American Advantages in Economies of Scale
Is the dominance of Hollywood, Facebook, Google and other American media and online services alone about American brilliance and entrepreneurship?
Is the European and Japanese failure to dominate in the creation of internet services, movies and other media content due to lack of talent or skill? And if not, what is the reason that Hollywood, Netflix, HBO, Facebook, Google, eBay, Amazon, Apple and Microsoft are all American?
In particular in business magazines there is a tendency to point fingers and blame Europe for being laggard in these kinds of industries. The Economist, Time Magazine, Bloomberg, Heritage Foundation and similar types of media outlets love to characterize Europe and Japan as lacking dynamism, entrepreneurial spirit and what not. Our labour markets are not “flexible enough,” we are told. This is code word for: Workers have rights. Apparently that is a bad thing.
Read more: No, Capitalism Did Not Make America the Richest Country
Of course there is a grain of truth to this. America has a long history of entrepreneurial spirit and can-do attitude. But here it is important to distinguish between what is part of the laws and regulation and what is part of the culture.
If you put a German in the US, they are not suddenly going to pile on debt, get 20 different credit cards and go on a spending spree. America is a country which sells happiness as something you get through consumption. Whatever problem you have, there is some product than can fix it for you. Not happy? Buy more stuff. Of course in such a cultural environment there is more opportunity for success with new products.
And while consumer culture and business culture is something one could explore in great detail, that is not what this story will be about. Instead I will focus on a topic often ignored: The advantages America derives from having the worlds largest consumer market and access to the largest talent pool.
World’s Largest Consumer Market
One of the most important insights from early writers about economics such as Adam Smith, was the observation that specialization and economies of scale can dramatically increase productivity. Adam Smith’s famous pin factory example:
Adam Smith goes on to say he visited a pin factory employing 10 men who produced 48,000 pins per day. If ten workers did every step themselves, Smith says they could each produce 10 or 20 pins per day. So the pin factory replaces up to 4,800 pin makers. The increase in labor productivity (output per person per day) is as high as 50 times that of individual pin makers.
A black smith alternating between making a variety of products cannot produce any single item very quickly compared to an operation setup specifically to mass produce a particular item such as a metal pin.
Today we see the same play out in car factories with assembly lines. A single man assembling a car from scratch in his garage would produce far fewer cars per time unit than workers performing more narrowly defined tasks along an assembly line.
The key thing the observe here is that for highly efficient mass production to be employed you need large volume. To get a large volume, you need a large market.
The size of a market is not merely about number of consumers but also about their income level. China and India may have a lot more people than the US, but each Indian and Chinese have much lower purchasing power than the average American consumer.
Total Gross Domestic Product, gives a sense of the potential for consumption in an economy. Here it is clear that the United States of America has long had a massive lead over other countries.
The combination of a very high population with high GDP per capita gives America an enormous market.
Homogenization of Consumers
But population is not everything. One could argue that Europe has a large population and thus a large market. However Europe is made up of a patchwork of states with different languages, cultures, rules and consumer habits. But it goes deeper than this. When consumer culture started developing in the early 1900s in the USA, this was difficult to achieve even within different European countries.
Many European countries have distinct regions with different culture, habits and sometimes entirely different languages. This applies to most of the old world, whether you are in Europe, China or India. Each region tends to have unique food traditions. Just travel within Italy and each region has a different way of making Pizza or pasta dishes. Some areas have spicy variants others are milder.
This kind of regionalization hindered consumer culture from quickly developing as companies would have to cater to a variety of regional preferences. Over time homogenization progressed and consumer tastes and preferences have become more similar across the whole world. Young people wear T-shirts and sneakers from Africa to Japan today. However that was not always the case.
While America is populated with people from all over the world, these people have all been mixed together in the great American melting pot, erasing much of the ethnic differences between people. You cannot easily tell the difference between a Norwegian-American, German-American, French-American or Polish-American today. Living in North Dakota, which has one of highest percentages of people with Norwegian-American heritage, I think one of the bigger surprises was not the visibility of Norwegian culture but the absence of it. People don’t eat like Norwegians. They eat like Americans. They don’t live like Norwegians but like Americans. Their values and mindset is not Norwegian but American.
America must be one of the most successful and rapid cultural homogenization processes in history. This process produced the ultimate consumer population. A large group of people which a variety of companies could sell a vast number of products without significant modification and customization.
Thus Wall-Mart, McDonalds, Holiday Inn, Home Depot, Staples and many other American chains could spread across the whole country servicing customers in mostly the same manner all over. A Wall-Mart in North Dakota looks exactly the same as Wall-Mart in Honolulu, Hawaii.
