On Sept. 13, French Finance Minister Bruno Le Maire gave a rousing speech about innovation and technology at the OECD Global Blockchain Policy Forum in Paris.
It was a robust defense of the role of government not only in regulating and taxing technology, but having a strong say in how it is developed. Among the highlights:
“It never bothered me paying my taxes to finance French schools, nurseries, hospitals and public services. But it bothers me to know that those who make the biggest profits don’t pay.”
And:
“France will always remember that it is men who must master technologies according to their values, and not technologies that impose their values on men.”
On the surface, it’s hard to object to either statement. However, Le Maire’s views are reflective of a culture hostile to ground-up innovation, which is why France has struggled in an era of decentralized technology development.
See related article: It’s All in the Nuance: French Blockchain Investor Translates Le Maire’s Libra Remarks
Before we dig deeper into what Le Maire said, it’s crucial to understand the context in which he speaks and the stark difference between how France views markets and how Anglo-American countries see them.
Take the origin of legal systems. In Anglo-American countries, law starts with Magna Carta, a document that limits the power of rulers. From there, justices and governments created a common law of rules — organically developed over centuries — that generally reinforce the principle that the sovereign or state has limited power to take your property, including money. The wider effect in Anglo-American countries is that which is not specifically prohibited is generally allowed.
In Europe, legal tradition descends from the more encompassing Justinian Code. France added the eponymous Napoleonic Code, which was a dictator’s attempt to put his stamp on most of the rules governing society. The wider effect is that which is not specifically allowed is likely prohibited. French rulers expect significant say before new ground is broken.
As Le Maire put it:
“There can be no technology without these technologies being framed by our democratic values.”
What does Le Maire mean by France’s democratic values?
In Anglo-American countries, we don’t understand how different the French Revolution was from the English Civil War (in which the king was executed, but the elite was generally preserved) or the American Revolution. Taxation without representation was the principle both Anglo-American rebellions were fought upon — the American colonists extended its application. The middle and upper classes fought the state to keep their property. There was no redistribution. Neither was a peasant rebellion.
In France, the revolution came from the poor and targeted a rich elite that prospered while they starved. (This also explains why French elites have an instinctive fear of ground-up change.)
With the blade of the guillotine, the revolution replaced the old governing elite with a new one. Many were certainly members of the previous ruling class, but they had to adapt to the new way, which meant at least paying lip service to liberty, equality and brotherhood. The French’s elite is far more socialist than the American or British. It’s self-preservation.
Adam Smith is not the father of capitalism. Smith didn’t dream the invisible hand of the market, where supply meets demand. He observed its effect.
And that’s what Joseph Schumpeter did with creative destruction, where innovation that initially reduces jobs creates more profit. Whether the company reinvests that profit in its business or puts it in a bank for others to invest, ultimately more jobs are created.
Neither Smith nor Schumpeter was concerned with righting wrongs. Their models attempt to explain the world as it is.
However, the French Revolution was all about righting wrongs. Socialism is the world as leftists wish it to be. Saint-Simon, Fourier, Lassalle and Marx hated the rich. They first made the moral case for socialism and imagined what that system would look like. They are without a doubt the fathers of socialism.
This is why the French elite are skeptical of free market capitalism and the wealthy, which has a deep effect on the structure of French markets. These are not democratic values; they are market structure values. France choses to value a socialism that has failed to create as much wealth as capitalism.
As Le Maire said:
“There is no reason for libertarian philosophy to prevail when it comes to new technologies. I do not see why new technologies would necessarily be guided by a libertarian ideology that rejects any regulation and challenges the role of the state.”
Whatever pretenses of equality, the new French elite did what all elites do — find ways to entrench and perpetuate their grip on the system.
One pivotal way: the vast majority of the country’s top political and business leaders come from just one university — the École Nationale d’Administration, or ENA.
Every nation has schools that groom an elite. However, while Harvard enrolls some 1,600 undergrads every year, and Oxford 3,200 (both with major competitors), ENA admits 40 to 60.
Even this undersells just how narrow is the group that runs France, given that only the top 10 or 15 ranked graduates gain admittance to the truly elite civil-service tracks that enable someone to become a managing director of an investment bank before turning 30, as French President Emmanuel Macron did.
On average, just 12 percent of students admitted to ENA come from a working- or middle-class background.
Macron describes himself as an up-by-his-bootstraps outsider to France’s ruling class because he grew up in the medium-size city of Amiens.
In fact, his father is a neurology professor at the city’s teaching hospital, and his mother is a physician. They sent him to the top local private school and then an elite school in Paris before he won admission to ENA.
The growing tendency for Enarques, as the school’s graduates are known, to move back and forth between the public and private sectors has deepened the public perception of a distant, back-scratching old boys’ network. ENA’s corporate grads include the chief executives of telecoms group Orange, Société Générale and the former boss of insurer AXA.
