the Industrial Revolution started in
Europe in 1760 and kicked off the
transition to the modern global economy
we have today with mass production that
utilizes machinery and technology in
addition to land and manpower to provide
goods and services at a scale it was
once thought impossible Europe with its
dense population and internal
competition between different countries
was at the Forefront of technological
and economic advancements before that as
well they were pioneers of truly global
trade and the Dutch even created the
corporation as a way to fund risky
Ventures global trade industrialization
and modern corporations would have made
our world today thousands of times
wealthier than it was two centuries ago
the world has produced more economic
value in the last 40 years than it has
in every other year since humans crawled
out of their caves combined but the
birthplace of the initial developments
that made this all possible has started
to fall behind Europe has had stagnant
economic growth for more than a decade
now and that's why the rest of the world
has been doing pretty well as a all even
ignoring the growth of countries like
China which has been an outlier over
this time period Europe as a whole has
been doing a lot worse than their most
obvious point of comparison the USA
these are both large economic regions
with a lot of Natural Resources very
skilled populations good functioning
democratic governments and modern
infrastructure to make them globally
competitive in a range of Industries but
Europe has lagged behind and for a while
now not just the last decade of course
there are the headline issues brexit the
Eurozone crisis youth unemployment and
ongoing social issues over aging
populations and retirement but it's
important to dig deeper and ask why this
is happening and keep asking that
question until we get to the
foundational issues holding Europe back
with so many advantages and such a head
start understanding the underlying
reason why Europe has faced so many
challenges and setbacks to its economic
growth is going to be crucial to make
sure that it doesn't happen everywhere
else and also potentially to get Europe
back on track
so what caused Europe to start lagging
behind the US should economists expect
this kind of slow down everywhere and
finally why might this be a blessing in
disguise for Europe's economic future
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now before we get into it I want to
quickly give the big disclaimer that
this video will look at some future
projections but nobody can predict the
future least of all economists I also
want to quickly mention that once we put
this video together we noticed that a
small Creator made a video just over a
month ago on the same topic we mostly
cover different points here but his
video was very well made so we wanted to
give it a mention but with that out of
the way there is the general expectation
amongst economists that countries just
naturally follow a predictable pattern
of growth undeveloped economy start off
relying on basic Agriculture and
informal markets and then they become
developing economies as they either
create industrial Machinery from scratch
like during the Industrial Revolution or
they get given it through foreign
investments as has been the case with
most developing economies recently
building it from scratch is obviously
the slower process that's why Europe
took nearly 200 years to go from
agriculture to industry but a country
like South Korea was able to do the same
thing in two decades being an
industrializing economy means that
output is rapidly growing as more tools
are used to leverage existing resources
after an economy becomes fully
industrialized it gets to the hard part
which is transitioning from becoming an
economy that just makes stuff to an
economy that adds value in other ways
like providing services and getting
directly involved in markets abroad the
modern Corporation with shareholders
first advised by the Dutch is the most
efficient way to do this advanced
economies have got there by upgrading
their ability from Simply being able to
make things to being able to get
everybody else to make things that might
sound like advanced economies are taking
advantage of poor countries to do a lot
of their work for them and sometimes
that happens but more often than not
this can be a mutually beneficial
Arrangement it's better for a developing
country to be given the opportunity to
manufacture something like a car rather
than a hammer both of these products
need to be manufactured but the car is a
lot more technical so the developing
country would be dependent on an
advanced economy to give them the
designs and tooling needed to
manufacture it whereas a hammer well
they could probably figure that out for
themselves the advanced economy benefits
from this Arrangement because they get
to use a low-cost labor force to
manufacture their cars which means that
they can offer them to the Global Market
at a more competitive price and bring
more profits home to the advanced
country the developing economy also
benefits because building a car from
scratch adds a lot more value to the raw
materials than building a hammer if a
labor cost is a lower portion of the
total cost of a good or service then
there is more room for movement on wages
while still remaining competitive
Advanced High income countries that
still manufacture a lot of things
themselves but the goods that they do
produce are always highly valuating it
doesn't matter if it takes a team of
Engineers thousands of hours to put
together a jet engine in the USA or the
UK because the end price of that good is
tens of millions of dollars and the
labor cost even though they are higher
on a per hour basis are still only a
