Growing inequality is one of the biggest social, economic and political challenges of our time.

The European Socio-Economic Model — a economic blueprint to fight global inequality

By Oliver Fiechter

After the rise of the Western world which started in the 15th century, and the rise of the US starting in the late 19th century, we are witnessing the third global power shift in modern times — “the rise of the Rest” (Fareed Zakaria) and the emergence of a truly globalized world. For the first time in history worldwide economic development has been possible.

Non-Western countries have introduced free-market economies, are investing in education, science and technology, are adapting meritocratic systems and increasingly a culture of peace, and in more and more countries the rule of law gets established (Kishore Mahbubani).

While many of these non-Western countries are booming, Europe seems to be in bad shape. Since 2007 it has been hit by a series of crises — the subprime mortgage crisis, the banking crisis, the sovereign debt crisis, the Euro crisis. Crisis thinking has become a dominating feature of European societies, economies and the minds of its people.

No wonder that on global level Europe has been replaced as a role model for development. Successful emerging countries are following Asian state capitalistic approaches and US-American Shareholder Value thinking when creating their new political, economical and social structures. In the realm of ideas Europe has become entirely absent.

In the last 10 to 15 years the global environment has dramatically changed but Europe has not.

Economy 3.0

The global power shift has come along with substantial changes in the economical structure of our societies. Oliver Fiechter’s concept of the “Economy 3.0” explains the ongoing transformation.

Economy 1.0 was based on satisfied basic needs, such as survival and need to have. Economy 2.0 was geared by want –to have, meaning an increase in quality of life and consumption. In the Economy 3.0 the human being looks for emotional satisfaction. Quality of life gets more important, whereas possession is hindering our mobility and flexibility. The economy 2.0 was geared to increase production and ensure enough delivery. The economy 3.0 is in contrary, focusing on managing opulence. It is obvious these differences are based on fundamentally different logics. The categorization helps to understand the maturity of national economies, companies and organizations as well as to identify the respective needs for changes.

As a consequence, politics and society will be forced to think about the quality of growth and have to adjust targets in the future. In the near future, the wellbeing of nations will be defined by other values than simply by the BIP. These developments will also have a big impact on countries and companies. Even the new international accounting standards will incorporate new dimensions besides the mere financial capital. The modern reports have to contain qualitative aspects such as human or client capital.

The western free market economy is confronted with fundamental changes. The impact of real versus financial economy is changing. Due to globalization and increase in competition, the profitability of past successful economic sectors is decreasing. Politics, society and economy are exposed to increasing mutual distrust. Based on the theory of the economy 3.0 the changes in these relationships can be understood and impact on new approaches for the society as well as companies can be discovered. Considering the failure of traditional economic and social theories in connection with the anticipation or explanation of recent developments (such as the financial crisis in 2008) this new approach gains a lot of momentum.

Economy 1.0 was focusing on increase in physical wealth and goods which have been necessary for survival. The value added in the economy 2.0 is based on increase of material prosperity. We are talking about the industrialization where management is using more and more scientific developments. In contrast the added value in the economy 3.0 lies with the increase of immaterial wealth. Increase in quality is more important than further stretch the quantity. Production, marketing and development are more and more considering supply as well as demand. The players are melting and adding value commonly. As a result, we are talking about a real economic evolution. In the prior economic systems traditional production means (such as capital and machines) have been responsible for the economic success. In the economy 3.0 the human capital gets more and more important. The added value in the economy 3.0 is defined by investing life time to achieve or deliver certain services, rather than the inserted capital. Increase in productivity has therefore its natural borders. The meaning of the economy of scale is vanishing.

The developments of the economy 3.0 are empowered by the digital transformation. New technological developments and networking possibilities are shaking traditional power structures. The older forms of economies have known a centralization of power and resources. Companies, political organsiations as well as social institutions have been administered and steered centrally. On the other hand, the new world will not be centralized in the least. The internet will play a major role in adjusting the existing power frames. New digital ecosystems will develop on its own. New playing rules will apply and this will lead to new winners and new losers.