If I knew how to find mustard, ketchup or mayonnaise in a store in Utah, I could easily find the same products in North Dakota or Hawaii. Why am I mentioning those specific products? Because it happens to be products I struggled to find each European country I visited. The eating habits can simply differ a lot, even between countries which are close to each other.
Consumer Differences in Europe
The Netherlands and Norway are both part of Northern Europe and both Germanic countries. Thus there should in principle not be as big differences as between say Norway and Italy, given that Italy is part of Southern Europe, Catholic and part of the Latin language family.
In Norway mayonnaise comes in a metal tube and is placed in the fish section because in Norway we often eat Mayonnaise with fish products. It also goes together with caviar because we eat both caviar and mayonnaise with hard boiled eggs. Thus the packaging of caviar looks quite similar to that of mayonnaise.
Moving to the Netherlands I simply assumed it would be the same there. Totally wrong. In the Netherlands mayonnaise is not packaged like caviar and it is not in the fish section. Instead it is together with ketchup and has a similar package to ketchup. What? Why this difference? Because unlike Norwegians, they Dutch eat their fries with mayonnaise. Norwegians eat fries with ketchup.
Let me take some other examples. Swiss Nestle changed their chocolate powder receipt Nesquick. You mix it with milk to make chocolate milk. Sales were doing well in many European countries, but totally tanked in Norway. In fact consumers were flocking to their competitor O’Boy. Nestle could not grasp why Norwegians hated their new receipt so much. Turns out they did not grasp regional differences well enough. You see Norwegian unlike most other Europeans tend to drink cold chocolate milk, not hot. The new Nesquick receipt would not dissolve in cold milk. It would turn into lumps.
Norway has many of these different habits. Norwegian food tends to have a lot less salt than other European food. This was a problem when Norway some years ago ran out of butter and had to import from the rest of Europe. Finding butter with the salt content Norwegians were used to was a challenge.
I have also noticed how almost every European country seems to have a different idea of what a sausages or hotdogs should be. I cannot stand British sausages, but from my understanding they cannot stand ours.
Bread is another example. Norwegians love fresh whole-grain bread with crispy crust. In Britain and Ireland they eat very soft white bread akin to what Americans eat. Not very popular with most Norwegians. In Baltic countries they add some kind of herb or spice which creates a taste I personally found difficult to adjust to. Interestingly this was added to almost every bread I tried while visiting the Baltic region.
I am not saying there is any right or wrong here, merely that every country has quite different habits. This is different from living in the US. No matter what American state I have visited I have had access to mostly the same kinds of core products. You get the same types of breads, cereal, hot dogs and meats.
There is however a profound homogenization going on in Europe. Europeans are getting their food selections expanded and are developing more similar food eating habits to each other. E.g. I grew up eating mostly boiled potatoes next to whatever fish or meat I ate. Today I predominantly eat rice or pasta.
Various French and Italian types of breads have become more popular such as ciabatta and focaccia. Italian pizza have become more popular, while American style pizza dominated. However local variants and favorites still. Norwegians still love pepperoni with pineapple, which I don’t think any Italian would be caught dead eating.
Swedes have the weirdest stuff on their pizza such as banana. Kebab is a similar good example. It originates of course from the middle east but it has adopted to local conditions all over Europe. Norwegian, Dutch, Greek and German Kebab are all different. In Norway Kebab has corn and some kind of special Kebab sauce I am not sure what is made of.
American English as a Superpower
Americans got lucky being colonized by the British. It gave them English which has turned into a world language which nearly everyone on the planet learns as a second language.
The US benefits from being by far the largest country with English as the first language. Despite English originating from Britain the world is speaking and learning American English. I know British cab drivers will ask me slightly annoyed why I speak English with an American accent. Had he seen my writing, I suppose he would have asked why I write American English.
It is not a stupid question because I went to school learning to speak and write British English. I did not learn American English is school. So why do I an so many other Europeans who got taught British English speak and write American English?
Because America is a cultural superpower. Hollywood, Netflix, Youtube, computer games, numerous books, TV series, pop music, toys etc is all American English. Before I went to school to learn English I actually learned my first English watching American cartoons like He-Man and Transformers. “Decepticons retreat!” was probably one of the first English sentences I learned.
Why does this matter? Remember all the talk about market size and volume. The European Union is 447 million people, but that is made up of people speaking entirely different languages. The largest language in the EU is probably German spoken by around 92 million people (Germans and Austrians).
This is tiny compared to the world of native English speakers which share a very similar Anglo-Saxon inspired culture such as the US, Canada, UK, Australia, New Zealand and Ireland. There are also 5 million people in South Africa with English as their first language. That means the Anglophile world is a whopping 475 million people. That is more people in the EU and they all speak the same language and share a lot of cultural traits.