tiny fraction of the end cost developing
economies normally don't have the kind
of facilities or expertise to build
these world-class products and since
advanced economies can produce them
domestically with no major loss in price
competitiveness there is no motivation
for them to give developing economies
the investment and training they would
need to be able to do it for themselves
even if the goods would be slightly
cheaper it's not worth the risk for the
companies based out of advanced
economies to share their world-leading
designs with factories across the world
because there's a good chance that they
will just get stolen and it's very hard
to get those design secrets back once
they're out there also while it may be
slightly cheaper it could end up as a
less competitive good overall because
there will be less demand whether they
would admit it or not people would
prefer to fly across the Pacific Ocean
with jet engines made in the USA rather
than say China this means developing
economies normally grow by starting with
really basic items and then they start
building slightly more advanced items
over time but eventually they run into a
problem eventually they go from making
very basic items for not very much money
to semi-advanced goods for a decent
amount of money and then their people
get used to this higher income and get
out competed by other developing
economies coming up behind them the only
way to avoid the middle income trap as
this is known is to either continuously
suppress people's wages which is
obviously not a very politically popular
choice or to develop Advanced Industries
like the rich economies which is not
very easy especially these days when
those advanced economies have had such a
head start it does happen Israel is an
example that we explored last month that
went from being a barely developing
economy to an advanced economy within
two decades but it's rare a lot of
developing economies are hitting a brick
wall right now with the economic shocks
that have slowed their transition again
we have made an entire video on that
recently as well so I don't want to
repeat too much here the reason this is
all important is that Europe is
primarily comprised of economies that
are already advanced but most of them
became Advanced a long time ago
especially in Western Europe Europe does
have its own International companies
operating in advanced Industries but not
as many collectively it has about as
many Global 2000 companies as Japan but
with a much larger population it also
falls well behind the USA that has
roughly twice as many major global
companies as all of Europe combined a
lot of these companies also only exist
to service their home countries orange
is one of the largest telecommunications
companies in the world and the 31st
largest company in all of Europe but if
you don't live in Europe you probably
would never have heard of it companies
can still do well by servicing just the
European market because it's made up of
wealthy advanced economies but they only
became Advanced because they built out
these modern Industries before anybody
else and today they lack the Innovative
global companies to compete with the USA
and even the new players coming from
Asia in a way they're kind of living off
their Advanced country inheritance while
the USA is at the prime of its career of
course before the comments start listing
European companies with global
operations there are exceptions to this
Germany in particular is home to a lot
of world-leading companies in a range of
high-tech Industries and even France is
the global epicenter of fashion which is
a very lucrative and surprisingly large
industry exceptions exist but in
aggregate the continent is just
underrepresented in global corporations
and whether we like to admit it or not
these corporations are the conduits
through which advanced economies become
advanced economies
the correlation between Global 2000
companies per capita and GDP per capita
is very strong but Europe falls behind
now people might point out that there
are lots of very small economies around
the world that are Advanced but are not
home to Major Global corporations a lot
in Europe for that matter places like
Luxembourg have the highest GDP per
capita of any non-micro nation in the
world and while they cheat a little bit
to get that figure they have a very
prosperous economy in its own right but
these smaller countries get there by
providing services to larger countries
that do have Global wealth generators
Singapore Ireland Hong Kong Luxembourg
and even Switzerland to a lesser extent
have all become advanced economies by
providing Financial Services to other
larger advanced economies okay Point
made to become an advanced economy a
country needs to have advanced
industries that are not highly dependent
on worker wages or industries that they
can operate exclusively across the world
to bring profits back home Europe had an
early lead because it was the first
continent to properly industrialize but
now it's falling behind the USA and Asia
especially in Tech which is one of the
easiest Industries to operate across the
globe the surface level issues that make
headlines have all been accelerated by
this under concentration of global
operations but we can go deeper again
and ask the next obvious question why
doesn't Europe have more global
companies
it's difficult to directly compare the
underlying characteristics of the USA
with Europe because the US is one
country and while it's a very large and
diverse country it's still not nearly as
diverse as Europe which is made up of
dozens of countries that speak dozens of
different languages and have different
governments and even on an economic
level have wildly different productivity
Ukraine and Kosovo have a GDP per capita
