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East & West, North & South — Real world test labs

Summary:
Some want us to compare the practical experience of capitalism, warts and all, with some abstract theory of what socialism might be like “if it were done properly.” It is difficult to compare the two, given that experiments with each have been done at different times, in different places, in different countries, in different cultures. We cannot usually do a “ceteris paribus” because other things are not usually equal, and therefore different outcomes can be attributed to outside variables.There are, however, two obvious cases where we can see countries of similar background, history and assets over enough time, to give us an approximate laboratory comparison of the outcomes achieved by each system. They are postwar Germany, divided between East and West; and postwar Korea, divided between

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Some want us to compare the practical experience of capitalism, warts and all, with some abstract theory of what socialism might be like “if it were done properly.”

It is difficult to compare the two, given that experiments with each have been done at different times, in different places, in different countries, in different cultures. We cannot usually do a “ceteris paribus” because other things are not usually equal, and therefore different outcomes can be attributed to outside variables.

There are, however, two obvious cases where we can see countries of similar background, history and assets over enough time, to give us an approximate laboratory comparison of the outcomes achieved by each system. They are postwar Germany, divided between East and West; and postwar Korea, divided between North and South.

The two parts of Germany and Korea shared broadly similar backgrounds and peoples, but in each case one part of the country followed the path to socialism, while the other allowed its economy to follow the route to free markets and capitalism.

If anything, the North Koreans had the advantage of most of the peninsula’s natural resources, while the East Germans had most remaining postwar industrial infrastructure. The Marshall plan did benefit West Germany a little, but Italy and West Germany received only 10% of it each, while the UK had 25% and France 20%. Economic estimates put the benefit to West Germany of perhaps only 0.5% growth in GDP between 1948 and 1951.

The two split countries showed a striking disparity in economic performance. After Ludwig Erhard abolished price controls and made “a bonfire of restrictions” in a single weekend, West Germany embarked upon the “economic miracle” that soon led it to be Europe’s top economy. Meanwhile the East had to endure endless shortages, poor quality goods, low growth rates and wages.

In Korea, the South embraced markets and capitalism and roared to success as one of the booming “tiger” economies. The North saw starvation and economic stagnation as living standards declined. It was a reasonable like-for-like test of the two systems. In each, one part of the split countries capitalism delivered the goods (literally), while in the other part, socialism simply did not work.

This comparison does not take into account the misery and stunted lives brought about by the totalitarian dictatorships in East Germany and North Korea that accompanied socialist controls. On economic performance alone, capitalism came out as the overwhelming winner in delivering better lives to its people. It affords a salutary lesson.

Dr. Madsen Pirie
Dr Madsen Pirie is President of the Adam Smith Institute, and was one of three Scots graduates working in the US who founded the Institute in 1977. Before that, Madsen worked for the House of Representatives in Washington DC, and was Distinguished Visiting Professor Philosophy at Hillsdale College in Michigan.

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