People preferred — and still prefer — to believe that labor produces value in and of itself. And something more dangerous was also at play: it was fiendishly difficult to organize a state where citizens wouldn’t tear each other apart if they believed others had no intrinsic value. “All men are created equal” sits uncomfortably with the idea that a person is worth exactly what someone is willing to pay for them.
Contemporary society is trapped in this paradox. It wanted to build a society without God, but refuses to fully acknowledge that without God there is also no intrinsic value in people. And so it has ended up constructing itself on two contradictory principles that coexist… barely.
On one hand, we believe that participation in economic life — working, saving — regardless of outcome, confers a “right” to housing, healthcare, education, and social recognition, as if there were some higher authority obliged to provide them. That authority is the State, which assumes the role once played by God: a universal body that recognizes the value of each person by the mere fact of their existing and participating. On this side, we think like believers: people have intrinsic worth and the system must respect it.
On the other hand, the moment we leave the territory of the State and enter that of the market, we embrace marginalist logic without blinking. We want unequal effort, differing talent, and varying skill to be recognized and rewarded. Nobody would think it reasonable for professorships in economics, or spots on the national football team, to be distributed by lottery among those who had put in the same number of hours. Here we think like marginalists: everyone is worth what the market is willing to pay for them.
The monumental clusterfuck we find ourselves in — the crisis of Western civilization — springs from this contradiction, and from the fact that neither theory — neither the labor theory nor the subjective one — is capable of producing a social model that works in the 21st century. Paul Krugman’s confusion, Luis Garicano’s, Branko Milanovic’s, Noah Smith’s — in my view, it all flows from this same contradiction.
Producing your own grave
In geopolitics, without a doubt, there is no father figure, no state, no higher power to embrace us and tell us we are valuable. There is no universal authority that recognizes what each country is worth. And yet when economists wade into the productivity debate, the first thing they do is write as if such an authority existed. They return, again and again, to the idea that whoever produces the most — or produces most efficiently — will win the global game. As if there were some celestial referee keeping score of hours worked and chips manufactured.
From within that confusion, every author you’ve read this week defends the same thing: that the United States is richer, more viable, and more prosperous than Europe because it produces more. It is more innovative, makes more chips, invented computing, data centers, the entire software apparatus. It has a financial system behind it to sustain all of that, which is why even Europeans who want to build things end up doing so in California. From Merz demanding longer hours to Milanović scolding Europeans for their picnics, the argument is always the same: whoever tries hardest wins. And it’s a lie.
What does it mean that technology prices keep falling? It means technology has failed to generate new value. Today people assign the same price to something that cost forty times more forty years ago. And with what they have left over, they aren’t willing to buy another computer or another smartphone. Efficiency can produce more, but it cannot generate new desire.
The United States, despite its capacity for innovation and ever-expanding functionality, has been unable for the past 25 years to generate fresh, renewed desire for the products and services it wants the rest of the world to buy. Aside from New York and perhaps San Francisco, it doesn’t have much that the rest of the world can’t copy. As a result, it offers exactly the same thing as China — the same technology, the same factories. Both countries have locked themselves into the wheel of a blind and deaf productivism, competing with increasing ferocity in a race to the bottom of the barrel in which both players stand every chance of drowning.
Meanwhile, what we observe the moment we’re able to look at the problem without the blinders of mainstream economics is that China and the United States have spent 25 years subsidizing certain industries in that race to the bottom. China through public subsidies, the US through private investment and the entire financial machinery propping up Silicon Valley. American investors subsidized Uber and Airbnb. Chinese taxpayers subsidized BYD and solar panels.
Until none of the things they are capable of manufacturing is worth anything at all.
How can this possibly be a good strategy for global leadership?
AI: the last hope of the industrial world
It isn’t. It’s civilizational suicide. Continuing to fight to be an industrial power at a moment when industry produces ever less economic value per unit of output is madness. And it’s a madness that lies behind the evident political and cultural decline of the United States, behind the rage of white men in the American Midwest and of young urban Chinese — the rats that have been set running on the wheel.
That’s why AI is a life-or-death cultural artifact for the United States.
As every economist who has taken part in the European competitiveness debate acknowledges, the divergence between the United States and Europe — and between the United States and China, for that matter — flows from a single source: Silicon Valley. Or more precisely, from the strategic alliance between Silicon Valley tech companies and Wall Street financiers. That marriage of convenience is what has spent 25 years inflating one bubble after another — first the dot-coms in the 2000s, then the “unicorns” in 2010, a few inventions along the way — Google Glass, the Metaverse, NFTs and crypto — and now artificial intelligence.
But the US needs that bubble to keep dreaming that someday it will escape the rat race it has gotten itself into and produce something it can patent, own, and sell to the rest of the world without competition. That’s why Trump and the entire American elite today need to believe that this new technology will once again be capturable and will produce a new industrial revolution in which desire will be on their side again.
