Free Riding on the Innovation That Emerges from America

It's no accident that the lion's share of innovation, world-changing entrepreneurship, patents, pharmaceutical drugs, etc. today emerge from the United States. In America are a unique set of factors that do not exist elsewhere. It assimilates immigrants better than anywhere. There is a relatively low regulatory burden on business. Lower marginal tax rates. More flexible bankruptcy laws. There are flexible labor laws, allowing entrepreneurs to hire and fire at will. There's a culture of risk taking and entrepreneurship. Smaller government, more free markets, more private sector. The result: Google, Pfizer, Ford, Apple, many others.

The American model that produces such innovation does come with significant costs. It is a more cutthroat society. There's more inequality than in Europe. There are bigger winners and bigger losers. There is not as much a safety net if you're out of work or are born with a bad number. It's easier to lose your job. There's a workaholic culture. An obsession with success and self-improvement. Perhaps lower levels of happiness.

For these reasons, I don't blame Europeans who rather enjoy the French way of life and choose to live, say, in the beautiful Loire Valley. And not just that: the Frenchman in Loire Valley gets to use Google! Dell! Microsoft!

In the age of ideas and internet, every individual can take advantage of innovations that originate from anywhere. Ideas know no boundaries.

Just as European nation-states free ride on the American defense shield, allowing them to invest less in military defense than they otherwise would, so too can European individuals free ride on the entrepreneurship that emerges from the American model.

So I'm confused when Europeans criticize the American model and hope for its abolition or transformation into a European-like welfare state. The rational, self-interested view of a European who loves the European model should be, I live in Europe, enjoy the fruits of a stronger welfare state, see only low levels of inequality, access widely available healthcare, enjoy pretty good free universities, AND can use all the innovation that comes out of America.

The varying models of liberal democracies around the world — for example, the different ways to organize the interplay between government and the private sector — serve a valuable experimental purpose. Europeans are lucky to be able to sample from their own menu, and America's. As consumers, they get the best of both.

Bottom Line: If you're a European citizen who enjoys and supports the European economic / social model, you should still be supporting the American model as it stands because it produces lots of innovation you benefit from. If the American model becomes the European model, innovation decreases, and everybody loses.


Counter-argument 1: The American model is increasingly resembling the European model and there's no evidence in a slowdown of innovation. However, the trend is a mixed bag. The overall size of government has increased and the most recent healthcare bill is European-esque. But the Clinton welfare reform in '94 or the Bush tax rates the last 10 years are still distinctly "American model" policies.

Counter-argument 2: It's not the "American model" of economic policies that allows innovation to flourish, it is rather its entrepreneurial culture, a culture that operates somewhat orthogonally to policy.

38 comments on “Free Riding on the Innovation That Emerges from America
  • The defense free-rider thing comes out of left field. America doesn’t spend more on defense because of necessity nor does it get appreciably more for its buck. If we didn’t do it, that would be far fewer dollars going to waste and to line defense contractor’s pockets. We do it out of narcissism. We have to project this image to the rest of the world as being a tough guy. And most Americans have this ridiculous picture in their heads that we are the world’s big brother.

    The world would be a much better place if we curbed like 70% of our defense spending. Particularly to get rid of out-of-touch generals and admirals.

    Our defense spending is a festering wound that we try to dress up as a suit of armor.

  • I would wish that our bloated defense budget was simply because of narcissism, but there’s evidence to believe there’s bigger things at play. In our cut-throat society, don’t you think arms industry execs. are more interested in remaining profitable than our nation remaining peaceful?
    I’ve done extensive research on the American Military-Industrial Complex. A concise, well produced documentary on the topic is called “Why We Fight” by Eugene Jarecki

  • Whenever the conversation of defense comes up in a comparison with the US and Europe, one point always seems to be missed. In the last hundred years, the cost of war for European countries has been much more severe than that of the US. Maybe not in financial terms, but war has penetrated European society to a degree unthinkable to Americans. I don’t think it’s at all a coincidence that the Europeans are taking a “free ride” on the American defense train: they have considerably more to lose. Even if the United States were somehow “attacked”, it’s hard to imagine a situation where the entire country was overrun by the troops of a foreign nation.

