Does EU-Style Capitalism Cripple Innovation?

As a native German, I read with great interest a recent Wall Street Journal article by Edmund Phelps, Columbia University’s 2006 Nobel Prize winning economist. In the piece, Dynamic Capitalism , Phelps favorably compares the American model of free enterprise with the “stakeholder-driven capitalism” favored by most EU countries.

He concludes that the U.S., the U.K. and other countries with greater economic freedom are much better at innovating than most EU countries with more market restrictions.

Phelps’ article should give European policy-makers pause.

A recent report by the London School of Economics [pdf] confirms that Phelps is telling some hard truths. In a review of the EU commitment to transform the 25-member block into the world’s most dynamic economy by 2010, LSE concludes that “the Lisbon Agenda seems to have made little difference for Europe’s innovation performance”.

The LSE report also reveals that the innovation performance of the EU as a whole lags behind that of Japan and the United States, both when innovation performance is measured in terms of patents per million population and in terms of research and development (R&D) investments.

Illustrating a further cause for concern for European policy-makers, China has increased its investments in R&D at such a high rate in the last couple of years that it is rapidly catching up with the EU.

This sobering assessment ought to remind legislators that fundamental changes to Europe’s innovation policy are urgently needed if the EU still hopes to achieve the goals of the Lisbon Agenda.

Specifically, the EU needs to get serious about truly achieving a single market by eliminating regulations inhibiting free trade and the free movement of the workforce, liberalizing the financial sector, and creating a strong, unified system of intellectual property protection.