France has been one of the most successful economies in history,
but in the last decade alone it has in many ways lost what made it special in the first place
for a number of unfortunate, albeit necessary, reasons.
France is one of the first countries in the world to kick off the industrial revolution,
but it did it a bit differently from its European rivals, preferring a slow and steady approach that
favoured more small artisanal industries over the large factories that were coming to dominate the
world. Some of this was by choice, and some of this was because they lost their most skilled
workers years before they realised just how important they would be. For better or worse,
this slower development during a period of rapid global wealth creation meant that France built an
economy that valued its workers just as much as other countries valued the factories that
put them to work. This is a historical trend that has clearly carried through to the modern day,
where French workers, more so than any others in the world, are famous for demanding exactly what
they want in the most spectacular ways imaginable. But this unique past has given the country an
equally uncertain future. Today, France is between a rock and a hard place. On one hand,
it can't afford to keep running its economy like it currently is due to a variety of unfortunate
national and global issues, but on the other hand it can't make the necessary, somewhat radical
changes it needs to, or else its very active citizens could just leave in a bitter case of
history repeating itself. The compromise the country is making is almost the worst of both
worlds. France, once famous for balancing a relatively egalitarian lifestyle with advanced
industry, is now home to one of the richest men in the world who made his fortune with basic
leather bags and trinkets. One man and one industry are obviously not the entire story
of a national economy, but they are a sign of change. And by losing its unique economic principles,
the country could find itself in a position where it's just a less competitive copy of
every other advanced western economy. But to understand these challenges and difficult
choices, you must as always answer a few simple questions. Why does France need to so radically
reshape its economy? Why can't it effectively do it? And finally, what will happen to the country
if it continues to stagnate? When France invests heavily into things like education and other
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The industrial revolution was one of, if not the most important thing to happen to humanity.
Over the course of just a few centuries, the blink of an eye by historical standards,
the development of machinery and technology that could increase how much stuff a single
worker could produce took societies around the world from being primarily peasant farmers
to rich comfortable consumers. The development of machines and technology that could make even more
machines and technology which could make even more stuff for everybody to enjoy was really
what economists call capital development. Before these machines, economies ran almost exclusively
off land and labour. The only way to grow an empire was to have more land to farm and more
people to work on those farms. But the development of capital, the third factor of production,
meant that even sprawling global empires would be challenged by whoever had the best technology.
The people that could develop that capital, the capitalists, would go on to become wealthier than
land-owning lords and kings could ever dream to be, while also kicking off exponential growth of
the human population, global wealth and it also must be recognised utilisation of limited resources.
That's the story as it happened for most countries, but it was a little bit different in France.
The industrial revolution was not like flicking a switch where one second everyone was peasant
farmers and the next they were all working on production lines, it was a slow gradual transition
to basic automation. In France, even though the country was one of the first to embrace
industrialisation, that transition was a fair bit slower than its other European peers.
Historians have a few theories as to specifically why, but broadly it was all stability and confidence.
France in the decades of the outset of the industrial revolution was busy having its
own revolution, and after that it was at the epicentre of a number of regional wars which
meant that most of its local industries, transportation networks and even political
systems were built around fighting rather than innovating. France also suffered from an exodus
of skilled workers in the lead up to the industrial revolution. These people were mainly protestants
fleeing religious persecution, but a large share of them were early mechanics and engineers,
skills that would become highly valuable to a country that wanted to build steam engines and
mechanised factories. Now while these people weren't fleeing the country for better economic
opportunities at the time, this may be one of the first cases of brain drain in history,
something that is still plaguing the nation of France today.
