European Economy Needs A Bourgeois Revolution!
Overregulation and excessive tax is killing the European dynamism.
One of the best movies of 2024 was Dune II.
It was an epic movie by all measures, acting, music, visual effects etc…
Aside from its box office record, the biggest success of the movie is reviving the long lost interest for the genius science fiction series underlying the movie.
Dune is not just a great science fiction book, it’s one of the best books of all times.
Unlike Star Wars, which takes place in a different galaxy a long long time ago, Dune takes place in humanity’s future.
This is not a random pick.
The author Frank Herbert draws on human history ranging from Medieval to Modern Era and uses allegories and metaphors to tell a future story of humanity based on its past.
“Spice” for instance is the resource that big houses fight to control in Dune. Without spice, technological development and inter-galactic travel is impossible. It powers everything. Given the name of the planet it’s sourced from, “Arrakis”, sounds like “Iraq”, it doesn’t take a genius to figure out that it’s a metaphor for oil.
However, the selection of name for this all important resource has even deeper roots in human history. He didn’t make a new name for it but simply preferred to call it “spice”. This is perhaps because spice is what made the early riches in Europe.
The West wasn’t always the wealthier part of the world.
Most of the Medieval in Europe was characterized by glorifying the access to the East’s “riches.”
A big part of these riches was spice. European merchants engaged in spice trade with Eastern counterparts throughout an ancient trade road called “Spice Road.”
It started from SouthEast Asia and went all the way to Italy.
Early European merchants made their wealth mostly through the spice trade and it was exactly that accumulation of wealth that later triggered the “Bourgeois Revolution” in Europe.
The Bourgeois Revolution tore down the daddy model of wealth and laid the foundation for a free market economy that would make the West rich beyond imaginable.
End of the “Daddy Model of Wealth” in Europe
“Daddy model of wealth” is a term coined by Paul Graham.
It refers to the top-down distribution of wealth without regard to merits.
It’s called “Daddy Model” because we all start our lives operating under this model.
In a traditional family, the father provides livelihood and stipends to children. In this model, a variation in stipend is unacceptable because it’s seen as an extension of a father's love for his children.
If one child gets more, others think like they are loved less than him. A good father provides his children with equal love and affection so he has to provide them with equal stipend.
When children internalize his equal love, they see the difference in stipend as an error and they want to correct it by demanding “equal pay.” Thus, we start our lives thinking that wealth is something that should be distributed top-down and distributed equally.
This is not the reality, this is just a deception created by a loving family.
From the late Classical Era to the end of Medieval, Europe also operated under the daddy model, that is called “Feudalism.”
Land owners were called “lords” and they would grant a portion of their land in exchange of service to vassals and knights who would employ serfs to work on that land. King was also a lord, he had the the largest land under control.
Serfs wouldn’t get money in exchange for their service, they were just granted a portion of their produce for subsistence.
In this top down model, nobody created wealth other than serfs but what they created was forcibly taken from them. There was no incentive to create more wealth through harder work or innovation.
Where there is no incentive to create wealth, poverty is perceived as faith. This is why the West had remained underdeveloped.
Spice changed all that.
European merchants started to accumulate wealth by buying spice from the East and selling it in European Towns.
They were creating wealth. They understood that wealth was something that could be created. However, the wealth created was still under the threat of getting claimed by the lords and vassals of the feudal system.
It was the randomness of the history that saved them.
In the 14th Century, bubonic plague, known was Black Death, hit the West.
Within two decades, it killed 50% of the Western Population.
England was hit hardest, as you can see on the map below:
Because it was a huge island, there was no way out. Once plague hit a town, it would end up killing mostly all of it.
At the time, England's population was estimated to be around 6 million and nearly 3 million people died in plague, mostly serfs of course.
There is a reason why the industrial revolution happened in England. Because it was hit hardest by the plague, feudal lords struggled to find serfs to work on their land.
Lords started to offer better conditions to serfs to leave their current lord. Thus, small lords weakened and fell over time while the power got concentrated in bigger lords. Who do you think the biggest lord was? The King of course. Naturally, centralized monarchies gained power against feudal lords.
Before long, most serfs left their feudal lords to seek better opportunities in towns where they would be offered jobs by the merchant class that got wealthy in towns through spice trade.
This so-called “bourgeois” class supported the King in centralization of state because monarchy represented stability and continuity against the disorder stemming from the greed of feudal lords. They supported the King in exchange of protection over personal property.
With the decline of feudalism and extension of protection over personal property, non-noble men were, for the first time, allowed to create and keep their wealth.
In the next 200 years, the West would overtake the East as the center of wealth and power in the world. All major inventions on which today’s world was built came from the West.
It was all because the men were now allowed to make wealth and keep it. Entrepreneurship and risk taking were promoted instead of feudal corruption and blind obedience.
Daddy model of wealth i.e top-down distribution of resources was replaced by the rule that defines our modern society: “Whoever makes it gets to keep it.”
Silent Return of the “Daddy Model” in Europe
Since the end of feudalism, whenever societies experimented with going back to the daddy model they suffered poverty.
The Soviet Union was the biggest experiment.
It started with the sweet sounding mandate of equal distribution of wealth and resources.