The European Socio-Economic Model

Europe’s socially based, free market economy (Soziale Marktwirtschaft) was shaped in the aftermath of World War II in the second half of the 20th century. In many respects — e.g. small-scaled structure, solid industrial base, and apprenticeship systems — it builds on century old traditions. Albeit diverse in its specific occurrence, three main characteristics describe the

European socio-economic model:

1. The state assumes a broad responsibility for the welfare of its citizens.

2. Social dialogue and labour relations are institutionalized.

3. Redistribution policies are in place to diminish differences in income and wealth.

Depending on their local specifications, scientists distinguish between a “Nordic” version of the European socio-economic model, a “Continental” or “Corporatist” version and a “Liberal” version (Karl Aiginger).

This socio-economic model laid the foundation for Europe’s success in rebuilding its social and economical structures after the times of war and destruction in the first half of the 20th century. And it still depicts the basis for today’s welfare states. However, in times of increasing globalization, global power shifts and disruptive technologies the model has obviously reached its limits.

How can Europe adapt to changes in the global environment? What are Europe’s strengths in an increasingly globalized society? What is it what Europe can actually offer to the world?

In a first approach we see the following entry points:

1. Humanistic Thinking and European Values

Missing individual rights and political freedom is what in most cases still distinguishes emerging countries from Europe. It has been Europe that has developed the humanistic worldview based on humanistic thinking, rationality, secularity, rule of law, democracy and universal human rights.

Individual rights are crucial for sustainable and long lasting economical, social or cultural development — in Western and non-Western countries.

2. Stakeholder Value Networks

The traditional European socio-economic model is based on a stakeholder value approach. The purpose of a company or organization is seen in producing value for every stakeholder involved — customers, employees, shareholders, suppliers, local communities, and others.

But the “Shareholder Value Movement” has increasingly been replacing this approach. Maximizing profits and maximizing the value of a company — the shareholder value — is the best for shareholders and at the same time the best for the economy and society as a whole. That’s the essence of the shareholder thinking which started in the US in the 1980s and soon became the dominating doctrine for businesses all over the world. It fuelled the financial economy, laid the theoretical foundation for its leveraging and contributed substantially to the emergence of the financial crisis.

But two things have brought the stakeholder approach back on stage. Firstly, the financial crisis and the insight that the shareholder value movement has reached its limits. Secondly, new communication technologies and digitalization of ever more spheres of life put an emphasis on networks and networking approaches.

Peer-to-peer networks and interactional expertise have become crucial success factors in the Knowledge and Communication Society. The economic system is increasingly seen as a network of clients and stakeholders who collaborate and cocreate.

3. System-oriented management practices

The changes in the general setup of our world order has led to an increasing level of interdependencies and networked systems, a new type of communication, and leapfrogging in the dimension of the worldwide division of labour. Hence we see a “complexification” of almost all spheres of live. Coping with complex and hypercomplex environments needs a different form of management. Traditional business administration and MBA education systems are still aligned with the much too simplistic shareholder value thinking and have reached their limits. The boundaries between business organizations, civil society movements and the public sector become blurred. Modern management practices bases their theoretical foundation on system thinking and complexity sciences.

4. Hidden Champions

A specific part of Central Europe’s real economy continues to be globally very strong. More than 1500 companies in German speaking Europe and another couple of hundreds in the rest of Central Europe are either top-3 on the world market or top-1 on the European market. They employ more than 6 million people and generate a turnover of more than 900 billion Euros. The German management thinker Herman Simon calls them “Hidden Champions”.

The success of these companies seems to be based on two principles:

1. They focus on innovative solutions for specific problems and needs, somewhere in the world. In doing so they focus on the creation of “customer value”, while profit-seeking rather comes as a constraint than an objective.

2. Their management practices value the individual. Creative organizations draw on the potential of their employees and all the other collaborators and adapt their systems to the needs of the individuals (and not — as in the industrial age — the individuals to the needs of the system).

All these principles are based on Europe’s long lasting tradition in economical and industrial development and are an outcome of the European humanistic worldview. The European Socio-Economic Model can be seen as successful representative of a new Economic order of cooperation in place of competition.