The history is fascinating, but the economic outcome was that while other countries in Europe
were starting to form the shape of modern economies with large corporations dictating
huge industrial empires, France's economy remained largely dominated by lots of small
artisanal industries. The result of this was that while human labour in other industrial
economies was often thrown into the literal meat grinder of early industry, France's workers
maintained a lot more power over their employers because there were far more, much smaller
companies driving industry. If only one company dominates an industry, that's called a monopoly,
and typically in economics this isn't seen as an ideal situation because that company can
raise its prices and lower standards and there isn't anything that can be done about it because
there is no other option. The alternatives to a monopoly are a duopoly where two companies
dominate an industry, an oligopoly where only a handful of companies dominate an industry,
all the way down to perfect competition where almost limitless companies are all competing
amongst one another. Now typically when assessing the problems with oligopolies or monopolies,
most people, even most economists, will focus on the issues that limited competition can cause for
consumers. If only one company makes computers, then whatever they charge for that computer is
what the consumer will need to pay if they want to buy it, and that company would have no incentive
to spend money on R&D to make a better computer because customers have no other option.
Now this is a problem, but an even larger problem is what it does to workers.
If people have to spend a little bit more on a subpar computer, that's not as bad as someone
who is trained in building computers only having one potential employer. If one company dominates
an entire industry they can push down the wages of their workers because there is nowhere else
for them to go. Again, the exact opposite of this is perfect competition with lots of small firms
that are competing with one another for customers and workers, which is a situation that France
found itself in during the industrial revolution. The French economy developed slower than other
European powers with highly focused industrial centres, but it built the foundation of a more
egalitarian culture that has served the country quite well through to today. The trade-off has
been that French industry has always been slightly less productive than countries like Germany,
the UK, and especially the USA, which means that even though France is a highly industrialised
advanced economy, wages have always been slightly lower. This was especially true in the post-war
period where French workers, and most European workers for that matter, actually worked longer
hours than workers in the USA, while still producing less overall. Obviously today that
is no longer the case and France has again sacrificed absolute economic output for a
more balanced lifestyle, but with more of a focus on good working conditions, strong worker
protections, and secure retirements, it was a trade-off that most French workers were pretty
happy with. In fact, for most of the country's modern history following rebuilding efforts after
the second world war, any attempt to challenge those working conditions and protections was met
with, well, let's just say the kind of resistance that would have served them well in 1940.
This all led to the formation of another vitally important element of the French economy as it
exists today, the strong hand of the government. France has had a capitalist economy for the better
part of two centuries now, but in that time it has reigned in the influence of the free
market in certain sectors with the strong involvement of the government in certain
industries. Lots of small companies may have been great for workers, but there are benefits
to having some big organisations in an economy as well, because they can simply operate at
scales and in industries that small companies cannot. France after the second world war
realised this weakness and the government took an active hand in rectifying the situation by
basically saying, if large operations don't exist, we'll make them ourselves.
This was an economic policy that went on to be known as Derogisme,
sorry to any French speakers for butchering that pronunciation.
Anyway, this roughly translates to direction, as in the government directs the economy through
the formation of industries that it thinks are important, but still welcomes private
industry to grow alongside it or even out-compete government operations if that becomes possible.
The government created state enterprises like national banks, national high-speed rail services,
air france and even minitel, which was basically the internet before the internet.
In simple terms this was really a compromise between the two major competing ideologies
in the world at the time, communism where the state owned all industry and pure market capitalism
where the only role of the state in the economy was to regulate competitive private industry.
By creating state enterprises within a free market, France tried to get the best of both worlds.
The existence of these companies was funded by the government not only because they could
be genuinely good investments, but because it was deemed important that the country have
these services provided by an organisation that could deliver them at appropriate scale.
Despite the benefits that having lots of small companies competing with each other has for
workers and consumers, a service provider like an airline wouldn't be able to operate
effectively with just 10 employees. To provide a comprehensive network of routes and all the
infrastructure that goes with it, it needs thousands of workers and billions of dollars
in investment which was provided by the government.
Now from a purely macroeconomic perspective, there's nothing particularly special about
a government. In a way it can be thought of as just another monopoly that provides
certain goods and services, just with a small difference.