    I think this also goes part way in explaining why the UK is slightly more militant than continental Europe. Although parts of the UK were devastated by the Blitz, it’s been centuries since England was invaded (last successful invasion? 1066) and so the country is more insulated from war than, say, France.

  • For much of modern history, most of humankind’s science output was conducted by just a handful of nations. The economic & scientific rise of China seems to be a great thing for humankind in that context. It might just save your life if you someday use treatments that benefits from science done in China (who now train more scientists in some fields than the US).

    As well, Asia avoids what seem to be two of the largest cultural biases that to drag down the West’s intellectual abilities: 1. Irrational supernaturalism (e.g. only ~10% in the US believe in natural selection) and 2. the West’s general biophobia that makes them resist honesty about human biodiversity (innate human inequality even among siblings) and the eventual technological solutions to it (and a host of related societal problems).

    Thanks so much for the site!

  • I vote for counter-argument #2. The people that innovate aren’t going to stop simply because they get better healthcare or bigger social security checks. In fact, I would bet there are quite a few people that might try their hand at innovating if the safety net were better, i.e. they don’t have to risk bankruptcy or their family’s health to start a company. A larger safety net may lower overall productivity but I doubt it would stifle innovation. And I’m not even convinced about the productivity part – it seems to me that a better educated, healthier workforce would be more productive in the long run.

  • Ben,

    Yes, a lot of innovation has come from the United States. However, I find it difficult to reduce that down to just “culture of entrepreneurship” or laisse-faire economic policies. Surely those are factors, but consider a Scandinavian country like Sweden.

    Yes, admittedly, Sweden hasn’t contributed as much innovation, but there are many major Swedish countries, GDP per capita is very high and the population size is just a few percentage points of the United States. Despite being one of the most successful states in Europe, it also has one of the most left-leaning fiscal policies and is definitely a model of the welfare state.

    The United States, in my opinion, has credit for such a wealth of innovation as a combination of its success as a state (which is due to a complex array of factors), but also due to its population size which makes it difficult to adequately compare the country to other countries that may be doing similarly or better, but are far, far smaller.

    Figuring out what makes a state successful is hard. There are factors that contribute, undoubtedly, but the question is an immensely complex mix of culture, policy and the weight of history.

  • It’s a nice story – your stated reason for why the US produces more innovation – but I’ve heard smart, reasonable people give completely different explanations. The problem is that I don’t know of any clearcut way of testing which explanation is true.

    Just as an example, an alternative explanation, which I don’t necessarily endorse, is that the US gets the benefit of huge returns to scale as a result of having a relatively homogeneous culture, language, etc. Those returns to scale are far greater in the US than in Europe. Maybe (!) that’s the real reason for the disparity in innovation. The question is: what fraction of the disparity in innovation is due to those returns to scale? Is it 10%? Or 50%? Or 90%? And, of course, there are several other plausible explanations for the disparity in innovation as well. I don’t necessarily think that your explanation is wrong, but I’ve never heard of a plausible way of determining which of these plausible explanations is principally responsible for the disparity in innovation.

    Incidentally, the “US produces more medical innovation” idea is arguable. At least if you use Nobel Prizes per capita as a metric, I believe Australia is ahead of the US. If you use drugs brought to market as the metric, US companies are ahead. Of course, the latter benefits enormously from concentrations of capital, and we’re back to returns to scale.

  • I agree the size of the U.S. is a major advantage.

    How much of Sweden’s GDP per capita success is due to its homogeneity and small size?

    I need to read more about Scandinavia in this respect.

  • I agree with Michaels comments. I worked for a startup in Shanghai (interning) during last summer, so I learned a lot about scale. Being Irish and from a country that was one of the countries to watch in Europe in terms of its economy, a big problem I’ve noticed is the lack of diversity. Some of the economic problems that Spain, Portugal and Ireland experience at the moment is perhaps due to a lack of diversity and innovation. For instance in Ireland lots of people went into property development, real estate management, bricklaying, etc. Its important I feel to actually propose ways to examine innovation, and what actually causes it to happen. Lots of theories are proposed for this, and a huge chunk of educational reform is centred around ideas such as ‘we need to foster innovation’, ‘we need to encourage Science and Maths’. Does anyone have any ideas for testing innovation per capita. There is for instance as I understand it a lot of professors and scientists from Australia (a country of only 26 million) doing nontrivial research. However sometimes they aren’t in Australia. Michael for instance was a faculty member in Canada, and did his Postdoctoral work in USA.