For American companies this creates an amazing opportunity. If you make movies, books, comics or video games you can do all of that in your own native language and reach a huge audience. The fact that so many people speak English as their second language means you amplify that market further.
This fact helps explain why Hollywood got so big. They could screen movies for a large audience which meant they could make bigger budget movies which again meant bigger appeal abroad.
It also explains why the US came to dominate internet services. If you make something like Facebook in the US you can reach critical mass much faster than if you try the same in Finland with a market of a tiny 5 million people.
Sure you could make a service or application in English in Finland or Sweden and then grow it larger. Yet that is not quite how it works. Usually you start with your home market. In Norway we had a company Finn, which made a web site that let people locate houses and apartments to sell. In fact it developed into dealing with anything you wanted to buy or sell. In many ways it was the eBay of Norway. It was also a place where you could find jobs or advertise jobs. It was a really well made service. At the time it arose it was better than anything comparable I saw in the US, or other European countries where I had a chance to look at similar services.
When other services at the time only had text describing an apartment, they gave you pictures of the rooms, total areas of the house and the property as well as a map showing where it was located. All of this stuff was of course tied in with datasets and practices particular to Norway.
That is the problem with trying to grow abroad. The way information about houses and properties are registered is different. The legal rules around information you got to provide is different. Address formats are different. All of this requires special expertise which you may have about your domestic market but not for foreign markets.
If a Norwegian or Swedish company tries to grow big immediately by targeting the US market, then they face the problem that they are not intimate with the culture, laws and habits the way an American is. This is a problem with growing any business in Europe. I lived in the Netherlands which has many cultural similarities with Norway. Yet everything related to buying, selling and renting apartments was very different.
Dutch people and Norwegians for instance have entirely different practices and expectations. In the Netherland it is common that you rent a place without a floor or basically anything. People buy these special tiles that they place on the ground in the places they rent. Not always but often. Dutch law does not require renters or sellers to specify the number of square meters of the house sold or rented. Often all you know is the number of rooms. Water is heated with gas in the Netherlands but electricity in Norway.
There are just a huge number of differences in how things are done and legal frameworks across Europe that building universal services for half a billion people in Europe is very challenging.
World’s Largest Talent Pool
Being a cultural superpower and having a history as a land of immigrants gives the US some unique traits and advantages. Thanks to American media, everybody around the world knows the US. To most people outside of the West, a white person is the same as an American. You travel to Tibet, Laos or some other distant place and people are going to come up to you ask ask you about how you celebrate Thanks Giving. Doesn’t matter that you are Finnish or Italian and have never heard about Thanks Giving other than in American movies.
When people decide to move for more opportunities then they are going to go to places they know or have some familiarity with. Talent in India, China, Indonesia, Nigeria, Ukraine or pretty much anywhere in the world have some idea of what the US is like from movies. If they know another language then American English is most likely what they know.
If they have relatives living abroad they are most likely Americans. Or if an immigrant community consisting of citizens from your country exists abroad there is a higher chance that it exists in the US than elsewhere. In every large American city you can find enclaves for different immigrant groups. That fact provides some security when going abroad. You can move to an enclave where your kind have already established themselves. You can get in touch with people who know your language. There will be people with stores selling the kind of food you are used to from home. All these little details lower the barrier to making the jump to another society and culture.
How much does this matter to American success and economy? A lot. According to Forbes 55% of all $1 billion startups have at least one immigrant founder. While 38% of Nobel Prizes in chemistry, physics and medicine have been won by immigrants since 2000.
This success cannot easily be emulated in other countries. Imagine a brilliant young professional considering where to go abroad. That he or she will pick my native Norway is rather slim. The fact that we speak an obscure language is a major negative. Why put in effort to learn a language with only 5 million native speakers when you probably already know English?
Second problem is that you have absolutely no idea what Norwegian culture and customs would be like? The candidate will ask whether a person like him will be accepted there. Can he or she get the kind of food they are used to? Who knows?
But perhaps the biggest problem is the fragmentation of Europe. If you move to one country and decide that you want to transfer to another job or another University then that means crossing a border, learning a new language and a new culture. Culture isn’t merely spicy or flavoring. Work culture will differ a lot across Europe. How do you address your boss and colleagues. What is appropriate to do at work and not. Norwegians are extremely casual and don’t care one iota about titles, while in Germany titles are a serious matter and you better use titles and address your boss and colleagues in a proper formal manner.
For some people like me that is part of the fascination with living in Europe. They help make Europe an interesting place, but they are not things which make Europe work efficiently in economic terms or in terms of attracting talent from abroad.
