Two Germanys and two Koreas, the natural experiments that socialism lost

Every scientist wants a control group. Economists almost never get one, because you cannot take a nation, cut it in two, and run different systems on each half while holding the people, the language, the culture and the geography constant. No review board would approve it. Twentieth-century history ran the experiment anyway, twice, without asking anyone, and the data came in so one-sided that the defenders of central planning have spent decades trying to change the subject.

That is the subject of this post: Germany from 1945 to 1990 and Korea from 1945 to today. I will lay the two cases side by side, give the other side its best arguments, and then explain why they do not survive the numbers or the common sense of anyone who ever stood at a checkpoint and watched which way people were trying to cross.

Why divided countries are special

A fair test needs three things. The two groups under study must start alike. They must be treated differently. And the outcomes must be measured on the same scale. Divided nations meet all three conditions better than any comparison between, say, Sweden and Ghana. East and West Germans shared a language, a literature, a legal tradition and a pre-war industrial base. North and South Koreans shared a language, a history of Japanese rule, and a thousand years of common culture. When they end up in two different places, you cannot blame the national character. You are left with the system.

Here are the premises I will defend.

1. The divided countries began from roughly comparable starting points, though not identical ones, and I will address the differences honestly.
2. Each pair then ran under opposite economic systems, one market-based and one centrally planned.
3. In both pairs, the market side became far richer and the planned side became poorer, and in both pairs, people voted with their feet when they were allowed to.
4. The lesson is not that a rich country is nicer than a poor one. It is that when the same people are given different rules, the rules decide.

The steelman

The strongest argument against reading these cases my way deserves its full due. It says the starting conditions were never equal. West Germany received Marshall Plan aid and was integrated into a trading bloc, while East Germany was stripped by the Soviet Union, which carried off factories and rail track as reparations and imposed a heavy burden afterwards. South Korea received large amounts of American aid and a security umbrella, while North Korea began with much of the peninsula's heavy industry and hydropower, which the Japanese had built there. And South Korea was no model of liberty for decades: it was ruled by strongmen, and its early growth was directed by the state. Therefore, the argument concludes, the economics is mixed up with geopolitics, and nobody can say it was the system.

Some of that is true, and I do not want to wave it away. The Soviet reparations were real. The American aid was real. The South Korean state was not a laissez-faire paradise, and conservatives should not pretend otherwise.

But three answers settle the matter. First, the aid arguments cut the other way over time. The Soviet bloc and the North received substantial assistance from Moscow and Beijing for decades, and the planned economies still fell behind. Second, the North began with the better industrial endowment in Korea, which is the opposite of a head start for the South. Third, the gap that opened was not a gap of a few percentage points that aid could explain. It was a difference in kind: a country that produces cars, ships and phones and a country that cannot reliably feed its own people. Aid does not turn a planned economy into a prosperous one. Look at the countries that have received aid for decades and stayed poor.

Germany: the decision on a Sunday

The German story begins with a gamble. After the war, Germany was under Allied occupation, and the economy ran on controls. Prices and wages were fixed. Goods were rationed. Money was nearly worthless, and cigarettes and barter filled the gap. Shop windows were bare because shopkeepers would not sell goods at the controlled price for money they could not trust, and hoarded the stock instead.

In June 1948, in the western zones, a new currency, the Deutsche Mark, replaced the old Reichsmark. Ludwig Erhard, the economic director of the western zones, then did something that his Allied overseers did not like: he announced the end of most price controls and rationing. The story of that weekend is told in Ludwig Erhard ended price controls on a Sunday and launched a miracle. The effect was quick. Goods that had been hidden came out onto the shelves, because now there was a currency worth taking and a price worth getting. Output rose. The phrase "economic miracle" followed.

In the Soviet zone, which became East Germany in 1949, the path ran the other way. Industry was nationalized, farms were collectivized, prices were set by the state, and a planning bureaucracy decided what the country would make. The state's attitude toward ordinary goods can be summed up in one car.

The Trabant

The Trabant was East Germany's people's car, produced from the late 1950s until 1991, long after the design was obsolete. It had a small two-stroke engine that filled the street with smoke, and a body made of a composite material rather than steel. Buyers did not walk into a showroom. They put their names on a waiting list, and the wait stretched on for years. Accounts of the wait run to a decade or more. A used Trabant could cost close to what a new one did, which tells you everything about the shortage.

Think about what that means. In a market, a car that smokes and breaks down is ignored, its maker loses money, and the maker either improves the car or goes out of business. In a plan, there is no competitor to lose customers to, so the unsatisfactory car goes on being made for decades, and the customers are the ones who wait. The Trabant is not a joke about East Germany. It is a proof of how a system without feedback works.

The exit

And then there was the matter of people. Between the founding of the two German states and 1961, millions of East Germans left for the West, many of them young and skilled. Berlin was the leak in the fence, because the four-power status of the city meant that a person could go from the eastern sector to the western sector on a train or on foot. By the summer of 1961 the leak had become a flood.

On August 13, 1961, East Germany began building a wall. It was sold as an "anti-fascist protection barrier," which was a fine piece of branding for a structure whose purpose was to keep its own population from leaving. Pause on that. No country that was winning the argument would need to build a wall to keep its people in. When a government has to fortify its border against its own citizens, it is making the most honest admission possible about how those citizens would vote if the gate were open.