And conversely, if AI fails — if it doesn’t manage to replace millions of workers (spoiler: it won’t) — the whole house of cards will come tumbling down. Then we’ll be facing a radically different question. What is the United States going to do with itself? Can the United States exist without being the factory of things that Europe dreams up? Can it invent its own paradises, seduce anyone on its own terms?
If it keeps on this trajectory, the answer is clearly no.
Economies of abundance
How is value created in the 21st century? What is the future of the global economy? How is economic value — the kind that can be exchanged and is therefore scarce — actually generated?
My intuition — one I’m still working through — is that the future of the economy in the 21st century will revolve around the commercial exploitation of public, or abundant, goods (follow the link if you’re not sure what those are). Let me explain: the English language is a public good. Around that good there is an entire industry devoted to translation, teaching, book publishing, copyediting, and so on — all producing private goods and services that can be exchanged. In the same way, the Mona Lisa is a public good, and there are countless businesses dedicated to exploiting its image, its tourist appeal, and so forth.
All of this might sound a little naïve, but these are enormous industries. And not only that — public goods are everywhere. In the software world, this model is perhaps most formalized. Linux is an open-source operating system. Anyone can use it. It is maintained by a community of thousands of volunteer developers, and anyone can download, install, or modify it. And yet around that free, collectively owned code, a gigantic business ecosystem has grown up. Companies like Red Hat, IBM, Canonical, and SUSE have built multimillion-dollar business models not by selling Linux — how do you sell something that’s abundant? — but by selling services around Linux: technical support, certifications, enterprise distributions with guarantees, training, integration with legacy systems, security management, and so on.
The technology we’ve been calling “artificial intelligence” is also a public good. And the industry taking shape around it will ultimately work in exactly the same way.
This is the pattern of the abundance economy: industries that rise up around a central asset that is open and shared, capturing value in the layer of services that surrounds it. Counterintuitively, this model produces some of the most profitable businesses in the world, built on top of one of the most widely used public goods on the planet.
Who will win the game of the 21st century?
Of all the economists’ contributions to the productivity debate, the one I’ve enjoyed most is this piece by Alex Tabarrok. Inadvertently, Tabarrok confirms what is self-evident: that Europe is the place where people want to spend their money. When an American makes money and decides to live well, what they do is buy a second home in Tuscany — not in South Dakota. That is what matters about an economy. Not what you can produce, but what people want to come and buy.
It’s not about work. No number of hours will make us more valuable. The winner will be whoever knows how to seduce. To attract, claim, and command the attention of many people. The winner will be whoever can free up more working time so that their country’s talent can focus on seducing the world. There’s nothing heterodox about this: everyone knows that the best companies today are those with the greatest distance — the greatest margin — between what they produce and what they sell. We call it “brand,” if we like, but no one seriously doubts that this is where the value lies.
And by the same token: those who, like China and the United States, dedicate themselves to the ruinous business of mass production will have nothing to show for it.
For this reason, the economic question of the century is not how to increase productivity, but how to create and sustain public goods so that industries can later grow around them with a genuine competitive advantage. Whoever is capable of creating ideas, ways of life, cultural models that the entire world desires and wants to adopt — but also software, medicines, technology, business models, and scientific advances — will hold a competitive edge. The value captured in the layer of services built around those goods will be where the game is won.
And Europe, look at it from any angle you like, is turning out to be remarkably competitive on this terrain. It has been, in fact, for centuries — it’s just that the economic logic is only now catching up to confirm it. What Europe exports is not tons of merchandise. It is ways of being in the world.
That capacity to create desirable ways of life is, almost without our having noticed, perhaps the single most valuable economic asset of the 21st century. And around it there already exists an enormous layer of services: tourism, which in some European countries represents more than ten percent of GDP; luxury goods, which command margins that would make any chip factory blush; wine, cheeses, oils, protected geographical designations; education, with European universities attracting ever more fee-paying students from around the world; design, fashion, gastronomy. All of this consists of services built around the fundamental public good that is the European way of life.
The mistake made by the Merzs, the Milanovićs, and the Wall Street Journal editorialists is failing to see that this layer of services is not built by working longer hours. It is built in precisely the opposite way: by nurturing the cultural conditions that make the model desirable. If Europeans started working like Americans, the first casualty would be exactly the things the rest of the world values about Europe. It would be like forcing Linus Torvalds to sell his code: the day he did, the entire ecosystem would lose its reason to exist.
Europe does not need to copy the American model to win the 21st century. It needs to do exactly the opposite: accept that its competitive advantage lies in continuing to be Europe, and build around that an ecosystem of services that allows it to capture the value it is already generating — almost without realizing it.
If you’ve made it this far, you can’t miss my first book, Hijos del optimismo (Children of Optimism).
It’s the older sibling of this newsletter, and the place where I’ve put all these ideas in order
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