In 1945, Germany was separated into two countries with two economies. The east was based on central planning and government ownership of property and the west was based on a chaotic market system and private ownership of property. In the west, individual rights were protected, especially property rights. In the east, however, this was not the case. In most other respects, the two Germanies were not very different – they had similar religions, genetic makeups and cultures. It was as close to a scientific test as you can ever get in the real world of how different economic organizational systems perform over time – in this case, over 4 decades.
Due to a lack of data exiting East Germany, we could only estimate economic activity in that region during that time. Most estimates placed it at about 60% of the west’s productivity in the late 1980s.
When the Berlin Wall fell in 1989 and we were finally able to peer into the true inner workings of the economy behind the iron curtain, we found that our estimates of economic activity in East Germany were substantially higher than the reality turned out to be. East Germany was an economic ruin.
As the conclusions of this experiment sank into the minds of well-meaning people around the world, the concept of cental planning in economies fell quickly into disrepute. Today it can be easy to forget that in the early 1970s in America, price controls were in effect under the Nixon administration. The U.S. – the bastion of market driven economics – was experimenting disastrously with central planning.
Today central planning is only seriously practiced in North Korea, Cuba, and most recently Venezuela, and their economies are suffering as a result. The rest of the world – most notably China, which contains ¼ of the world’s population – has embraced chaotic market systems as the best way to enhance the human condition and enrich populations.
As a result, hundreds of millions of people worldwide have been lifted out of poverty. You can check out the statistics in GapMinder’s online tool for exploring population data.
- Curt Finch, Journyx CEO