The bill

Germany reunified on October 3, 1990. The costs of bringing the east up to anything like the western level were enormous. West German taxpayers transferred sums over the next decades that, by most estimates, ran well past a trillion euros, and a special surcharge was added to the tax bill to help pay for it. The old eastern industries, once exposed to competition, mostly proved unable to compete, because they had been built to meet a plan and not a customer. The cleanup of the environmental damage left by planned industry was a bill of its own.

That is the cost of a generation of central planning: not only the lost output, but the repair afterward. Socialism's defenders like to point at the transfers as proof that the West was greedy. A better reading is that the transfers were the invoice for a mistake that was not the East Germans' fault, and that the West Germans, to their credit, mostly paid it without complaint.

Korea: the same experiment, with sharper edges

The Korean case is starker. At the end of the Second World War, the peninsula was divided at the 38th parallel into a Soviet-occupied north and an American-occupied south. The Korean War, which began in June 1950 when the North invaded the South, ended with an armistice signed on July 27, 1953, which left a heavily fortified border in nearly the same place. No peace treaty followed.

The two states then went their separate ways. The South, poor and wrecked by war, adopted a development strategy built on exports. Under the government of Park Chung-hee, from the early 1960s, South Korean firms were pushed to sell what they made to the world, and a country that had once made little but rice and textiles moved into steel, shipbuilding, cars and electronics. A country that had been among the poorest in the world became a member of the club of rich nations, and in the 1990s it joined the OECD. The North built what it called a self-reliant economy, on the principle that the state should control everything, and it added a political doctrine of hereditary rule on top.

The famine

In the 1990s, after the collapse of the Soviet Union ended the subsidies on which the Northern economy had depended, North Korea suffered a famine. The regime has never allowed a full count. Estimates by outside researchers of how many died range from a few hundred thousand to as many as three million, with many clustered near one million, and the debate over the figure is itself a sign that the state conceals what happened. What is not in dispute is that the famine happened, that it was not caused by war, and that a country with the same people and the same soil as a thriving neighbor could not feed them.

An image captures the whole comparison. Photographs taken at night from space show the Korean peninsula with the South lit up in a blaze of light and the North almost black, apart from the capital. A satellite does not take sides. It simply records the electricity.

The table

The pattern is the same across both pairs, which is what a controlled experiment ought to show. In both, the market side prospered, the planned side stagnated, and the planned side needed a wall or a fortified border to keep its people from comparing the two.

The numbered rebuttal

Let me answer the objections in order, because there are several.

1. "It was the reparations." The reparations explain the first decade, not the forty-year gap. East Germany was the best-off economy in the Soviet bloc, and it still could not match its neighbor. If planning worked, then forty years was enough time to catch up.
2. "It was the aid." North Korea received large amounts of support from its patrons. A country that is subsidized by two superpowers and still starves has a problem that aid does not solve.
3. "South Korea was a dictatorship, so markets don't need freedom." That is half right, and I will give it fully. South Korea grew under authoritarian rule for a generation, and I am not defending that rule. But notice where the argument leads. The South was market-oriented, and the South later became a democracy, one with free elections and a free press. The North has never been either. The sequence is instructive: markets and property created the middle class, and the middle class demanded a say. The reverse sequence, in which a plan produces a middle class that demands a say, is not found in the historical record.
4. "Per-capita income is not everything." No, it is not. But people who say this should be asked which of the two sides they would choose to live on, and then be asked why the East Germans did not choose to stay.

The Founders' view

The American founders did not read about East Germany. They did not need to. They knew from their own reading of history, and from John Locke, that a government with unlimited authority over property and trade would use it. James Madison's warning in Federalist No. 51 applies to economics as much as to politics: "If men were angels, no government would be necessary." Men are not angels, and that includes the men who sit on planning committees. A system that puts all economic decisions in their hands has put all the temptation in one place.

The Constitution answers with limits. The Fifth Amendment protects property from being taken without due process and just compensation. The Commerce Clause is a grant of power, but a limited one, and the Tenth Amendment reserves everything not granted. The design is a bet that dispersed decisions beat concentrated ones. Germany and Korea are two large confirmations of the bet. You can read the whole document at the Constitution page.

What conservatives should and should not claim

Let us be precise about what this evidence proves. It proves that planned economies lose to market economies when the people are otherwise alike. It does not prove that every regulation is a step toward the Trabant. It does not prove that the South Korean state's industrial policy was wise in every instance, and it does not prove that the market side has nothing to improve. Both of the market economies had, and have, their own problems.

What it does prove is the thing the socialist case cannot survive: the claim that a rationally planned economy can outperform a free one. It had its chance. It had forty years in Germany and seventy in Korea, and the result is the same. For the same lesson in other countries, see eight socialism myths tested against the countries that actually tried it and Britain's postwar socialism, from nationalized coal to the Winter of Discontent.

The case in brief

1. Divided nations are the nearest thing history offers to a controlled experiment, because the people, language and culture are shared and only the system differs.
2. West Germany freed prices in 1948 and prospered; East Germany planned, produced the Trabant, and lost millions of people until the Wall went up on August 13, 1961.
3. South Korea, after the 1953 armistice, grew through exports and trade; North Korea stayed planned and suffered a famine in the 1990s.
4. The best objections, reparations, aid and South Korea's authoritarian decades, explain a little and do not come close to explaining the gap.
5. The lesson is not about niceness. It is that when people can choose and decisions are dispersed, they do better than when a committee decides for them.

What you can do: read the Fifth and Tenth Amendments, and ask one of your state legislators which licensing or price rules in your state exist to protect a planner's idea of order rather than a customer.