  • Many interesting ideas on this matter of why nations are economically successful or not are discussed (in a humorous way) by P.J. O’Rourke in “Eat the Rich.”

    It seems to me that the “varying models of liberal democracy” could be taken further. Our governmental and geographic structures have little room for experimentation – how would you start a new country and try something?

  • Innovation like “Heat Retentive Plates” -which keep food warm on the plate for the first time in history- by an independent inventor was offered for licensing to all large dinnerware companies in the USA; they were not interested.
    The inventor found a manufacturer in China, started producing and now there is not a single state in the USA (Including Alaska and Hawaii) that has not placed an order for the plates.
    How do I know that? I am the inventor.
    Juan J. Ramirez

  • Most Europeans I’ve met don’t care whether the US becsome more European. They just wish we would stop being so militaristic.

    It’s especially odd given that even today no credible threat of invasion exists. Part of the reason the US grew so strong in the 1800s was, compared to the European empires, we didn’t have to worry so much about countries invading. As recently as Pearl Harbor I beleve the US was not even the in the top 10 in terms of military spending.

  • I don’t know if it’s still true today, but during the 90s, Sweden’s musicians/producers have had more Top10 hits IN the US charts than American producers.

    Music education and virtually everyone being fluent in English might be some of the factors here.

    Many UK-based banks have specialists who invest in musicians/record labels/audio software or hardware, because multimedia is the 3rd biggest industry in the UK.

    Certain countries/regions have certain “cultures” when it comes to money/investing in ideas and new concepts.

    I think the dominance of the “American entrepreneur”-model is based on something very simple: there are enough of those with money, who want to make more money by letting others access their capital.
    And of those, most believe that making “something out of nothing” is more promising than “improving the Status Quo” (read: big companies becoming bigger).

    IIRC, 0.5% of the money invested in the US goes into start-ups, while 17% of the GDP is created by said start-ups. That’s roughly 35-times more. The money for European start-ups is EXTREMELY short compared to that, so you can imagine how hard it is to find “money for new ideas”.

    There are as many of those who could’ve come up with Google, Youtube, Facebook, Myspace, etc…

    But for those ideas (none of which were original in ANY way) to be brought into existence (read: a product), let alone turned into a successful business, there is another (crucial) factor, which gives the US an advantage over other markets:

    – the US market was never about outstanding, new ideas, it was always about outstanding, new ideas related to the EXECUTION of concepts.
    If you look for example at Youtube, Paypal and Facebook, you will see that it all goes back to the same “source”. The EXECUTION of these concepts was successful, because that’s what these concepts were based around: the EXECUTION part, not the “heureka!” part.

    I think the perfect example is Nicola Tesla and his work in the US. Arguably the most influential person who ever lived (and in the field of “technology”, there is no doubt about it that he indeed WAS the most influential person, ever), he could’ve become the world’s first trillionaire. Instead the likes of Westinghouse and JP Morgan (who threatened to kill Tesla if he wouldn’t sell him his patents – and later burned down his laboratory) are being remembered. Not for the ideas, but for their part in executing them.

    The fact that you are blogging fairly inexpensively on the internet, powering your coffee machine in the morning and watching TV is based on one single trivial “idea” of Tesla’s: he tore apart the contract he had with Westinghouse, which would guarantee him $2.5 per kiloWatt of electricity generated.

    And the “idea” of the “coach potatoe” was only possible, because we started to cultivate potatoes AND because Nicola Tesla’s mother invented the remote control. LOL

  • @Ben: You mention America’s “obsession with success and self-improvement.” Is your point that a relentless focus on self-improvement leads to that unhappiness, because self-improvement itself is a never-ending process?

