In the second half of 20th century, the Western world experienced a lot of discussions on the type of economic system

they live within. After Soviet Union had failed, the world became dominated by the capitalist states. Michel Albert (1993), French economist, defined three main models of capitalism: Anglo Saxon, Rhine, and Eastern and Southeast Asian. In this work we will emphasize on comparing only the first two. Operating under the same capitalist camp, two different models performed as rivals to each other. They differ through the government spending, social security, and control over the market. From one side Anglo-Saxon model, used by countries such as, United States of America, United Kingdom, Canada, Australia and New Zeeland. On other side it is Rhine model, implied by western European countries, such as, France, Germany and Sweden. One model promotes free markets, operating without any government intervention. Another model promotes government control of the situation, and higher levels of social security. There is no definite answer to which model is superior to the others, however both of them have their own advantages and disadvantages. In this work we will discuss both models, and compare them. Also we will look at their performance during the current economic crisis, and discuss whether one is better than the other. Capitalism is also known as the Market economy or Free Enterprise Economy, promotes ideas of private ownership, self interest, price mechanism, consumer sovereignty, competition and limited role for the government. Capitalist economy appeared in the end of 18th century. Adam Smith was first to theorise, what we call capitalism. In his work, The Wealth of Nations, Smith (1904) argued that market should be governed by so called invisible hand. In his opinion, free market, without government intervention, will become highly efficient. He states that free economy will produce incentive for people, and bring down the prices. Even though Adam Smith is often called as the father of capitalism, in his work this system was named as the system of natural liberty. Anglo-Saxon capitalism is also known as Anglo-American capitalism. This term refers to the capitalist model, applied in the English speaking countries. This economical approach became popular after the second world war. It promotes ideas of neo-liberalism and supply supply-side economics. Milton Friedman, one of the founders of supply-side economics, was busy with one important question: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?(Friedman 1968:p.2). On the other hand, the idea of Rhine capitalism, also known as Rhenish, promotes higher levels of social security, and governments involvement, rather than ideas of Milton Friedman, and Friedrich von Hayek. According to Michael Albert (1993) the Rhenish model is more equitable, efficient and less violent. Rhine capitalism features several characteristics, such as: domination of banks over the stock exchange in financial world, close relationship between banks and companies, well proportioned balance of power between share holders and managers, and social partnership between employers and unions. Also it has better educated population due to dual education system, better regulated markets, and social ideas about equality and solidarity.

The rise of the Anglo-Saxon model began in the end of 1970s. During the after war period countries like United States and United kingdom were still operating under the Keynesian type of economics. Macroeconomic policy in the UK was rooted in John Maynard Keyness General Theory of Employment Interest and Money(Maynard 1988:p.1). Even though technically they were still growing, the growth rate was lower than in other European countries. Two major oil crisis occurred during 70s, at first the oil crisis in 1973, and then another one in 1970. As a consequence of that, the GDP of United Kingdom fell by 1.3% in 1974, and by 1.6% in 1980, and the GDP of the United States fell by 0.3% in 1974, in 1980 however it stayed positive, but the gain was only 0.4%. The two biggest countries of continental Europe, France and Germany, however, were much more stable. In 1974 French GDP grew by 2.9%, and in 1980 by 1.4%. German GDP grew by 0.8% and 1.1% respectively. The Anglo-Saxon economic model was applied under the Regan administration in the United States, and Thatcher administration in the United Kingdom in 1970s. Before Thatcher, Britain was operating under the Rhine capitalist model, which seemed to be not good enough. Thatcher, who was overwhelmed by the ideas of Friedrich von Hayek, decided that the United Kingdom needs a change. She introduced new government policy, which included cuts in government spending, and changes in the monetary policy, aimed to squeeze inflation out of the system, and re-establish sound money(Johnson 1991:p.30). Another feature of applying principles of Anglo Saxon model was cutting taxes on all levels, from income tax, to the corporate tax. However there were few tax rate increased, among them petroleum tax and the value added tax. Under Thatchers administration, aggressive privatisation of state owned businesses was performed. The last, but not least was reduction of trade unions power. Fritz von Hayek, in his series of essays, published in 1980 stated that: The trade unions became the biggest obstacle to raising the living standards of the working class as a whole; they are the chief cause of unemployment and the main reason for the decline of the British economy(Johnson 1991:p.220). At the approximately same time, in the United States of America Ronald Reagan came to power. At that time United States experienced a period of stagflation. Rising inflation and falling economic growth, threatened countrys stability. The 1979 energy crisis (oil crisis) caused by Iranian revolution, spiked the price for oil. In one year, from 1979 to 1980 the oil price more than doubled, from $15 a barrel to as high as $39. This caused a sharp rise in Americans rate of inflation, which in its turn caused economic downturn. In 1979 the inflation rate rose by 3.6%, from 7.62% in 1978 to 11.22% in 1979, and in 1980 it reached a point of 13.6% per annum. At the same time the growth rate of GDP slowed down. If in 1978 American GDP grew by as much as 5.7%, in 1980 this growth was not more than 0.5% only. At the first year of Reagans presidency inflation was 10.3%. He decided to apply supply-side economic policy to reduce inflation, and encourage economic growth. Inflation was tackled through the tighter control over money supply and reduced government spending. At the same time economic growth was encouraged through reduced taxation, deregulation of the economy. Even though in 1982 US experienced negative GDP growth of 1.9%, the inflation

