Editor's Note: This is the third article in a six-part series.

It would be unfortunate if the debate in the European Union became polarized around the issue of choosing between the American market model and the continental European social model. If that happens, you're just going to get more alienation and greater polarization. Both capitalism and socialism have strengths and weaknesses, and if you can take the strengths from each and use them, then each one is an antidote or counter-balance to the other within the same system. So it's not a question of whether you want capitalism or a socialist welfare state.

Let's start with socialism. Its strength is solidarity -- there is a collective responsibility for making sure that everyone is taken care of and that nobody is left behind. However, what socialist societies do not do well is to encourage individual initiative. Especially if you look at the Marxist version from the Bolshevik Revolution of 1917 up to the fall of the Berlin Wall. Individual initiative was brutally squelched and the entrepreneurial spirit and economic growth was dismal. Socialism doesn't stimulate self-interest, the entrepreneurial spirit or growth.

Capitalism, meanwhile, incontrovertibly stimulates self-interest, innovation, entrepreneurial growth and fosters development. That's its strongest point and it's something nobody would deny. Where capitalism stumbles, however, is in fairly distributing the fruits. It's complete fiction that the "invisible hand" will distribute the fruits. The fact is that if you let the market economy go unfettered without any controls, it will run wild and result in a "winner take all" society-- and that's what you have in the US and, increasingly, the United Kingdom.

To be fair, the Brits haven't totally followed the unfettered market model and I think Prime Minister Tony Blair is right that it's not right to accuse him of having done so. On the other hand, Britain has gone a long way towards undermining its social model. But the US and the UK also have the dubious distinction of moving more quickly towards greater disparity in income between rich and poor than any other OECD countries. They also have the fastest-growing crime rates. Britain is not anywhere near where we are on the unfettered market. But if Britain or Europe let the markets go unfettered, they will end up with the American model.

The key is this: You need to continually stimulate the market because it's the engine of growth. At the same time, we need strong trade unions, strong political parties and a strong civil society that can act as an antidote in order to ensure the fruits are fairly distributed.

With capitalism, the logic in the boardroom is to cut your costs, and labor is a key one, so you're always trying to beggar the laborer in order to maximize shareholder value. But there's a contradiction built into a system. That is, when you're constantly trying to lower labor costs, you undermine income distribution and weaken consumption. If you're not distributing enough income, who's going to buy the goods and services being produced? You really need a strong counterbalance. On the flip side, there's a deadly creeping paternalism in the welfare state model that often results in people becoming more and more dependent on the state and losing their personal initiative.

Misperceptions about Europe

But I think there are a lot of misperceptions out there about the strengths of America versus Europe. If you measure the economy by GDP, you could say, the US is doing well. But remember, the EU's GDP exceeded ours in 2003. So if the European Union is moribund and falling apart, if it's a museum filled with pampered workers, an aging population and inflexible labor, then how come its GDP exceeded our 50 states in 2003? Yes, they have a bigger population, but they also have a sizable GDP.

Here's the truth: the European Union is the largest exporter in the world -- it's ahead of the United States and China. That will shock a lot of people. Europe's largest exporter, Germany, sells more goods abroad than either the US or China, and that's only one EU country. Europe is the largest internal market in the world; 61 of the world's largest 140 companies are based there. It dominates in banking and insurance, aerospace with Airbus, engineering, construction, and the chemical and food sectors. America leads in some pretty big industries, too -- pharmaceuticals, automobile manufacturing, software and telecoms -- but to say we're this big economic giant and Europe's falling apart? I'm sorry!

Let me talk about how you measure a good economy. If you measure it by the pay check, then we're 28 percent richer per capita than Europeans. But if you measure wealth by quality of life, then the EU 15 passed up America at least 10 years ago in some areas. America has the best graduate schools in the world -- though there are some good ones in Europe -- but on the elementary and secondary level, students in 18 European countries performed better than American students in mathematics. We're the only industrialized country other than South Africa that doesn't offer its citizens universal healthcare -- we've got 45 million people uninsured. We have fewer doctors per capita. The EU 15 population lives a year longer than we do and they have a much lower infant mortality because they have less poverty. Europe does have serious poverty and you do see it, but it's not as bad as in the US, where one out of four kids lives below the poverty line. When it comes to leisure time, we get an average of 5 to 10 days off a year while Europeans get four to six weeks off as a right mandated by law. Americans often say the Europeans are not as productive, but the OECD figures show that from the late 50s to mid 90s, the EU 15 countries had higher growth in productivity per hour almost every year. We did catch up in the late 1990s and we dramatically passed up Europe over the past three years. But now Europe is going to be introducing the same IT revolution we did in the next three to five years and will likely catch back up and may even go ahead of America again in productivity growth per hour.

Even in 2003, seven EU countries, including France and Germany, had higher productivity per hour than the US. They just choose to work fewer hours and make less money. If you look at safe communities, we have four times the homicide rate and 2 percent of the male working population is currently in prison. So there's a lot more to an economy than GDP -- and even there, Europe isn't so far behind the US.

The big problem in Europe right now is that a chorus of people -- especially the neoconservatives and euroskeptics -- are saying that even if there is a European Dream with a global vision and humane social programs, we have to wake up. The economy stinks, unemployment is high, euroskleurosis has set in and while we don't want to give up the dream, we can't really afford to continue with it. We've got to go to the American model. It's unfettered, it's market driven, it's brutal, it's draconian, it's Darwinian, but the Americans know how to grow an economy and create jobs.

But there is no positive correlation between eliminating all your social programs and a positive economy -- there's only a negative correlation. If you eliminate the social benefits, you get negative GDP -- more crime, more prisons, deteriorating healthcare, deteriorating infrastructure and greater pollution. A lot of the European countries and their social programs are too paternalistic and they need to be streamlined the way the Scandinavians have done it. Indeed, the economic successes of the Scandinavians have shown that you don't have to eliminate your social net in order to grow your economy -- you can also find growth by streamlining the net.

There needs to be a balance between personal accountability and social solidarity. You can't be so dependent on the state that you no longer have any initiative. And you can't be so abandoned by society that you're all on your own and there's no helping each other.

Problems with the American model

If you look at the American economy in a detached way, there's no doubt that the unfettered market produces some innovation and growth. But the truth is that the recent economic growth seen in the US has been, in large part, the result of a massive increase in consumer debt. The US came out of the 1989-92 recession by issuing credit cards. We went on a huge credit binge and we basically kept the American economy and the whole global economy afloat on consumer credit and American consumers continuing to buy.

The cost of this was the depletion of the family savings rates of millions of Americans -- we had an 8 percent family savings rate in 1990 and it's nearly at zero today. We have millions of Americans who currently spend more than they make each year. More Americans this year will file for bankruptcy than for divorce, or get a heart attack, or get diagnosed with cancer, or graduate college. It's out of control. After we maxed out our credit cards, we refinanced our home mortgages, which was made easy by the low interest rates of the past five years. Now the interest rates have gone up and even the Economist recently worried that the US real estate bubble, the biggest in history, could burst.

And when Americans depleted their personal savings, President Bush gave us a tax cut to give us more discretionary income. He had to make this money available because wages have been stagnant for 25 years and the broken unions no longer have the clout to negotiate a fair wage package with employers. The result of Bush's tax cut is that we now have record government deficits.

All these problems are manifested in our currency. What I always ask my neoconservative friends is this: If Europe is so moribund and America so economically strong, why is the dollar continuing to devalue against the euro? It's because the investment community says we don't think the economic fundamentals are sound enough to guarantee pay off.