Gorbachev and the Most Complete Test in Economic History

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Only a moron would allow economists to make decisions for him. So, this week, we give thanks to morons. We’re referring to the dumbbells who took part in 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.

Readers may know Mikhail Gorbachev as a fellow who advertises Louis Vuitton luggage. But before he made it big as a mannequin, he was the top man in the Soviet Union. It was not an easy job. The empire was falling apart. So, in a rare act for a public official, Gorbachev told the Soviet people the truth: “We can’t go on like this,” he said in 1986. Three years later, on November 9th, 1989, the test was over.

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.

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.’

After a bit of food and a roof over his head, a man becomes more concerned with status than with survival. It is not how rich he is that matters; it’s how rich he is compared to those around him. Status brings reproductive advantages, say the socio-biologists. But it brings disappointments too. And envy. So wicked and destructive is the urge to envy that the Catholic Church banned it as a cardinal sin. Societies suppress envy in a variety of ways. Some tax the rich. Some force everyone to wear the same dreary clothes. Most level the population by sticking everyone into the same education, retirement and healthcare systems.

Capitalism doesn’t make anyone rich. It only allows people to compete for wealth on more or less equal terms. Naturally, some are better at it than others. Most people prefer alcohol, television or jobs on Wall Street to the rough and tumble of real enterprise. And almost 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.

“After the wall fell: capitalism is a disappointment” says a headline in yesterday’s Montevideo paper, La Republic. A poll showed that of people asked in 27 countries only 11% thought capitalism was working properly now. We’re surprised that anyone thought so. With so much finagling by the feds, it’s a wonder that it works at all.

But even among the complainers, few suggest a return to the policies that wrecked East Germany between 1949 and 1989. Instead, what they want is a kinder, gentler form of capitalism with the state as a benevolent partner. Full employment, with Audis. Guaranteed health and retirement benefits, with wifi and cappuccinos. Unlimited government bailouts, but without state bankruptcy.

Alas, the lumpen are worse at rigging the game than they are at playing it. The elites are better; that’s why they’re the elite. They use corrections the way a general uses a cease fire – to strengthen their positions. They connive with the government for more regulations to keep out competitors, bailouts to protect them from their mistakes, and handouts to enhance their status. That’s why, scarcely a year after they were all on the edge of insolvency, the world’s big financial firms are paying the biggest bonuses ever.

Does rigging the system like this make people better off? Many thanks to those teuton guinea pigs again! They conducted another test. After the wall came down, the Federal Republic in Bonn decided to intervene in the Eastern states in order to lift the ossies out of poverty and put them on a level playing field with the West. Beginning in 1991, the West transferred an amount equal to 4% of GDP each year to the East. Public works. Public health. Public education. Welfare! Handouts! Bailouts!

Unwittingly, which is the only way to do this sort of thing, they were merely adding to the test data. For next door was the Czech Republic, which also suffered under the Soviet boot, also engaged in absurd and counterproductive policies, and also flew the coop as soon as the Soviets dropped their guard. The Czechs had no rich relatives. They had no source of free money. They had no booming economy that they could join. No money. No port. Not even a language anyone else could speak.

Well, guess who won that race? The Czechs, of course. GDP growth rates in the Czech Republic pulled ahead of those in East Germany in the early ’90s; since then, they’ve been pulling farther and farther ahead each year.

Regards,

Bill Bonner,
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. Rigging Capitalism is only the start of the “Elite” plan for society. The reason everyone is saying capitalism has failed is because they plan to replace it through a carbon tax that will perpetuate the biggest transfer of wealth from Western nations to so called 3rd world countries.
    This will continue until living standard are about the same globally.
    Leaving the elite — and surfs.

    Keywords to research:

    Agenda 21
    Sustainable Development
    Codex Alimentarius
    Global warming scam
    Lord Monckton

    Reply
  2. “Societies suppress envy in a variety of ways. Some tax the rich. Some force everyone to wear the same dreary clothes.” .. this isn’t suppressing envy but acting it out. Letting the rich be rich is suppressing envy.

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  3. Mr Bonner – the modern day Ebenezer Scrooge.

    Bill Bonner 2009: “Instead, what they want is a kinder, gentler form of capitalism with the state as a benevolent partner.”