rate fell down to 6% per annum. In future years US economic growth returned to a healthy average growth rate of 4% per year, and average inflation rate of 3-4% annually. During that period, representatives of Rhine countries, such as Germany and France, had a much better performance. Even though their gross domestic product didnt grow much in the beginning of 80s, they didnt have negative growth. Germany had one month with negative figure of 0.8% in 1982, but on average it grew by 1% from 1979 to 1983. Compared to the double digit inflation rates in the US and UK, inflation in Germany was very modest, on average the annual figures were about 5% from 1979 to 1982. In France however, inflation during the same period averaged at 12%. In future years, it seemed that nothing is going to spoil the great advantage of AngloSaxon model, over the Rheinish one. Free and deregulated market advanced quicker. The growth was catching up. The United States, due to the size of the country, and therefore the size of their economy had GDP per capita rate higher than the other, whereas Britain was falling behind Germany and France. In 1990 British economy overtook the Germans in terms of per capita GDP by 3%. But France was overtaken only in 1997. Despite the economical difficulties in the beginning of 80s, effective policies in UK and US boosted these economies. The average GDP growth rate between 1980 and 1989 was higher, then of their European rivals. On average UK grew by 2.45% a year, and US by 3% a year. France grew by an average of 2.2% and Germany by an average of 1.8%. In total during 80s UK economy grew bigger by 29.2%, US economy grew by 34.8%, French by 22.9%, and German by only 17.8%. Anglo-Saxon showed faster growth through the next 15years. It seemed like their superior performance is not going to end anytime soon. In 1993 the French economist, Michel Albert argued that the Rheinist model is superior to the Anglo-Saxon one due to better balanced trade-off between economic growth and equity, however it was hard to believe in that. The facts by then spoke in favour of supply-side economic policies. Rapid growth and prosperity, of Anglo-Saxon economies ended up with a big crash in the 2008 financial crisis, also known as the credit crunch crisis. It is argued that the core problem was imperfect information, and simple greed of financial institutions. The speculative mania, emerged from imperfect information, covered the financial system. Banks, trying to increase their profits in any possible way, were giving loans and mortgages to people without sufficient risk assessment of this activity. Also, by that time, UK and US became largely service economies, which rely on their financial institution as the engine of progress. The crisis started from overheated housing market in the United States. Due to large demand for houses, caused by extensive amount of mortgages lead to rapid growth in prices. Everything went well, until the interest rate on those loans kept stable. Once the interest rate increased, the price of properties dropped significantly, and people struggled to refinance their debts. Moreover, during the housing and credit boom, financial banks invented two fresh financial products, such as mortgage-backed securities, and centralised debt obligations. These products were sold around the world to different financial banks and funds, who were

