An Empirical Test: Capitalism vs. Socialism in Post-War Germany
After the financial crash of 2007 – 2008, Newsweek columnists Jon Meacham and Evan Thomas wrote an article, which appeared in the February 16, 2009 edition, entitled “We’re All Socialists Now.” Meacham and Thomas wrote:
If we fail to acknowledge the reality of the growing role of government in the economy, insisting instead on fighting 21st-century wars with 20th-century terms and tactics, then we are doomed to a fractious and unedifying debate. The sooner we understand where we truly stand, the sooner we can think more clearly about how to use government in today’s world.
Ah, there it is: the voice of reason extolling the virtues of the welfare state and the need for government intervention in the economy. But is socialism really the answer? The left is constantly chirping these days about how the financial meltdown was due to the excesses of capitalism and as a result, we must now turn to socialism for answers, or when lacking the courage to use the “S” word, at least turn to government interventions that embrace the policies of European socialism. But should government really be seen as the answer to our current financial woes or is it, in fact, the problem? Would we look upon government as the answer if it didn’t have the capacity to borrow or print more money despite huge deficits and an accumulated national debt that would lead any private corporation to lose its credit rating and file for bankruptcy? Unfortunately, for the cause of historical accuracy, this debate about a revitalization of socialism and other government interventionism has occurred in a vacuum, as if mankind had never tested the relative strengths of capitalism vs. socialism. But this is precisely what did occur in Post- World War II Germany, when West Germany embraced a mixed capitalistic economy and Soviet-controlled East Germany adopted socialism. (One could also argue that the Cold War was an experiment in the relative strengths of capitalism vs. socialism, with the former coming out as the undisputed victor.) As Bill Bonner wrote in The Daily Reckoning Australia (November 16, 2009), this was “the largest and longest and most complete test in economic history”: “Two generations and 20 million of them. The poor lumpen of Mitteldeutschland proved that capitalism – even with heavy state interference – delivers the goods better than a planned economy.” In the Soviet Union, Gorbachev recognized in 1986 as the Soviet empire was self-destructing that “We can’t go on like this.” The Berlin Wall fell three years later on November 9th, 1989 and the great experiment came to a close. Bonner described the experiment as follows:
What they were going on with was a system of compulsory economics – in which bureaucrats made the key decisions. They decided how much capital to allocate to what sector…how many people to employ…how much to charge for the output, and so forth. Of course, in order to make these decisions, Soviet economists had already discovered that they needed to make a lot of other decisions too – such as where people would live, how much they would earn, what they would do, and which of them would be starved to death. So, it was a very controlled experiment. Conditions were so miserable in the East that the government needed a vast network of spies and gulags to keep the malcontents from ruining the test. Still, 5,000 people fled to the West. 136 were killed trying to get over the wall that separated West Berlin from the East.
Certainly, the Wall was one criterion for the experiment: The Germans had to build a wall to keep their people in; the United States is a building wall to keep people out, due to the massive influx of illegal immigrants from the south. In my own experience with East German immigrants to the United States in the 1980s, the main complaint about life in East Germany was the almost total lack of choice in consumer goods. You had your choice: to either buy an East German made automobile or to not own an automobile. Bonner continued his analysis of the experiment:
The results were obvious even before the test began. Ordinary people, looking out for themselves, always make better decisions than economists working for the government. Taxi drivers are better at getting people from place to place. Automobile manufacturers are better at making cars. Bakers bake better bread. Consumers buy what they really want. And capitalists make better investments. But just because a thing is absurd doesn’t mean it is unpopular. There are people who get upset when they discover that there is H2O in their drinking water. There are also people who want aparatchiks to make their decisions for them. And recently, there are more of them. Many Germans in the East long for good old days when things were under control. They call it ‘ostalgie.’
Of course, as Bonner contended, “Capitalism doesn’t make anyone rich. It only allows people to compete for wealth on more or less equal terms.” With socialism, the welfare state, and Obamanomics, competition on equal terms becomes passé, and government is increasingly caste in the role of picking winners and losers. This is at least partially due to the fact that capitalism doesn’t provide enough security for the masses, and in a democratic regime, the masses can vote for candidates who will promise them, and sometimes deliver goods and services for nothing to those dependent upon government largesse, while taking, in the form of taxes, from those who produce wealth. Enter the welfare state and the social safety net. As Sir Alex Fraser Tytler (1747-1813) is reputed to have written:
A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.
With economic freedom comes responsibility, and yes, risk. We are not all equipped to make sound economic decisions, and when we make stupid mistakes, we want someone, usually the government, to rescue us. Bonner continued: “[A]lmost everyone is prey to bubble delusions, hoping to get something for nothing from the latest fad investment. And then, when capitalism corrects their mistakes, they turn ostalgic, longing for the state to intervene and rig the game in their favor.” As we’ve learned in our recent financial meltdown with bail outs for “too big to fail” banks, the lords of finance are some of the main beneficiaries of government largesse, and without moral hazard, the consequence of failure for taking on too much risk, where’s the incentive for bankers to safeguard their own solvency?
