The lights are going out all over Europe: we shall not see them lit again in our lifetime.
—Sir Edward Grey, British Foreign Secretary, August 3, 1914

It is uncertain whether Sir Edward Grey actually uttered these words on the eve of World War I. But whether or not he said them, they did reflect a sense of foreboding among many statesmen of the time: a conviction that Europe—the very heart of Western civilization—was about to launch itself upon a path of self-destruction from which there might be no return.

Almost one hundred years later and with the fading of time, it is hardly surprising many of us have lost a sense of what World War I did to Europe. The military death toll alone should give room for pause. The minimal estimates are chilling: Germany, 1,800,000 deaths; Russia, 1,800,000; France, 1,384,000; Austria-Hungary, 1,290,000; Britain, 743,000; Italy, 615,000; Romania, 335,000. America did not enter the Great War until April 1917. This followed two and a half years of efforts by President Woodrow Wilson to maintain the United States' neutrality. Between that time and the signing of the armistice that silenced the guns on the western front on November 11, 1918, forty-eight thousand Americans were killed in combat.

This last figure is a tragic number. Yet it was far less devastating than the human and material destruction inflicted upon Europe by four years of modern warfare that drew upon all the might of industrial capitalist economies turned against each other. No American city was occupied. America suffered no naval blockade. Trenches bristling with sharp wire and lethal machine guns were not dug for thousands of miles across American soil. And when it was over, millions of American soldiers went home. Whether they numbered among the victors or the defeated, Europeans remained, surrounded by living memories of what had been twentieth-century Europe's first civil war.

Europe would never be the same. Within twenty-one years of the 1918 armistice, World War II took the European continent once again to the brink of self-immolation. Though Europe slowly recovered after 1945, its days as the center of world power were over. European colonial empires gradually disappeared from the globe. Until 1989, half of Europe was subject to Communist tyranny. Europe's lights, it seems, did indeed go out.

When the victors and losers of World War I gathered to make peace in Versailles, the seventeenth-century palace built by France's Sun King, Louis XIV, the agenda went beyond issues such as border changes, the recognition of new nations, or the carving-up of Germany's former colonial possessions. An intense awareness of dramatic economic changes in the offing permeated the Peace Conference. Socialist and Marxist political movements, characterized by a deep hostility to capitalism, were in the ascendancy. Lenin's Bolshevik revolutionaries had seized power in Russia. Germany's government was in the hands of Europe's largest social democratic party.

Even without these developments, economic issues were going to be central to the negotiations at Versailles. As well as ceding territory, Germany and the defeated nations were expected to pay reparations to the victors. This was understood as punishment of the losers and compensation for the winners. The sheer scale of reparations demanded by the Allied powers, however, was a severe shock to Germany. It quickly became a festering source of burning resentment among Germans of all political stripes. Germany's final reparations payment was not to be made until October 4, 2010.

Germans were not alone in their dismay. The burden of reparations that the Allies wanted to impose upon Germany was just as astonishing to a small number of officials serving as members of the Allied delegations at Versailles. One such delegate, a young British civil servant named John Maynard Keynes—later to become perhaps the twentieth century's most famous and influential economist— was so appalled that he resigned from the British Treasury in protest. Within months of doing so, in 1919 Keynes vented his misgivings in the book that first gave him celebrity status: The Economic Consequences of the Peace.

Read by thousands across Europe and America, Keynes's short and frankly polemical text shocked and titillated British, European, and American opinion with its pithy, even irreverent portraits of the statesmen who had led the Allies to victory. Figures such as Britain's David Lloyd George ("ill-informed"), France's Georges Clemenceau ("dry in soul, empty of hope"), and America's Woodrow Wilson ("slow and unadaptable") were presented as men with feet of clay, veering between utopian idealism and Machiavellian cynicism. Yet beneath the iconoclasm permeating Keynes's book was a far more serious message: that the economic conditions being imposed upon the defeated nations by these politicians were economically foolish, morally indefensible, likely to destabilize an already shattered German economy, and fertile ground for demagogues of the Left and Right.

The deeper background to Keynes's Economic Consequences was his conviction that Europe's economic landscape was about to change forever. At the beginning of the text, Keynes wrote almost winsomely about pre-1914 Europe as a world in which free trade prevailed, passports were unnecessary to cross borders, economic upward mobility was the norm, and people could invest virtually anywhere across the globe with relatively little interference.

Keynes may have been exaggerating, but his description of pre-war European economic life was not far from the truth. Moreover, the economies of Europe did undergo dramatic transformations over subsequent decades, as governments—and not just those led by Socialists and Social Democrats—steadily assumed an ever-increasing part in Europe's economic life, not least, ironically enough, because of economic theories Keynes himself developed in the 1930s as Europe and the world struggled to find a way out of the Great Depression.