    Reminds me about articles comparing the psychology of Republicans and Democrats — supposedly, Republicans are happier because they aren’t trying to improve things.

  • Canals, railroads, expressways. Interchangeable-parts manufacturing. Computing and the internet. It’s very hard for me to think of an innovation, or an infrastructural root of economic growth, not supported in some way by the federal government, or at least by states and localities (but more often the former). Any historian of technology would say the same.

  • I don’t quite see your point here. Apart from IT, which American key industry has been significantly more innovative than its European or Japanes counterparts over the last few decades? How come the American automotive industry is in such a shambles, while the automotive industry of Germany, which must be high on your list of welfare states that pamper their citizens into being non-innovative, is the world leader in technology in this area?

    There is strong libertarian case to be made for universal health care, as you know: The overall social cost of a lack of coverage is higher than that of a modest provision such as the one just voted into law by the US congress.

  • Yes, the European social/economic system is just terrible. That’s why all our wealthy Americans drive a German, Swedish, Italian or Brit cars, eat off of French china and drink their French or Italian wine from Irish crystal, lounging in Danish furniture while talking on their Finnish cell phones, with their wives’ clothes coming from Paris or London fashion houses. Innovation in my town is when another Dollar General store opens.

  • I think this statement can only come from an American, who seems to be missing the innovation that comes from Europe. America has Google and Microsoft. Europe is leading the world in open source software. Americans are all giddy about the iPhone, but Apple has a worldwide market share of 2%. Nokia has 34% (the US market is irrelevant for Nokia as they’re selling 30 million phone a month in India). Apple gave the world the mp3-player, but Europe gave the world the CD, while Japan created the walkman. Europe is not dependent on the Middle-East for oil. It has plenty of its own. Outside oil comes from Russia, which is not always a pleasant experience, but way better than dealing with the violent Middle-East. America has IBM and Intel, Europe has Siemens, Ericsson (from Sweden!) and Philips. American developed the internet (as a defense project by Al Gore), but the hyperlink came from Europe. In Europe one of the smaller members is bankrupt, the US the largest state is.

    In short, I think Europe is pretty happy with its own level of innovation. They enjoy American products, but no more than Americans enjoy European products. Or actually, a bit less, due to the negative trade balance that the US has with the EU. That means America buys more European stuff than the other way around. So, who is enjoying whose products more?

    I will agree that Europeans are very happy that they live on a continent where everybody can enjoy the benefits of pharmaceutical advancements, wherever they were made. For half the money Americans pay. And they’re happy to buy a few iPods with the savings 🙂

    [I’m a European living in the US]

  • Of course, the flood of innovation in the 20th century has nothing to do with government–evil! evil! government and its heinous support of mass education, infrastructure, and universities (SIlicon Valley–why it could have been birthed anywhere–Idaho! ALaska!–and of course the internet was just hatched from the head of a brilliant entrepreneur who sketched it on a napkin…) And as that support lessens (in EUrope too)–and as China tosses billions at its education system–I’m sure that America will continue to lead the innovative charge well into the future. Flexible labor markets! Entrepreneurs! Forward–into the past!!!!!

  • Why do Europeans think Americans should do things differently? Because the philosophy underlying the welfare state is ingrained in our consciousness. We think it’s a bad thing that poor Americans can’t get health care. We find it impossible to understand why Americans, who are so keen on justice and freedom and the American Dream, aren’t outraged by a system that allows someone to be denied coverage for her cancer treatment because of an alleged failure to report a pre-existing condition — acne! No, they’re not our poor. But we feel for them all the same.

  • I’m curious as to your statement that pharmaceutical innovation is American in nature. What do you make of the fact that a sizable proportion of pharma conglomerates operating in the US are European? E.G.: Astra-Zeneca (UK/Sweden) Novartis (Switzerland) GlaxoSmithKline (UK) Sanofi-Aventis (France) Roche (Switzerland) Boeringer Ingelheim (Germany), NovoNordisk (Denmark). Moreover, the megatrend for all companies is to outsource research to India and China, naturally for cost-savings. How is this American, in your view?

    Moreover, sizable innovation in the practice of medicine (not its gadgetry) is actually coming from socialized health systems because they have access to macro-level data and have dual responsibility toward individual healing and public health. Do you count that kind of innovation?