seeking to take part in the booming market. After housing bubble burst, financial institutions, which were highly exposed to the mortgage activity, experienced liquidity problems, which lead to a panic on the market, and as a result major downturn of financial markets around the world. There were two institutions to blame the most: government regulators, and credit rating agencies. Credit rating agencies were supposed to provide investors with liable information about business, but they proved to be inadequate in measuring risks. Government regulators, such as Federal Reserve, should have had spotted the problem, but failed. US financial industry was highly deregulated in the last quarter of 20th century, and as a result it went out of the control. This crisis was a failure of Anglo-Saxon system, and ideas of supply side economics, and deregulation policies. Rather than Anglo-Saxon speculative obsession, Rhinenish countries are more concerned with long term investments. They prefer stability to high and short term profits. Information in the Rhine countries is more transparent and therefore, investors, and public have better knowledge of the economys performance. Rhine countries are concerned with minimising the share of speculating activities on the market. As a result of steady and stable economic policies, together with tight government control over banks and investment activities, countries such as Germany and France didnt have those severe problems experienced by UK and US. If before 2008 Rhine model of capitalism was in a shadow, overtaken by Anglo-Saxon one, now it became clear that Michel Albert was right in his critique. Extensive and quick economic growth ended up with a tragic fall. To compare the performance of these four countries during the current recession, we might consider several statistical indexes. At first lets compare the GDP growth during the crisis time, starting from the year 2007 to the year 2011. In 2007 the leader of growth among four was UK, with its GDP growing at the rate of 3.5% annually. Germany and France grew a little slower, 3.3% and 2.3% respectively. United States was an outsider, growing at only 1.9%, as the crisis already kicked off there. The future year 2008 showed that deregulated Anglo-Saxon economies were more exposed to the crisis. US and UK finished the year with negative figures, going down by 1.1% and 0.3% respectively. France was down by only 0.1% and Germany had a positive growth of 1.1% . The worst year was yet to come. 2009 UKs GDP was down by 4.4%, US down by 3.5%, France behaved relatively stable, and lost only 2.7%. The worst performer among four was Germany, loosing 5.1%. Negative GDP figures, however, were not the only problem faced by governments of these countries. Budget deficit, and growing national debt went on the first plan. The national debt in the UK was only around 38% in 2007, and in 2011 it was as much as 75% of the countrys GDP. The national debt in the United States increased from 42.5% in 2007 to 72% in 2011. France and Germany were running a much greater government debt before the crisis. In 2007 French national debt was equal to 54% of GDP, and the German one was 50%. Even though it followed the overall tendency, and grew higher, the growth was not as dramatic as in UK and US. The French national debt increased up to 77% of the GDP and German national debt was only 54.6% of its GDP in 2011.

These difference in the growth of governments debt, was different level of budget deficit in these countries. To keep economies running, Britain and America had to spend much more, than they have earned. And because of the higher exposure of their banks to the crisis, massive holes in their budgets appeared. The average budget deficit figure for the UK between 2007 and 2011 was -5.3%, with maximum drawdown of 8.5% in 2009. USs average figure was -6.8% for the same period, with the worst number in 2009 of -10%. France and Germany did much better. French average was -3.1% and German was 0.5%. For France the worst figure was -5.5%, which occurred in 2009, and for Germany it was -1.1% in 2010. From these figures we can mention, that lower regulated economies, were highly volatile. Growing faster, as well as falling deeper. The dream for prosperity, was just a dream. The U.S. Treasury Secretary Timothy Geithner, in his interview to Charlie Rose, admitted that this crisis was the tragic failure of financial regulation. He admitted that their system was not designed to sustain the shock. High leverage of growth destroyed the system. Elliott Elison(2009) said that he believes that Free-market or Laissez-faire capitalism, meaning let the buyer beware, is a volatile and inefficient system that leads to severe economic shocks exacting severe human costs. At an international conference in Paris on January 8 2009, French president Nicolas Sarkozy gave a drastic critique to the current situation with globalisation and financial capitalism. In his opinion, the current crisis was no a crisis of capitalism as a whole, but rather it was a crisis of finance capitalism. The current crisis represented the end of the illusion of public impotence. The most important fact of the present crisis was the return of the state(Schwarz 2009). French were always hostile to the American type of capitalism, nevertheless in 1990s they moved towards certain aspects of capitalism. Melewar and Mott (2003) presented an argument which challenged French capitalist system. Indeed, French did move towards Anglo-Saxon model, by allowing aggressive takeover bids, reducing government intervention, and applying American outsider model of corporate finance and governance. However, after 2008 it is not sure whether these economic principles will survive. Moreover France is facing great difficulties in financing its public expenditure. According to the economicst (2012) French public spending accounts to 56%. Because of the president election coming in the end of April 2012, no one dare to reduce the budget deficit through the public spending cuts. Instead Mr. Sarkozy raised the corporate and income tax, and Mr. Hollande promises to bring top-income tax to 75% for those who earn more than 1m a year. Moreover the labour cost in France is 10% higher than in Germany, which has a negative effect on French exports, as well as employment rate. At the same conference, The German chancellor Angela Merkel demanded new regulations of international financial markets and institutions and said that this time she would remain firm should financial players try once again to prevent politicians from implementing new regulations( Schwarz 2009). In The economist issue from 14th of April 2012 the German economic model was discussed, and possibility of applying its principle in other European countries. Germany tackled the crisis problems on time and effectively. Reduction of the labour costs reanimated production of goods. By lowering costs of production Germans made their good more attractive for exports, and it helped to achieve a