When a private company is deciding what to produce and how to produce it,
it's going to look at what it can sell, and if it can produce that thing in such a way that
the sale price is greater than the cost to produce the good or service, then it will do it.
Governments also exist to provide goods and services to participants in an economy,
but they have a different motivation. They don't have to worry about the specific demand
for a good or service because they don't make their money by selling it,
they make their money by just taxing people.
This is a very effective way to provide goods and services that are not easily transactable.
Something like national defence, emergency services, and even a functioning legal system
all take resources to provide, but it would be difficult to get an individual person to
pay for them voluntarily because they are only effective collectively.
Now some fringe economists will argue that all of these services can be provided by the private
sector, but realistically a government structure that doesn't have to worry about direct profits
from these goods is a much more effective way to provide something like a police force.
The sales and marketing department of a government is their taxation office,
and a set of handcuffs for anybody who doesn't want to pay their subscription to society.
And it's very effective, and it's very effective at providing certain goods.
Now, on the other hand, there are certain goods and services that are more efficiently provided
by the private sector through a free and competitive marketplace.
Things like national airlines, national banks, and national manufacturers can run into problems of
inefficiency because they dominate their markets, and even if private industries are technically
allowed to compete with them, it can be difficult to break into a market where their competitor has
the financial backing of an entire country. These state enterprises also tend to behave
slightly differently in how they produce their goods and services.
While a regular private company will try to reduce costs as much as possible in order
to maximize profits, state enterprises are often given other objectives as well that
may not be the most efficient use of their resources, but instead do some public good.
The obvious example of this is that while a private company will try to minimize its
workforce as much as possible to reduce expenses, a state enterprise will look
for reasons to hire more people because high employment is politically popular.
They can also be tasked to produce goods and services that wouldn't be economically profitable,
like a national airline flying a low-demand route that connects the country but wouldn't
otherwise pay for itself. Now, it must be recognized that most countries do this in
one form or another. With this example, even the USA, which doesn't have a national airline,
still has a program that pays private airlines to fly low-demand routes.
In France, this system was taken to the extreme, and dirigism that placed a heavy
emphasis on state enterprise led to an economy that once again fell behind in efficiency and
output. Now, in isolation, this may not have been a problem. This might shock some macroeconomists,
but not everything needs to be done in absolutely the most efficient way, and sometimes unprofitable
public services are worth paying for because they increase the living standards of the people.
But France is not an economy that exists in isolation, and now that the global economy
is more intertwined than ever, that is causing the country some major challenges.
A not-so-obvious side effect of a large number of state-owned enterprises operating in an economy
is that it drives up inflation. When it's very easy for workers to get jobs at large
state-owned companies that want to employ as many people as possible, this naturally reduces
unemployment. Now, normally that's a good thing, but if it goes too far, it can cause problems.
Economists talk about the natural rate of unemployment as the ideal outcome for an
economy. But natural unemployment is not zero unemployment. In most advanced economies,
it's actually around 2-3%. An unemployment rate any lower than that causes inflation.
This is also sometimes referred to as the Nauru, or the non-accelerating inflation rate of
unemployment, which can be charted out on a graph like this, where the lower unemployment gets,
the higher inflation gets, up to an inflection point where the economy starts to experience
hyperinflation for only marginal gains in employment. Now, as always, just because
something looks good on a theoretical graph doesn't mean that it always works in reality,
and for the sake of France's economy, it's important to explain exactly why this happens.
If more people are working, there will be more income going to households,
which means more people have more money to create more total demand for everything in
that economy. It also means that if companies want to hire new employees,
they're going to find it harder to do so because there are just less people looking for a job.