Result? It created two classes: Poor workers and rich rulers. Just like feudalism.
This is because of the truth that not everybody contributes equally to the creation of wealth. Some of us create more wealth, others create less.
However, when you unfairly appropriate the wealth created by hard workers, entrepreneurs, risk takers, you leave them with 0 incentive to keep doing it. They stop creating more wealth.
This is why all communism experiments resulted in equalizing people in poverty not in wealth. Because there was no wealth creation that could be redistributed.
In none of the such “equalization” experiments, the government simply came up and appropriated the personal wealth. There was always a system.
In most of modern history, the name of this wealth distribution system was, and still is, “tax.”
Americans were keen to understand that higher tax was actually stealing money from their pocket.
All government taxation is redistribution of wealth.
Sometimes people see this, sometimes they don’t but they always feel it.
When tax is excessive, people are disincentivized to produce more, work hard and take risks. They feel that the fruits of their hard work is not left to them.
Equalizing high wealth creators to non creators through redistribution of wealth doesn’t incentivize non-creator to create but disincentivizes the creators. Before long the overall wealth creation in the society declines.
This is what we are seeing in Europe now.
This time the name of the system is: Excessive tax & overregulation.
Take a look at tax rates for instance. Tax rates across the board in major European economies are way higher than the US.
Tax to GDP ratio in France was over 45% in 2019 and 43.8% in 2023.
What does this tell you? This tells me that the Government in France is very big and it lives off on its productive citizens. The French Government taxes wealth creators and redistributes it.
Germany and Sweden are no different.
What do you think this leads to? Simple. They stop being productive.
This doesn’t even end here.
European Governments don’t just take more money out of your pocket, they are also making it harder for entrepreneurs to create wealth.
Number of pages in e-commerce related EU regulations nearly tripled since 2020.
This is insane. What do you think the result is?
The US has Amazon.
Latin America has Mercadolibre.
Asia has Alibaba, Pinduoduo, Coupang.
What does the EU have? What is the EU’s regional e-commerce champion that could compete with Amazon? There is none despite the fact that free movement of goods and services within the Union provides a huge advantage for such services.
Entrepreneurs just don’t do it.
Why would they? You have to deal with EU level regulations and then separate regulations in the member countries. Suddenly it’s impossible to send batteries from Munich to Marseille.
It’s a complicated and hard job and even if you pull it off, the Government takes most of the money you made from you. Why would you do it? You wouldn’t.
This stagnation reflects itself on the stock prices:
As investors, we aren’t left with anything other than the US.
Yes, there are strong businesses in the EU that are overlooked but because of the overall anti-business environment of the continent they remain overlooked and investors can’t profit even if they bet on the right horse.
The solution is simple: Going back to the roots.
Allowing productive people to keep fruits of their efforts made Europe rich in the first place. It should just go back there. It should stop taking their money through taxes and overregulation.
Allow risk takers and entrepreneurs to keep what they made, then they’ll produce more and others will inevitably benefit too.
Conclusion
As the US market is at all time highs, I want to diversify away from it by buying European stocks. However, the underperformance of the region in the last decade is discouraging.
The problem underlying the EU’s lack of productivity is simple: It’s disincentivizing wealth creation by trying to make everybody equal by taking more from those that create more wealth.
That might seem working initially.
Indeed, redistribution of wealth creates an illusion of welfare and you can brag with the level of civilization you have. But it’s temporary.
Before long those who create more wealth stop doing it because they feel that they don’t get to keep the fruits of their hard work and risk taking.
When that happens, society starts going backwards altogether.
Of course everybody deserves humane living conditions but that shouldn’t go beyond equalizing them in opportunity. If somebody doesn’t work because he can live off of welfare and he is happy with that, there is a problem here. It may be equal, but it’s not fair.
Europe should simply stop this redistribution of wealth and simplify regulations.
Allow entrepreneurs to keep what they make and make the process simpler. They will create wealth for everybody.
Until that happens, we shouldn’t expect to see any European tech giant that is comparable to the US peers. We will be left with the legacy businesses like luxury and rare strong growth companies that emerged despite the system.
Buying EU stocks will be cherry picking but we have no other choice.
Hopefully, the EU regulators and nations will see their mistake at some point and stop trying to reestablish the daddy model of wealth.
Living in Denmark and paying approx 50% in taxes.
The social security and entrepreneurial incentives from the state has made it much easier for me to take the risk and start my own company. 12 years later, today I have 14 employees. And I still pay my taxes with a smile. I know that if I fail or run out of luck I still have universal world class healthcare, free education including college/university, a well governed state with no tech oligarchs paying their way into the politicians minds and legislation.
Without the experience of living in the US I still think that being entrepreneurial is way easier in Europe than the US because it is easier to take a chance if you know there is a safety net.
I don’t think someone working in McDonalds in the states would have many options to take that financial risk it is to start a company. Or even to live a proper life with college education for their offspring. The American Dream is working fine for the well-off. The rest is fucked from what I see.
True words! Germany is a catastrophe... And most citizens are not capable of understanding this. From my point of view as german: Germany and France are by far the worst countries, scandinavian countries have much better systems with useful tax spending. And Poland is ruled well.