The bizarre situation in Europe is that even for us Europeans it can be easier to move to the US than another European country. I have often contemplated moving to Spain due to its rich culture, architecture, food and amazing climate. However despite being a European I know American culture and language infinitely better. Settling in Spain would mean putting in some effort learning Spanish. Sure plenty of retired people all across Europe live in Spain without speaking a word Spanish. But if you actually want to work there, be party of society, make Spanish friends and not live in some enclave then you need to learn the local language.
Europe as no simple way to compete with America in attracting foreign talent which can startup companies and win Nobel Prizes. Doing that would require changing all languages to English and homogenize the cultures, laws and regulations across Europe.
In many ways this is partially what the EU is trying to do with their nutty list of regulations. Yet doing something like that amounts to selling your soul for economic gain and prosperity. It simply isn’t worth it. Surely life is not about maximum profits.
European Long Terms Strengths
American future is bright given that the US is not only extremely resources rich as I pointed out in my earlier story., but it can also attract some of the best talents in the world.
That is why ironically the US does very well economically despite the fact that American educational system is not actually all that impressive. The US has the worlds top universities but many of them are also made great thanks to lots of foreign talent. K12 education in contrast is better in a lot of other countries. But if a large cohort of people from the countries with the best school systems go to the US then it doesn’t matter.
But the US as one major achilles heel which was made clear when Trump was elected. The US political system is deeply flawed, and one bad leader can drag down 330 million people.
Because Europe is a patchwork of states one has spread the risk of bad leadership. Bad leaders will pop up from time to time but they cannot drag the whole continent down, because they can only be in charge of one country at a time.
This is also historically why Europe eventually outcompeted the Ottomans and the Chinese Empire. 500 years ago China had the greatest sea-going fleet in the entire world. At its peak it counted 3500 ships. Then the Chinese emperor ordered the fleet to be burned.
This even coincided exactly with the beginning of European world dominance. 500 years ago ships poured out of Europe trading and conquering territory all over the world. Europe which had been a backwater quickly started rising in power and influence because of it. Unlike China, Europe has insurance against such idiotic decisions. Europe had no Emperor ruling over all of Europe. Any monarch making a profoundly stupid decision would quickly see their country getting eclipsed our outcompeted by neighbors.
Europe represents a free market of political and economic ideas which can compete with each other. Large structures such as China and the US suffer the same problem as any monopoly system. Being a large monopoly can have benefits in economies of scale. However over time there is a risk of stagnation, and bad leadership brining the whole thing down.
Should the US ever fall behind, it will be because of its broken political system. In terms of markets, resources, entrepreneurial spirit and access to talent the US is in an exceptional good position.
No, The US Does Not Have a Superior Political and Economic System
Part of the motivation for writing this piece was to tackle the frequent claims that somehow American style free-wheeling capitalism is superior to the more balanced social and economic systems found across Europe. Countries must be judged based on their natural potential. Europe has much less resources, significantly smaller markets and talent pools (fewer immigrants) to draw from.
We can compare with countries with resources, market sizes and talent pools more similar to what you find in Europe. You can find that relatively mature countries such as France and Austria as either kept up with or outpaced Japan. In 1990 Thailand and Poland where basically at the same level and Thailand was not far behind Hungary. Yet while Poland and Hungary has advanced Thailand has been quite stagnant.
If we look at relative development you can see that Poland has grown much more rapidly than even a fast grower like South Korea. Hungary has outgrown Thailand despite starting at higher level which should give less growth potential. Japan which used to be the star economy is doing worse than all European economies even mature ones like France and Austria.
Many of the problem in Europe are about more technocratic issues such as the Euro currency being a bad choice for a diverse set of countries. It contributed to Greece borrowing too heavily and without ability to devalue once running into economic problems.
In countries like Italy many of the problem stems from dysfunctional politics and a northern and southern region which don’t quite fit together.
Related Stories
If you are interested in reading more of my stories on social and economic history, you might find these stories interesting.
- No, Capitalism Did Not Make America the Richest Country — Quantifying American advantages in land and natural resources such as coal, oil, iron, hydropower and fertile land relative to Europe.
- How Norway Got Rich Against All Odds Before Oil — Economic and political history of Norway from 1800 to 1940s.
- How Fjords Made Norway Rich — The role strong seafaring traditions stretching back to Viking times played in economic development.
- Why England Industrialized First — The role of water in industrializing Britain.
- Geography and Economics — How climate, coastline and rivers affect economic development of countries.
- Why Did China Not Industrialize First? — Given its massive economic and technological lead, why did China not industrialize before Europe?