But let’s return to Meacham and Thomas’s paen to government intervention.
Now comes the reckoning. The answer may indeed be more government. In the short run, since neither consumers nor business is likely to do it, the government will have to stimulate the economy. And in the long run, an aging population and global warming and higher energy costs will demand more government taxing and spending. The catch is that more government intrusion in the economy will almost surely limit growth (as it has in Europe, where a big welfare state has caused chronic high unemployment). Growth has always been America’s birthright and saving grace.
The big assumption here is that government must stimulate the economy, ostensibly to get us out of the recession/depression. This indicates a lack of understanding about what got the U.S. into this recession. The housing and stock market bubble would not have occurred without the easy money policies of the Federal Reserve, which pumped way too much excess liquidity into the system that had to go somewhere. One to two percent interest rates simply don’t cut it, and one must do something to earn a better return. Voila, the investment houses came up with mortgage backed securities, and some of those securities just happened to be subprime loans. So absent this understanding and following the script of most establishment, leftist, and Keynsian economists, Meacham and Thomas recommend more of the same, as if more easy money, more spending, and more consumption can get us out of this crisis, although to some degree, it seems that Meacham and Evans recognize this conundrum:
The Obama administration is caught in a paradox. It must borrow and spend to fix a crisis created by too much borrowing and spending. Having pumped the economy up with a stimulus, the president will have to cut the growth of entitlement spending by holding down health care and retirement costs and still invest in ways that will produce long-term growth. Obama talks of the need for smart government. To get the balance between America and France right, the new president will need all the smarts he can summon.
The Obama administration is indeed caught in a paradox: It is trapped in the contradictions inherent in its own economic assumptions. As Meacham and Evans observe “more government intrusion in the economy will almost surely limit growth.” Government doesn’t grow jobs, according to a common “liberal” assumption; it actually diverts resources away from the private sector where real jobs are actually created. A government takeover of health care and a Cap and Trade bill to limit the effects of so-called anthropogenic global warming will only cripple an already damaged private sector.
To conclude, using history as our guide, an empirical experiment to test the relative strengths of capitalism and socialism has already been concluded, most effectively in a divided Post-War Germany, but also, in the larger context of the Cold War. The Soviet Union collapsed under the weight of its own contradictions and inadequacies. (China, on the other hand, has retooled enough of its economy along capitalist/mercantilist lines to become the most dynamic economy in the world.) Socialism collapsed in the Soviet empire due to the inherent failures of a planned economy. In the April 28, 1990 edition of The Economist, “A Survey of Perestroika,” the authors wrote:
The most obvious difference between a centrally planned economy and a market economy is that, under central planning, producers are told what to produce and how much to charge for it: prices and quantities are fixed by decree, rather than by interaction of demand and supply in the market” (p. 4).
What a true socialist economy lacks is a pricing system, to give producers feedback as to how much to produce of each product. If something doesn’t sell at a given price, this is information for the producer that he must lower the price to increase sales. The Soviets produced too much of what the people or consumers didn’t want, and not enough of what they did want. The Austrian economist Ludwig von Mises has written: “Where there is no free market, there is no pricing mechanism; without a pricing mechanism there is no economic calculation” (Economic Calculation in the Socialist Commonwealth, 1920/1990, p. 28). And “Without economic calculation there can be no economy” (Ibid., p. 21). The lessons of the Cold War era should make it clear that the more modern welfare states go down the road to serfdom prophesized by Hayek, and the farther away they get from “ordinary people, looking out for themselves,” the more difficult it will become, with bureaucrats at the helm, to make the right decisions for optimal productive capacity. Coincidentally perhaps, the Soviet regime was one of the most environmentally unfriendly and wasteful economies on earth.
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Comments
Excellent post Mark, and one that I personally saw in action in the 50′s. As an Army brat in Germany (1953 -57) I remember seeing in what was then nicknamed “West Germany” bombed out buildings, the shell was still there, sometimes all the way up to the second and third floors or perhaps only the concrete lined basement with grass growing in the bottom but no rubble in evidence. Now understand, these buildings had thick walls, often a foot or more But that was the exception and not the rule. On the other hand, East Berlin, as seen from West Berlin before the wall (spring, 1957 – I was 10 years old) the bombed out building was the rule and not the exception, complete with rubble from time to time. The comparison between East and West was stark.
Decades later, traveling in Berlin both East and West after the fall of the Wall (we were in Berlin on the afternoon of September 11, 2001 and news of the terrorist attack on New York became known around 5PM or 6PM their time.) and the difference, some 44 years later in fact, was amazing. East Germany, now part of the Federal Republic was a pleasure to walk through. Stepping through the huge Brandenburg Gate, strolling through Check Point Charlie with no East German Police giving you the eye, visiting the Reichstag. Yes, a world of difference indeed.
Let the left explain that difference and surely they will say “Yes, a socialist Federal Republic” or “Yes, a left leaning Federal Republic,” but the truth is simple: It was Capitalism, and only fools can doubt it.
Thanks for the eye witness account GM. I’ve only been to West Germany in the late ’60s. So far, I haven’t met a German who would have preferred life in the East.