positive budget. In recent years many countries around Europe tried to copy German model of success, and implement its features to their economies. France for example raised the pension age, and Mr. Sarkozy is talking about cutting social-security contribution as it was made in Germany. Spain is thinking about exporting German dual system of education. However Italian attempt to introduce a short-time working scheme ended up with disappointment. Germany got back to shape very quickly, and it is a good example to others, but copying German model is not easy. The economic system in this country is deeply rooted with its culture, and history, and cannot be applied to others as it is. World in the 21st century needs to develop new model of financial governance. Times of capitalism competing with other economic system had past. Nowadays capitalism competes with itself. It varied between more and less regulated economies, but after the credit crunch it became obvious that only tight government control can reduce the risk of crisis. However financial bubbles appeared throughout the human history and U.S. housing bubble is not much different from the tulip bulbs bubble, which appeared in the 17th century. People tend to gamble, hoping to win the highest stakes, but in the time of globalisation these gambles spreads the economical virus all over the world in a matter of days.

References: Albert, M. (1993) Capitalism Against Capitalism. London, Wiley. Angus Madisson. (no date). Statistics on World Population, GDP and Per Capita GDP. 12008 AD [Online]. Available from: http://www.ggdc.net/maddison/Maddison.htm [Accessed 5th April 2012]. dArvisenet, P. (2005) The Anglo-Saxon Model: a critical view [Online]. Available from:
http://economicresearch.bnpparibas.com/applis/www/recheco.nsf/ConjonctureByDateEN/1D7F2D42CE54277CC125 70A7004F8E6A/$File/C0510_A2.pdf [Accessed 4th April 2012].

Davis, S. (no date) The Anglo-Saxon vs. the Rhine Model of Capitalism. Thesis. Buffalo State College. Economy Watch. (no date) The Economic Statistics and Indicators Database [Online]. Available from: www.economywatch.com/economic-statistics/ [Accessed 5th April 2012] Elliot, E. (16th March 2009) The Anglo Saxon Model of Capitalism is Dead.[Online]. Available from:http://foreignpolicyblogs.com/2009/03/16/the-anglo-saxon-model-ofcapitalism-is-dead/ [Accessed 4th April 2012]. Eurostat. (no date). Real GDP Growth Rate [Online]. Available from: http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home [Accessed 5th April 2012]. Friedman, M. (1968) Capitalism and Freedom. Chicago, The University of Chicago Press. Johnson, C. (1991) The Economy Under Mrs Thatcher. London, Penguin Books. Maynard, G. (1988) The Economy Under Mrs. Thatcher. Oxford, Blackwell. Melewar, T.C., Mott, A. (2003) Is the French Model of Capitalism Becoming More Like the Anglo-Saxon Model?. Journal of General Management.[Online] 28 (4), 47-63. Available from: Business Source Premier [Accessed 4th April 2012]. The Economist (3rd June 1999) A Survey of France The Grand Illusion. The Economist.[Online] Available from: www.economist.com [Accessed 5th April 2012]. The Economist (31st March 2012) The French Election An Inconvenient Truth. The Economist. p.29. The Economist (14th April 2012) Germanys Economic Model: What Germany Offers the World. The Economist. p.27. Schwarz, P. (16th January 2009) Sarkozys New Capitalism.[Online]. Available from http://www.wsws.org/articles/2009/jan2009/pers-j16.shtml [Accessed 4th April 2012]. Smith, A., Cannan, E.(ed.) (1904) Wealth of Nations. 5th edition. London, Methuen & Co.