    Bill Bonner in 2002 on why he prefers living in ‘socialist’ France: “when I look out my office window in Paris, I do not see socialism. I see a very romantic street scene – with the Paradis Cafe on the corner…cobblestone streets…and attractive people wandering around … Taxes are higher in France, but where else can you buy a decent bottle of wine for $5? … What I really care about is not the “isms” — but the everyday experiences of my life. Are my children safe? Are they being well-educated? Is the food good? Is what I have to look at appealing to my eye?”
    http://dailyreckoning.com/darwinism-and-other-nonsense/

    Perhaps paying a little extra tax (and expecting the elite to contribute money back to society) is not the end of the world if it means having good experiences of everyday living and a gentler form of capitalism? ‘Bah, humbug’…

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  4. Capitalism as a philosophy is not without its failings. When monopolies form, capitalism ceases to be simply an economic system but becomes political. Owners of monopolies wield power over governments and, both directly and by proxy, control nations and, potentially, the world. Once this situation develops, there is nothing fair or natural about the system and “opportunity” which is the catch-cry of capitalists, ceases to exist. (incidentally, I most definitely am not a socialist).

    An appropriate system of economics needs to allow for competition and free enterprise – material reward for ingenuity and hard work, but it must be counterbalanced by devices which prevent monopolies from forming, and which encourages smaller units to grow and thus increase competition. It also cannot be divorced from culture – you can have any system you like, but if people are rotten, they will find a way to rot the system until it stinks to high heaven.

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  5. All systems of population control have givers and takers, cloaking in an ‘isms’ is reaching for a philosophy to explain the individual merits or flaws.

    You meet working family people from all systems and find how proud, caring, patriotic and so on. Interesting movie doc ‘The Corporation’ has the leaders psychiatric evaluation under the DSM V as psychopathic.

    Capitalism drives monopolising wealth and is not free and fair enterprise that promotes merit appointment. We see this in our politicians and corporate leadership….seriously its been suggested that without the corporate playground some CEOs could become serial criminals and we have to wonder why we wait so long to arrest their obvious guilt…..

    Greed is greed under any system of ‘ism’. Democracy is really the level of control govts enforce on us…..communal tribal systems promote freedom within but someone who brings about a piece of technology operating outside the ‘memes’ (engines of creation) risks being cast out……..Aus uses tall poppy.

    West and East Germany still have problems there is still the divide of intellectual capacity where the brains go west and what is otherwise stays in the east.

    Russia found the opportunity to become even more corrupt and debased as a society…..China developed its own form of ‘ism’, the USA had a trickle down skewed democracy which is beginning to look embarrassingly to the rest of the ‘free’ world as a drip….a paranoid ‘ism’ society that believes that people should die if they can’t afford health care.

    The Czechs having to stand on their own feet prosper becuase of human challenge and the improvisations of an inherent intellectual strength….’Czech having a language only they speak’…remind me of Japan….Great societies formed pull together for the social and common good, with entrepreneurs that seek more on fair and equitable grounds…in opposition to leaders that steal money from their constituents to give to the wealthy…..

    tar and feathers
    November 17, 2009
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  6. tar:

    Well, unless we label things (eg: as capitalism) we will spend forever describing them in minute detail and get nowhere far – books are better places for that sort of thing.

    As for democracy, there are flavours – and I think people realize that in reality a representative, multi-party democracy is more about people’s power over their government – as is exemplified by what happens when this system is absent. Sure it’s a system that is often rigged, but still, in principle it’s about accountability and mitigating power.

    As for Russia’s transformation from the USSR, and for what happened to Czechoslovakia (and the rest of Eastern Europe), it was a smoother transition than people seem to perceive – a guided collapse. Though the trail of information is often blurred and covered up, it is still there.

    As for DSM V, psychiatry and psychology overall are not scientific in the way that behavioural science is. The diseases are consensus definitions and change with cultural norms. Being a CEO may require one to exhibit “pathological” traits but it is not a disease if it’s not considered to be a problem. It’s all fluffy and the comparison merely serves as entertainment. Medicine should never be used as a moral guide, although morality is often proven right by it.

    I agree with you, but coming from a different angle. The thing that political philosophers and economists seem to miss is that below the surface human associations which are publicly measurable, there are layers of hidden associations which are used to undermine and circumvent checks and balances. Greed drives people to cheat – the best cheats are undetectable, and even better, untouchable. Some cultures have been very effective at reducing this problem, but quickly slip back once the problem ceases being referred to.

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