    Also, are you aware that many European countries are turning toward more of an entrepreneurial economic development policy? They are pivoting off benefits like national healthcare to enable diverse tech startups – look at the tech corridor in Grenoble and the fresh approach by the Paris Chamber of Commerce and industry. Europe never used to do this stuff – but they are catching on very quickly. Meanwhile, housing, education, and healthcare have skyrocketed in the US, favoring the large and established over small, scrappy, prototypically American startups. Do you think this is new?

    We may have a “culture” of entrepreneurialism in America, but our reality seems to be in tension with that culture.

  • I’m not really sure Europe has been lagging on the technological front — it’s just that it excels in different areas. Americans lack a worthwhile mass-transit system, let alone one that incorporates an achievement like the Chunnel or the Alps tunnels. Ford might have pioneered automobiles, but Europe makes the world’s best. We use European and Japanese cell phones; our computer hardware owes plenty to European design, and Europe is far ahead of the U.S. on the use of green energy technology. Frankly, many of us Americans would like to do more free riding on Europe.

  • You are both quite right and very wrong. In pharmaceutics, you are right. An American company can invest more on R & D because they know they can make a huge profit within the American reimbursement system, and that’s something a European company can not be sure of.
    In other areas, you’re wrong. Take banking systems, cell phones, entertainment, green energy systems. The Danes rule the world in wind energy, the Germans are taking over on solar power. If New Orleans had been protected by a Dutch dike system, Katrina would not have been so devastating. Big Brother, the tv show, was a Dutch creation, that made the creative mind behind it very very wealthy.

    Short answer: it just depends on the industry. And on the question which kind of inventions you deem more important.

    Most major technological inventions in the sixteenth century were Spanish and Italian. In the seventeenth century: Dutch. Eighteenth and nineteenth: British. Right now: American, Israeli and Japanese. Fifty years from now: maybe Indian and Pakistani. Things change.

  • You’re right Ben,

    “The American model that produces such innovation does come with significant costs. It is a more cutthroat society. There’s more inequality than in Europe. There are bigger winners and bigger losers. There is not as much a safety net if you’re out of work or are born with a bad number. It’s easier to lose your job. There’s a workaholic culture. An obsession with success and self-improvement. Perhaps lower levels of happiness.”

    the EU is a more moral place.

    Also, the US is a country that started on third base and thought it hit a triple. Massive landmass, untapped natural resources, all the knowledge and innovation of European history etc etc.

    Also see unified currency and economies of scale for a much better idea as to why there is more innovation in the US (debatable actually, take away defense spending for some what if games) than a discussion of marginal tax rates and welfare.

    Stop patting yourself on the back.

  • “There is strong libertarian case to be made for universal health care, as you know: The overall social cost of a lack of coverage is higher than that of a modest provision such as the one just voted into law by the US congress.”

    Very true.

  • counter argument #3: Americans really aren’t that innovative.

    Your whole argument rests on a premise that you give no evidence for. Equally, I don’t think you would have any evidence that wasn’t anecdotal (ie not data), and as eric garland shows above, there is going to be an equal amount of counter-anecdotes.

    Equally, in a lot of fields any anecdotal evidence your going to muster is going to be heavily culturally-biased to america. You, for example, don’t have access to cutting edge pharmaceuticals/medical gadgetry developed in other countries because they wont have been approved in the US. You wont see Nokia selling millions of cell phones in India but all of your friends are using i-phones. You wont see that the world’s most innovative shipping companies arent american because you don’t pay attention to ships, nor will you see innovative train/bus designs because america doesn’t have them. You won’t see most innovative architecture because the most innovative architects probably aren’t american and aren’t building in the united states.

    In other words, when you say innovative, i see good at software/IT, terrible banking practices and little else.

  • Meh, Japan has a weak financial economy, socialized medicine, robust insurance for seniors, and a nationally organized, high-preforming, expensive educational system, and yet they still produce tons of innovation from MIRs, to cars, to architecture, to art. This argument that having a government active in the economy stymies innovation simply doesn’t hold water, and it never has, really.