Another subterranean theme pervading Keynes's Economic Consequences was his immense disappointment with the performance of America's President Woodrow Wilson at Versailles. It may have been, Keynes conceded, partly a question of inflated expectations. President Wilson, in the eyes of Keynes and many other Europeans with progressive dispositions, had traveled to Europe enjoying "a prestige and a moral influence unequaled in history."2 Yet almost from the beginning of the Peace Conference, it became clear to Keynes that Wilson simply did not understand Europe. Wilson, Keynes wrote, "not only had no proposals in detail, but he was, in many respects, perhaps inevitably, ill-informed as to European conditions."

Not all Americans were as naïve about Europe's post-war economic conditions in 1919 as Keynes considered Wilson to be. Plenty of Americans were aware that economic problems were contributing to the deaths of thousands of noncombatants in Germany through mass starvation and disease. Few today know that the future American president, Herbert Hoover, was responsible for organizing the transfer of several million tons of food supplies from America to Germany and other starving areas of Central Europe immediately following World War I. "Europe," Keynes himself acknowledged, "should never forget the extraordinary assistance afforded her during the first six months of 1919 through the agency of Mr. Hoover and the American Commission of Relief." A few lines later, Keynes added: "The American Relief Commission, and they only, saw the European position during these months in its true perspective."

In many history books Herbert Hoover is dismissed as an unsuccessful president: a leader who did too little too late as the Great Depression's effects crashed their way through every home and business across America. From Keynes's perspective, however, the prepresidential Hoover was an American who understood Europe, and considered it important enough to be worth helping in its hour of need.

Americans have, of course, been thinking about and influenced by Europe for a long time. Today the rise of China and India presents new mirrors through which Americans can reflect upon themselves. Nevertheless, Europe has been an external focus for America in ways that India and China have not, and may never be. Political correctness and the ideology of multiculturalism notwithstanding, America's persistent attention to Europe owes much to the simple fact that contemporary America's cultural origins do not lie in China, India, or Africa. Buddha and Confucianism are not significant reference points for the overwhelming majority of Americans in the way that Magna Carta and Christianity are. When it comes to its dominant political ideas, iconic figures, legal institutions, religious culture, and economic history, America is very much Europe's child. To be sure, America is a bigger, more powerful, grown-up child. And, like all children, it has determined much of its own destiny and is not a clone of its parents. But for all that, America remains an offspring of Europe.

In part, this reflects economic links. Before the American Revolution, many of the thirteen colonies enjoyed closer economic links with Britain than with each other. Today, the amount of trade between the United States and European nations remains extraordinarily high, as does the degree of capital invested by Americans and Europeans in each others' economies. Nor can we discount the political connections between the two continents. Despite strong isolationist impulses in America, the twentieth century saw millions of American soldiers travel to Europe twice in the short space of twenty-seven years. Post-war economic and political engagements, such as the Marshall Plan, the formation of NATO in 1949, and the stationing of American troops in Europe, have helped keep the "Old Continent" at the forefront of many Americans' minds.

Taken together, these cultural, economic, and political realities present America with some distinct opportunities. One is that social and economic developments in Europe can give Americans insights into possible scenarios for their own future. Americans are so accustomed to hearing Europeans talk, often with a tone of complaint or resignation, about the "Americanization" of their cultures that they rarely consider the ways in which America has become, or is becoming, economically Europeanized.

To be sure, no two European nations are exactly alike. Finland is not Belgium, France is not Germany, Britain is not Greece, and Poland is not Portugal. Nevertheless, part of this book's argument is that, when it comes to the economy, there is enough of a European "canary in the coal mine" to help Americans with decisions about their economic future that, once made, would be increasingly difficult to retreat from.

To put the point in somewhat dramatic terms:

  • Do Americans want to embrace modern European economic culture? Do they want to live in a set of economic expectations and arrangements that routinely prioritizes economic security over economic liberty; in which the state annually consumes close to 50 percent of gross domestic product; where the ultimate economic resource (i.e., human beings) is aging and declining in numbers; where extensive regulation is the norm; and perhaps above all, where economic incentives lie not in hard work, economic creativity, and a willingness to take risks, but rather in access to political power?
  • Or do Americans want to embrace the opposite? Do they want to live in an economy in which economic entrepreneurship is rewarded; where the government's economic responsibilities are confined to a number of important but limited functions; and where the stress is upon economic liberty, rather than remorseless efforts to equalize economic outcomes through state action?

That is the choice increasingly facing America: a form of "cuddle capitalism"—the European social model—presided over by an allpervasive European-like political class and associated insider groups wielding bureaucratic power; or, alternatively, a dynamic market economy that takes liberty seriously and understands that government intervention in the economy must and can be limited. As we will see, the decision is not as simple as it might seem. Among other things, it involves trade-offs, the prioritization of different values, differences about ends and means, and fundamental disagreements about the nature and functions of government.

The debate about which road to take is not a new one. Its origins go back to Europe's Middle Ages. There is, however, nothing like a crisis to focus the mind. And this, many would say, is precisely what happened in 2008, when the United States entered a period of economic instability of such severity that it is known today as the Great Recession.