INSIGHTS: THE EXPERIMENT – CAPITALISM VS. SOCIALISM
By Guest Columnist David Legates, Ph.D:
Professor of Geography, University of Delaware is a climatologist and a Senior Fellow of the Cornwall Alliance for the Stewardship of Creation.
Reprinted with permission from Townhall.com.
Experimentation is a major tool in the scientist’s arsenal. We can put the same strain of bacteria into two Petri dishes, for example, and compare the relative effects of two different antibiotics.
What if we could do the same with economic systems? We could take a country and destroy its political and economic fabric through, say, a natural disaster or widespread pestilence – or a war. War is the ultimate political and economic cleansing agent. Its full devastation can send a country back almost to the beginning of civilization.
We could then take this war-torn country and divide it into two parts. It would have similar people, similar climate, similar potential trading partners, similar geography – but one part is rebuilt using capitalism as its base, while the other rebuilds using socialism and its principles. We’d let the virtues of each system play out and see where these two new countries would be after, say, fifty years.
Don’t you wonder what the outcome might be? Well, as it turns out, we have already performed The Experiment. It’s post-war Germany.
Following the devastation of World War II, Germany was split into two parts. The German Federal Republic, or West Germany, was rebuilt in the image of the western allies and a capitalist legal-political-economic system. By contrast, the German Democratic Republic, or East Germany, was reconstructed using the socialist/communist principles championed by the Soviet Union. The Experiment pitted the market economy of the West against the command economy of the East.
On the western side, considering what’s being taught in our schools, one might expect that “greedy capitalism” would create a state where a few people became the rich elite, while the vast majority were left as deprived masses. Socialism, by contrast, promised East Germany the best that life had to offer, through rights guaranteed by the state, including “human rights” to employment and living wages, time for rest and leisure, health care and elder care, and guaranteed housing, education and cultural programs.
So the Petri dishes were set, and The Experiment began. In 1990, after just 45 years, The Experiment abruptly and surprisingly ended – with reunification back into a single country. How did it work out?
In West Germany, capitalism rebuilt the devastated country into a political and economic power in Europe, rivaled only by its former enemy, Great Britain. Instead of creating a rich 1% and a poor 99%, West Germans thrived: average West Germans were considerably wealthier than their Eastern counterparts. The country developed economically, and its people enjoyed lives with all the pleasures that wealth, modern technologies and quality free time could provide.
By contrast, East Germany’s socialist policies created a state that fell woefully behind. Its people were much poorer; property ownership was virtually non-existent amid a collectivist regime; food and material goods were scarce and expensive, available mostly to Communist Party elites; spies were everywhere, and people were summarily arrested and jailed; the state pretended to pay its workers, and they pretended to work. A wall of concrete, barbed wire and guard towers was built to separate the two halves of Berlin – and keep disgruntled Eastern citizens from defecting to the West. Many who tried to leave were shot.
By the time of reunification, productivity in East Germany was barely 70% of that in West Germany. The West boasted large, vibrant industries and other highly productive sectors, while dirty antiquated factories and outmoded farming methods dominated the East. Even staples like butter, eggs and chicken – abundant and affordable in West Germany – were twice as expensive in the eastern “workers’ paradise.”
Coffee was seven times more expensive, while gasoline and laundry detergent were more than 2½ times more expensive. Luxury items, like automobiles and men’s suits were twice as expensive, color televisions five times more costly. About the only staple that was cheaper in East Germany were potatoes, which could be distilled into vodka, so that lower caste East Germans could commiserate better with their abundant Russian comrades.
Moreover, state-guaranteed health care in the East did not translate into a healthier society. In 1990, life expectancy in the West was about 3½ years longer than in the East for men, and more than 2½ years longer for women. Studies found that unfavorable working conditions, psychological reactions to political suppression, differences in cardiovascular risk factors and lifestyles, and lower standards of medical technology in East Germany were largely responsible for their lower health standards.
The socialist mentality of full employment for everyone led to more women working in the East than in the West. This pressure resulted in better childcare facilities in East Germany, as mothers there returned to work sooner after giving birth and were more inclined to work full-time – or more compelled to work, to put food on the table, which meant they had to work full-time and run the household. This also meant East German children had far less contact with their parents and families, even as West Germans became convinced that children fared better under their mothers’ loving care than growing up in nurseries.
As the education system in East Germany was deeply rooted in socialism, the state ran an extensive network of schools that indoctrinated children into the socialist system from just after their birth to the university level. While it’s true that today East Germans perform better at STEM (science, technology, engineering, math) studies than their Western counterparts, that may be explained in part by the influx of numerous poorly educated immigrants to former West German areas, and the extensive money invested in the eastern region since reunification.
However, schools of the East were not intended to establish creative thinking, which results in creativity and innovation. Rather, they were authoritarian and rigid, encouraging collective group-think and consensus ideas, rather than fostering outside-the-box thinking, novel philosophies and enhanced productivity. Thus, East German technology was slow to develop and students were often overqualified for available jobs.
Did the East gain any advantage? Nudism was more prevalent in the East, if that was your thing. Personal interaction was higher too, because telephones and other technologies were lacking. But even though East Germany was much better off than other Soviet satellite countries (a tribute to innate German resourcefulness), East German socialism offered few advantages over its capitalist western counterpart. In fact, in the years since reunification, homogenization of Germany has been slow, due largely to the legacy of years lived under socialist domination, where any work ethic was unrewarded, even repressed.