In April, Macron again posed as an outsider by proposing to scrap his alma mater. However, reports suggest the French leader has reconsidered and will back reform rather than closure. One reason for his re-think? About 15 of Macron’s advisers at the Élysée Palace are also alumni.
The result of this elite familiarity is French innovation still tends to come from large firms connected to government and not from ground-up innovators who risk pouring effort into ideas that may run afoul of the government.
From a government perspective, it’s much easier to give out research and development (R&D) grants and tax exceptions to large companies — especially if you know and trust the people at the top — than to try to pick winners among fledgling firms.
This is why the work of the venture capitalist is as vital as it is difficult. It requires constantly searching for new companies worth investment, then determining if their business model makes sense and the founders have the ability to execute. VCs take that risk with private and not public money.
It pays off. Studies show that a dollar invested in venture capital creates three times more patents than a dollar invested in R&D.
The result is diffusion of technology across the whole economy, increasing productivity and augmenting both the economic and social return on venture capital investment.
Le Maire alluded to Facebook’s contentious Libra cryptocurrency, but his over-dramatic and deep hostility expresses the French desire to control the process:
“I think we can have strong states and powerful new technologies. The two are absolutely not incompatible. And if the price to pay for the emergence of new technologies is the destruction of the states, it will be without France and without the European states.”
That leads to the very differential tax treatment of private investment in Europe and in the United States. France has the highest corporate and personal income tax rates in the G7.
These high taxes on capital gains, a wealth tax on the value of shares and the tough treatment of private investment all increase the cost of venture capital and discourage its development in France.
You can debate the fairness of the United States’s interest carry deduction or whether capital gains should be taxed at lower rates than income, or even at all (in Hong Kong and Singapore, capital gains are tax free). But the net effect is the U.S. has a tax structure that has allowed innovation to flourish. Tech has created trillions of dollars in value for the American economy.
The state of California has a population of 40 million compared to France’s 67 million. Yet, an independent California would have a GDP of $3 trillion compared to France’s $2.7 trillion.
Another way to look at it: Tech in California contributes $275 billion to GDP. France says tech contributes 5.5 percent of its GDP, which comes to $149 billion.
In his speech, Le Maire touted France’s technology companies. But there are clearly not enough of them, and they don’t generate anywhere near the kind of value Silicon Valley does.
There are many talented French technologists and entrepreneurs (given the hostility of the system in which they work, they have to be). The problem is most don’t live in France. Silicon Valley has a huge French expat community. So do Hong Kong and Singapore. According to Macron, London is the sixth-largest French city in the world. Instead of recognizing the role they create in generating new wealth, France drives its innovators away.
Le Maire touted as a virtue his country’s obsession with making sure innovators pay what France says is their “fair share,” even if other countries say that fair share is much lower:
“No total deregulation on the grounds that they are new technologies, but adaptive, flexible regulation on the basis of voluntary work and, of course, taxation that takes account of this new creation of value … Our determination to reach an international agreement at the OECD on digital taxation and minimum taxation is absolute.”
When you look at the value tech has created in the United States, it seems safe to say Washington will reject letting Paris set its tax policy.
Finally, France, like the rest of Continental Europe, has failed to duplicate the U.S.’s NASDAQ, where young new companies can exit via initial public offerings (IPOs). Despite attempts in the ’90s, when the internet bubble burst, a number of these markets folded or merged with the main stock markets. Those that still exist have very little IPO activity.
The weak public market for young companies in Europe means the primary avenue for their exit is merger or acquisition.
IPOs offer a much larger return than mergers and acquisitions: an average 60 percent annual return compared with 15 percent in general. Plus, IPOs allow investors to establish agreements with the managers about the future control of companies, while other forms of investment do not.
That’s another reason for French and European innovators to develop their ideas elsewhere.
In Paris, Le Maire recognized the problem, but then ducked the real causes:
“If today we do not have digital giants in Europe like those in the United States or China, the only reason is money. We have technologies, but we don’t have the funding to grow our startups; turn them into mid-sized companies, then digital giants or technology giants. And we can no longer accept having our startups bought by foreign giants and take technologies that we put so much investment into in France and Europe.”
| Country/Territory | GDP (2019) | Population (2019) |
| United States | $21,344,667 | 327,000,000 |
| European Union | $18,705,132 | 513,000,000 |
| China | $14,216,503 | 1,386,000,000 |
| Japan | $5,176,205 | 127,000,000 |
The problem is not that Europe lacks capital. The problem is Europe and France talk a great game about the importance of innovation — but for cultural and philosophical reasons they are allergic to doing the things necessary to achieve it.
The view expressed is solely the opinion of the author and does not necessarily reflect the editorial view of Forkast. News.
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