Appendix 1.

General Government Balance (% of GDP) Year France Germany US UK % 2011 -3.482 -0.266 -9.034 -5.515 2010 -5.519 -1.143 -8.876 -7.815 2009 -5.521 -0.748 -10.903 -8.488 2008 -0.79 2.451 -4.514 -3.305 2007 -0.382 2.695 -0.656 -1.096 2006 -0.074 0.816 -0.061 -1.108 2005 -0.631 -0.992 -1.194 -1.768 2004 -1.19 -1.298 -2.49 -1.948 2003 -1.626 -1.461 -2.935 -1.879 2002 -0.517 -1.214 -1.774 -0.588 2001 1.138 -0.252 1.995 2.137
Appendix 2.

Year 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001

GDP Growth 2000 - onwards France Germany US % 1.7 1.5 -2.7 -0.1 2.3 2.5 1.8 2.5 0.9 0.9 1.8 3.0 3.7 -5.1 1.1 3.3 3.7 0.7 1.2 -0.4 0.0 1.5 1.7 3.0 -3.5 -0.3 3.5 2.7 3.1 3.5 2.5 1.8 1.1

UK 0.7 2.1 -4.4 -1.1 1.9 2.6 2.1 3.0 3.5 2.7 3.2

Appendix 3.

Total Government Net Debt (% of GDP) Year France Germany US UK % 77.923 54.664 72.406 75.127 2011 74.551 53.818 64.824 69.423 2010 68.376 55.914 59.854 60.904 2009 57.801 49.693 48.404 45.621 2008 54.08 50.104 42.554 38.153 2007 53.947 52.745 41.912 37.968 2006 56.67 53.051 42.676 37.338 2005 55.183 50.475 42.285 35.491 2004 53.211 48.195 40.735 33.69 2003 49.148 44.579 37.495 31.953 2002 48.243 42.122 34.882 32.186 2001

Appendix 4.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

GDP 1970 - 1990 France Germany uk us 592,389 843,103 599,016 3,081,900 621,055 867,917 611,705 3,178,106 648,668 903,739 633,352 3,346,554 683,965 944,755 675,941 3,536,622 704,012 952,571 666,755 3,526,724 699,106 947,383 665,984 3,516,825 729,326 993,132 680,933 3,701,163 756,545 1,021,710 695,699 3,868,829 777,544 1,050,404 720,501 4,089,548 802,491 1,092,615 740,370 4,228,647 813,763 1,105,099 728,224 4,230,558 822,116 1,109,276 718,733 4,336,141 842,787 1,099,799 729,861 4,254,870 852,644 1,119,394 755,779 4,433,129 865,172 1,150,951 774,665 4,755,958 877,305 1,176,131 802,000 4,940,383 898,129 1,202,151 837,280 5,110,480 920,822 1,220,284 877,143 5,290,129 961,287 1,260,983 920,841 5,512,845 1,000,286 1,302,212 940,908 5,703,521 1,026,491 1,264,438 944,610 5,803,200

Appendix 5.

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

GDP Per Capit 1970 - 1990 France Germany UK 11,410 10,839 10,767 11,845 11,077 10,941 12,264 11,481 11,294 12,824 11,966 12,025 13,113 12,063 11,859 12,957 12,041 11,847 13,466 12,684 12,115 13,913 13,072 12,384 14,240 13,455 12,828 14,634 13,993 13,167 14,766 14,114 12,931 14,840 14,149 12,747 15,132 14,040 12,955 15,245 14,329 13,404 15,382 14,783 13,720 15,530 15,140 14,165 15,833 15,469 14,742 16,158 15,701 15,393 16,790 16,160 16,110 17,300 16,558 16,414 17,647 15,929 16,430

US 15,030 15,304 15,944 16,689 16,491 16,284 16,975 17,567 18,373 18,789 18,577 18,856 18,325 18,920 20,123 20,717 21,236 21,788 22,499 23,059 23,201