  • Europe doesn’t free-ride on US defence spending.

    The UK spends 4.5pc of the world’s military budget, putting it in third place behind the US and China. France spends an identical 4.5pc, putting it in joint third place with the UK.

    Europe has two of the world’s nuclear powers, half a dozen of the world’s best professional armies and no conceivable state aggressor except Russia, which has a third of its population and one tenth of its defence budget ($35bn to $350bm).

    Of course Europe doesn’t spend as much on defence as the US, but then it isn’t governed by its military-industrial complex.

    As for innovation, previous posters have listed European achievements. And look at Nobel Prizes per capita. The US is in 11th place, sandwiched between France and Germany: all of the top ten countries are European. (

    So you’re upside down: in fact, Europe /should/ be encouraging the US to be more European.

  • Here we go again with the myth of the US carrying the world on its innovative cod-tails.
    – Airbus would be surprised to learn they should thank the US military.
    – The French would be surprised they should thank the US for their high-speed trains and leading position in civil nuclear power.
    – The Germans would be surprise they should thank the US for their achievements in manufacturing which makes it the second largest exporter of manufactured goods just behind China and way ahead of the US.
    – The Fins would be surprised they should thank the US for hosting the world’s premier telecom company: Nokia
    – The Swiss would be surprised they should thank the US for hosting among the most innovative and largest pharma companies (in particular Novartis)
    – US automakers should thank their European subsidiaries for teaching them how to build cars.

    And the list goes on and on. Europeans are less “innovative” in consumer products than the US because they are not as consumerist a society as America, not because they don’t innovate.

  • I would be much more rsik-taking if I knew that I, and more importantly the ones depending on me, had a decent floor below them in case I failed—which is much closer to being the rule than the exception in innovation, and how evolution works.

    All the creative, hard-working people I know in I.T. and in science would work regardless of whether they needed to do or not. Well-fed cats can make _great_ mousers.

    And, to be blunt, I believe that growing up less afraid of poverty helps to make you ‘nicer’—not ‘better’, or ‘good’, but nicer. Once consequence of this is a willingness to (say) see a huge nation behave decently toward its own citizens even if it might make for some small reduction in your own wealth….

  • Defence spending leads to alot of high tech gains.

    The issue is relevant – despite Casnocha’s argument on unique factors – defence spending and the sheer scale of it contribute to a significant number of US inventions.

    Furthermore, before US dominance is completely trumpted, consider that a MITI ( Japanese department of trade and industry 0 government report concluded in the 1990s that UK had contributed to 54% of the world’s most important innovations, the US 25%. That despite the UK’s far smaller size and and different economic model.

    The fact is innovation is not easily categorized, Germany is not laggard in this sense. Specializes in a core set of innovations from chemicals, automobiles and audiovisuals.

    Freeriding, is a false argument, America reaps dividends from their innovations, if they didn;t they wouldn’t innovate . It’s crude to simply lump everything you like about US economic model and equate it to innovation and at the same time ignore European innovations

  • Actually Sweden, with 50% of its economy in the public sector, has a much higher rate of per capita patent registration than the united States, in fact highest in the world discounting Japan’s eccentric patent system.

    That’s because Sweden makes sure all its people have the opportunity to contribute fully to its economy and society.

  • I would advise that you *go more* to Scandinavia in this respect. You might for example examine how Scandinavian countries *do not* have laws that make it difficult to fire people, but instead have generous unemployment support when people are fired. This has increased labor market flexibility, and is partly responsible for the fact that long-term unemployment in Scandinavia is half that in Germany.

    In general, referring to a “European model” is a crutch, and it’s a good idea to go deeper as quickly as you can.

    On the other end of things: You list four “innovative” companies which you say come out of America. Of these, Pfizer is not doing as well as other pharma companies in the past 5 years, and the contention that the decision to locate HQ in the US by most of the world’s rapidly consolidating pharma companies reflects anything other than market size and tax sheltering is not taken up here. Ford, meanwhile, is not more innovative than VW. Dell is not a particularly innovative computer company; they had one insight 17 years ago.

    Apple, however, is an innovative company.

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