Freedom was the single most important ingredient that caused West Germany to succeed. Freedom is the elixir that fuels innovation, supports a diversity of thought, and allows people to become who they want to be, not what the state demands they must be. When the government guarantees equality of outcomes, it also stifles the creativity, diversity, ingenuity and reward systems that allow people and countries to grow, develop and prosper. The Experiment has proven this.
These days in the United States, however, forgetful, unobservant and ideological politicians are again touting the supposed benefits of socialism. Government-provided health and elder care, free tuition, paid day care and pre-school education, guaranteed jobs and wages are all peddled by candidates who feel government can and should care for us from cradle to grave. They apparently think East German socialism is preferable to West German capitalism. Have they learned nothing from The Experiment?
A friend of mine believes capitalism is greedy and evil – and socialism, if properly implemented, will take us forward to realizing a better future. I counter that The Experiment proves society is doomed to mediocrity at best under autocratic socialism. Indeed, those who turn toward the Siren call of socialism always crash upon its rocks. But my friend assures me: “Trust me, this time it will be different.”
That’s what they always say.
ON THE ECONOMY: FOR WHAT IT’S WORTH
By John Dunham:
Managing Partner, John Dunham & Associates
There’s something happening here. What it is ain’t exactly clear. There’s a man with a gun over there, telling me I got to beware. I think it’s time we stop, children, what’s that sound, everybody look what’s going down. There’s battle lines being drawn. Nobody’s right if everybody’s wrong. Young people speaking their minds, getting so much resistance from behind. It’s time we stop, hey, what’s that sound, everybody look what’s going down. This 1967 song written by Stephen Stills and performed by Buffalo Springfield, is often calledThere’s Something Happening Here, and that appears to be what is going on with the most recent household income statistics that were released by the Census Bureau a couple of weeks ago. (http://www.census.gov/newsroom/press-releases/2016/cb16-158.html)
In its annual report, the Bureau suggests that median household income rose by 5.2 percent in real inflation adjusted dollars in 2015. Income Growth that high has not happened since before Richard Nixon was President. Considering the current state of the economy (GDP has not grown faster than about 2 percent annually for years) one has to wonder whether or not there was either a data error in the report, or some sort of issue with the statistics. Quite frankly, the numbers presented throughout the report simply do not suggest that the headline figure of 5.2 percent growth in household income is possible.
Median household income represents the income level of the middle household if all were lined up from the lowest income to the highest. On the other hand, average household income is the income level calculated by taking total income and dividing by the number of households. Usually, the average income level rises faster than the median since it is dragged upwards by a small number of super rich households. Consider that a 1 percent increase in income for the Buffett’s (say 1 percent of $100 million) is equal to $1 million. A one percent increase in income for Mr. Buffett’s groundskeeper (say 1 percent of $50,000) is equal to just $500, and a one percent increase for his butler (say 1 percent of $100,000) is $1,000. In a world consisting of just the Buffett estate, median income is up by $1,000 from $100,000 to $101,000, while average income is up $333,833 from $33,383,333 to $33,717,167. This simple example shows why average income generally rises faster than median income.
Not this year, however. Reported average income was up just 4.5 percent with the median up by 5.2 percent. This has only happened 10 times since 1970. In addition, earnings for workers (wage income) was up way less than reported median household income – just 1.5 percent for men and 2.7 percent for women. Taken together these figures suggest that income is rising much faster for lower income people, but these same people rely primarily on wages for their income and wages are rising at a fairly modest rate that is much more in line with real GDP growth.
So what is happening here? While what it is ain’t exactly clear; however, the data presented in the report suggest that there was significant growth in the number of families with over $100,000 in income and a corresponding reduction in those with under $50,000. This implies that the growth in median income is due to a shift in the population from lower to higher income brackets. Interestingly, this shift happened only for white families, and while the percentage of black, Asian and Hispanic families in the lowest income categories did fall, the percentage in the highest fell as well. So while minority families were becoming more middle class, white families were entering the over $100,000 club at a record pace.
The Bureau of Labor Statistics, in its Consumer Expenditure Survey sheds some light on what is happening here. The CES provides some limited data on the source of income by family. Across the board wages were up between 2014 and 2015, up substantially – between 4 and as much as 7 percent. Income earned by self-employed individuals barely moved however, suggesting that most of the wage growth was in larger companies. In addition buoyant stock prices helped lift income, with income from stocks and investments up by about 7 percent to 9 percent virtually across the board. African American families received huge increases from income from the markets, all be it from a low base. All of this suggests that while wages drove these income gains, they were helped significantly by bubbly asset markets.
All in all, the household income figures suggest that the averages are driving the medians. In other words, the wealthy are getting wealthier and this is helping to pull some middle class people upward into higher brackets. That said, this is an unprecedented rate of growth and follows dismal numbers in the prior eight years where income generally fell on an annualized basis. Still, it is not possible for income to grow faster than the economy over a long period of time, so 2016 is probably the high water mark. Rapid income growth of this type also tends to foreshadow higher levels of inflation, and even with the recessionary headwinds, it is possible to see rapid income growth and a stagnant economy – as happened in the 1970s,
So while this report is generally good news, particularly for non-minority households, I think it’s time we stop, and everybody look what’s going down before we get too excited. Much of the income growth is due to asset bubbles, and growth in real wages follows a particularly miserable period for American workers. What is happening ain’t exactly clear.
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