So they'll have to offer more money to try and get people who already have a job
to come and work for them instead. If all companies are doing this,
they'll be forced to raise their prices to maintain their profit margin,
which means people will demand higher wages to keep up with inflation,
which will drive companies to increase their prices all over again in a vicious cycle known
as a wage-price spiral. Now, this wouldn't necessarily need to happen if the increases
in worker pay were matched by increases in worker productivity. If there were 10 people
in an economy and 9 of them were employed and paid $1 each to make 9 baskets of goods,
then each basket of goods should sell for $1. If the 10th person also gets a job paying $1
and they make a 10th basket of goods, then that basket will stay at $1.
But very quickly, these 10 workers will realize that they are the only people that can make these
goods in an economy and demand higher wages of $1.50. Since they will still only be producing
10 baskets, all that will do is increase the price of those baskets, so really,
they're no better off overall. And that's assuming that the 10th
worker is just as good as the first 9. A high level of employment also generally
means that workers are overall less productive because it's hard to replace them and there's
just not much pressure to upskill or work hard to secure limited jobs.
Of course, this was an incredibly oversimplified example, but out of our 10 basket makers,
there might have been a reason that the 10th worker didn't have a job to begin with.
This issue is normally compounded in the case of a state-owned enterprise,
where efficiency and productivity is not always the top priority.
So an exceptionally high level of employment above the natural rate will drive up wages
faster than total output, which means that there will be more money chasing fewer goods,
which is inflation, which is exactly what happened to France when dirichism was in full swing in the
1980s. The government pulled back on this in many ways, but even today France is facing a reality
that its workers are vehemently insisting on maintaining a standard of living that their
productive capacity can't provide. Things like very generous retirement conditions,
low working hours and generally strong worker protections have combined with companies that
have lost their global competitive edge after decades of strong government protection.
Its population is also aging, meaning that young workers are left needing to be more productive to
support a growing number of elderly French workers who expect strong support in retirement.
On one hand, the government could try and make this work by doubling down on high levels of
taxation and direct control in the economy, but beyond potentially running into issues with the
EU which insists that member countries trade freely with one another, it could just force out
more of the young workers that it has left. Young skilled French workers can already make
more money in places like Germany, the UK and especially the USA, and already France has one
of the highest rates of brain drain of any advanced economy in the world. If they raise
taxes to keep the system of strong protections and strong benefits, more people are going to leave.
Likewise, if they remove those systems and introduce a more competitive dynamic to their
economy, then beyond just annoying economic participants who were promised they could
retire at 55 on a healthy pension, it's going to give workers even less reason to stick around
because their wages would fall and their working conditions would be worse.
What is actually happening is a weird combination of both strategies, where France is trying to
increase its overall productivity while desperately cutting down on unsustainable and uncompetitive
systems. France still has some advantages, their international perception as a place of artisanal
craftsmanship has carried over from the days where they took the slow and steady approach
to industrialization, and today some of their largest industries are just selling goods that
are profiting off that perception. A leather handbag might cost $100 to make, but if it's
made in France they could easily be sold for 100 times that amount, and in terms of a value-adding
industry it doesn't get much better than that. But even still, France is a country that has
been living beyond its means for a bit too long. It's allowed its workforce a lot of protections
and a strong quality of life that honestly a lot of economies could learn something from,
but now it's just getting outcompeted by places that are willing to work harder
in ways that are more economically competitive.
Nobody can predict the future, least of all economists, but in response the country is
acquiescing and slowly changing its economy to run more like other advanced global superpowers.
In the long term this will hopefully pay off for them, but inevitably the debt of living
beyond one's means needs to be paid off eventually even for a national economy.
So unfortunately there is probably more difficult but necessary changes in store
for France into the foreseeable future.
As we've mentioned the pushback over these issues is one of the things that makes France
so interesting as an economy. Even if the changes are necessary, French workers do a
damn good job of making sure their disappointment is heard.
We recently made an entire video on a fascinating European power, the Roman Empire.
Apparently some of you guys think of it up to 5 times a day,
but after looking at the economic figures it's hard to see why.
You should be able to click to that on your screen now.
Thanks for watching mate, bye.