Before returning from Europe to Chicago recently, I took a short trip to Berlin. Quite the contrast from Paris. The latter, being the most northern of Mediterranean cities, offers glitz, espresso and mopeds. Everybody wears black. Berlin, in contrast, has a distinctly Northern European flavour, offering open space, bicycles bicycles bicycles, and bio-organic food.
Free markets collectively make sounder decisions than do top-down planners
My favourite hour in Berlin was my visit to the small DDR Museum, which documents the former country of East Germany. It's not only a visually arresting, fun exhibit, as well as a memory trip for those who remember the days before Justin Bieber, but it's also fabulously instructive. Sometimes, one learns best about success by examining failures. And as failures go, East Germany was quite spectacular.
As West Germany flourished, remaking itself into a global manufacturing powerhouse, East Germany sank into economic ruin. It was trapped in a vicious cycle, wherein it needed to spend money to purchase raw materials for its manufacturing-based economy but could not generate enough income from its exports to pay for those raw materials. It built goods, all right, but nobody would pay good money for them. The country's exports were so shoddily built, and so outdated, that they could only be sold at very lower prices. East Germany was a bottom feeder. The country was so desperate for outside cash that it exported cobblestones.
The museum makes clear why East Germany flopped.
A primary reason, of course, is that free markets collectively make sounder decisions than do top-down planners. East Germany's tight central controls cut off the flow of information that comes from the exercise of free markets, leading planners to make poor allocation decisions—from supply chains and labour to the volume of production and pricing. Adam Smith, yes. Karl Marx, no.
That is the answer that we all know. However, there was more to East Germany's demise than solely the problem of top-down planning.
One was the country's approach to education. East Germany invested little into higher education, as the government believed that practical, vocational training was sufficient for the vast majority of workers. Few would need the specialised knowledge and skill that came from attending university. Making matters worse, at the lower levels of education—primary and secondary schools—the emphasis was rote learning. Critical thinking and creative classwork were actively discouraged. The result of these policies was a drone workforce that was capable of following simple orders and executing basic tasks, but little more.
Reinforcing the scepticism about advanced knowledge were the country's pay scales. A chemical researcher made roughly the same monthly salary as a manual labourer. The former needed several years of university education to do his job; the latter needed to stay in school to age 14. Not only was the supply chain for education limited but also was the demand.
The shortage of trained thinkers was exacerbated by a national culture that rewarded conformity and penalised individualism. From early childhood, children in East Germany were taught by state organisations about the importance of obedience, of not questioning authority.
As adults, they learned to keep their heads down, so as not to attract the attention of the nation's pervasive internal security system. By the time of East Germany's demise, at least 2.5% of the country's adults worked as informants for Stasi, the internal security police. (Some argue that the true figure is much higher, as the Stasi records are incomplete and, quite naturally, informants who were not identified did not step forward to acknowledge their participation.) It was a culture of paranoia.
As potential enemies of the state, artists were strictly controlled. Rock musicians were expected to sing only in German. If they did, they received prominent play time on East German radio, which was given a quota of home-grown music that it was required to play. (Rather like the old days of wire-house mutual funds in the US, wherein the brokers were instructed to place at least 50% of their mutual fund sales with in-house funds.) Theatre, film and television production was monitored and the content restricted.
The result was a product that not only could not be exported—the East German government never did realise that, like manufactured goods, intellectual property could also be sold for cash—but that also did not serve the internal market. East Germans, in particular East Berliners who had easy access to West Berlin's radio and television broadcasts, refused the in-house products and opted instead for Western artists. This preference for things Western held true for clothing as well, as a pair of Levi's sold for 25% of the average monthly salary in East Germany.
The country's multiple failures all came together in its national car, the Trabi, displayed at the museum. East Germany's national car did have the advantages of being cheap, easy to operate, easy to repair and able to haul a high cargo load for its size. Thus, the Trabi wasn't a complete joke when it was launched in 1957. But it did not change. Ever. By 1991, it was essentially the same car as in 1957, still featuring a two-stroke engine that delivered 26 horsepower. What once was vaguely competitive had become completely, utterly non-competitive.
The DDR Museum illustrates the conditions necessary for innovation. Innovation benefits from a high level of national education; critical thinkers; a culture that permits experimentation, questioning and nonconformity; and a system that rewards those who do innovate with success. East Germany had none of those features. As a result, it was powerless to change the Trabi. East Germany, like its national car, was doomed to slide into extinction.
