Germans make wonderful beer. Yet the productivity of the German beer industry is only 43 percent that of the U.S. beer industry. Meanwhile, the German metalworking and steel industries are equal in productivity to their American counterparts. Since the Germans are evidently capable of organizing industries well, why can’t they do so when it comes to beer?

     It turns out that the German beer industry suffers from small-scale production. There are a thousand tiny beer companies in Germany, shielded from competition with one another because each German brewery has virtually a local monopoly, and they are also shielded from competition with imports. The United States has 67 major beer breweries, producing 23 billion liters of beer per year. All of Germany’s 1,000 breweries combined produce only half as much. Thus the average U.S. brewery produces 31 times more beer than the average German brewery. 

     This fact results from local tastes and German government policies. German beer drinkers are fiercely loyal to their local brand, so there are no national brands in Germany analogous to our Budweiser, Miller, or Coors. Instead, most German beer is consumed within 30 miles of the factory where it is brewed. Therefore, the German beer industry cannot profit from economies of scale. In the beer business, as in other businesses, production costs decrease greatly with scale. The bigger the refrigerating unit for making beer, and the longer the assembly line for filling bottles with beer, the lower the cost of manufacturing beer. Those tiny German beer companies are relatively inefficient. There’s no competition; there are just a thousand local monopolies. 

     The local beer loyalties of individual German drinkers are reinforced by German laws that make it hard for foreign beers to compete in the German market. The German government has so-called beer purity laws that specify exactly what can go into beer. Not surprisingly, those government purity specifications are based on what German breweries put into beer, and not what American, French, and Swedish breweries like to put into beer. Because of those laws, not much foreign beer gets exported to Germany, and because of inefficiency and high prices much less of that wonderful German beer than you would otherwise expect gets sold abroad. (Before you object that German Löwenbräu beer is widely available in the United States, please read the label on the next bottle of Löwenbräu that you drink here: it’s not produced in Germany but in North America, under license, in big factories with North American productivities and efficiencies of scale). 

(Diamond, J. ,2005. Guns, Germs, and Steel. New York: Norton.)