of one-tenth out of Luxembourg an island
so the differences within Europe are
arguably larger than the differences
between Europe as a whole and the USA
generally though European countries are
seen as more egalitarian placing a
stronger emphasis on comfortable working
conditions and social protections to
make sure that everybody lives
comfortably at the expense of higher
taxes for higher income earners that
relaxed attitude in contrast to the
USA's Cutthroat growth at all cost
economic attitude in theory goes a long
way to explaining this divide but a lot
of countries in Europe especially the
ones that are famous for their strong
social policies actually have higher
rates of involvement with new business
we saw this recently in our video on
Germany that people are more likely to
start a business or work in a risky new
startup if they have a strong social
safety net to support them if the
business doesn't work out Europeans also
work Less hours preferring a comfortable
work-life balance when compared to their
U.S counterparts and the data does back
this up in Germany and France the two
largest economies in Mainland Europe
employed people work for 1400 hours and
just over 1500 hours a year respectively
yes the supposedly lazy French work more
than the industrious Germans I'm sure my
German researchers are going to love
that statistic but both of them fall
well behind the USA where the average
employed person works almost 1800 hours
these working hours are down
significantly in the USA about 25 from
their peak in the 1950s and 10 from 2000
but they are down a lot more in major
European centers France and Germany both
used to work a lot more than the USA but
now they work Less in Germany those
hours are down by close to 50 percent so
yes growth in Europe has been slower but
a lot of that has been major economies
trading off higher output for better
working conditions and yes that does
cause problems especially when a lot of
our economic systems are built around
stable growth but I'm sure a lot of
people would happily trade those
problems for an extra 200 hours a year
economics is a study of how people
interact with things of value and
there's not much more valuable than
people's time so it's hard to call this
an economic failure on Europe's part
it's more of a decision that like all
economic decisions has trade-offs it's
just that these trade-offs make for
better headlines now this is not the
only Factor workers in the USA work a
lot less than a lot of other workers
from less prosperous countries around
the world the other big factor is worker
productivity or how much value a worker
produces in a given hour of work to make
workers more productive they can either
be better educated so that they can work
in more skilled roles or they can be
given better tools to work more
efficiently between the USA and Europe
education is roughly on par with Europe
doing slightly better overall but the
USA being more attractive to school
migration so overall very similar the
USA though just has much better Capital
with the average business investing a
lot more into their workers than the
same businesses in Europe the reason
they do this is because they can the USA
is a very attractive destination for
investors it uses the world's Reserve
currency it has a strong legal system a
strong culture of innovation it's
English speaking and it's a One-Stop
shop for investors in the USA it's not
really worth investing anywhere else and
for foreign investors the USA is the
first logical place to start investing
abroad compare that to investing in even
Europe's major markets where investors
would have to navigate through multiple
legal systems and tax codes in multiple
languages or to get access to markets
that have historically underperformed
the us having access to this investment
to build capital is how multinational
corporations are built even if Europe
does have more new companies with better
ideas in the USA if the US companies are
the ones that get the capital to rapidly
expand across the world then they are
always going to win and that Trend makes
it even more attractive to investors and
something of a self-fulfilling economic
prophecy the only other question left is
will this trend last
obviously nobody can predict the future
least of all economists but the lead
that the USA has been able to build
through the advantage it has with its
massive global companies especially tech
companies is probably not going to be as
strong in the future big Tech Giants
have had free reign of the entire planet
for a long time and since the USA was a
large English-speaking country with lots
of access to investment most large tech
companies originated from there before
spreading around the world but now laws
are catching up with this new technology
and that's coming at the same time as a
shift away from globalization and
towards domestic Industries run within
economies or with their close neighbors
Europe may not have benefited As Much
from the modern globalized economy but
it won't suffer as much from its
contraction either because it already
has the European Union which is built
around the idea of close trade between
close neighbors even if Europe never
catches up gross output is really only
one aspect of economic success and
Europe is just as far ahead of the USA
in many economic metrics as the USA is
ahead in all of the others
a big part of the success of the
European economies will be dependent on
how well the EU fulfills its objectives
to learn more about that watch the video
linked on screen now about whether the
EU will fail or if you prefer to listen
to these videos we make all of them
available as well as full interviews
with world-class economists up on our
Spotify page
thanks for watching mate bye