Mises Wire

The Berlin Wall Reminds Us of What Happens After We “Smash Capitalism”

This week marks the thirtieth anniversary of the fall of the Berlin Wall. Decades later, the wall remains a symbol of the violence employed by socialist states, and a reminder that the egalitarian workers’ paradise of East Germany was so hated by its residents that the state had to build a wall to keep residents in.

It is ironic, then, that only a generation later, Americans are becoming increasingly enamored with socialism. According to a recent Gallup poll, 43 percent of Americans say socialism is a “good thing.” It’s unclear how many of those respondents can actually define socialism. Some believe socialism to simply be policies that promote equality. Others define it using the more historically orthodox view: government ownership of the means of production.

There is no doubt, however, that a vocal and not-insignificant minority — of the sort represented by Jacobin magazine, for example — advocates for the total destruction of capitalism.

When American democratic socialists who want to “smash capitalism” say they like “socialism,” of course, they are likely to add that they don’t want the sort of socialism they had in East Germany. They want kindly, happy, well-lit socialism. Not the gray, dour, socialism of the Eastern Bloc.

I have no doubt this is indeed what they want, although that’s what the founders of East Germany and the Soviet Bloc thought they would get too. Many of them no doubt truly believed they were leading the way to a kinder, gentler, more equal society.

After all, up until the 1980s, the socialists of the Eastern Bloc were still entertaining the idea that they could deliver a higher standard of living to ordinary people than could the “decadent” economies of the West.

In 1959, of course, Richard Nixon and Nikita Khrushchev literally debated whether the West or the Communist world could deliver the best kitchen appliances to the general public.

Obviously, the West won that debate, although many Western socialists failed to get the memo. Right up until the end (of the Soviet Bloc) the highly influential American economist Paul Samuelson maintained that communist economies worked perfectly well. As David Henderson noted in 2009:

Samuelson had an amazingly tin ear about communism. As early as the 1960s, economist G. Warren Nutter at the University of Virginia had done empirical work showing that the much-vaunted economic growth in the Soviet Union was a myth. Samuelson did not pay attention. In the 1989 edition of his textbook, Samuelson and William Nordhaus wrote, “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”

As it turned out, the socialist economies — designed to deliver an easier life to consumers and workers — were really vehicles of impoverishment, not to mention environmental degradation.

A Lasting Legacy of Poverty

To this day — thirty years after re-unification — the standard of living is lower in the parts of Germany that were once part of East Germany. In 2014, for example, the Washington Post reported how East Germany has lower levels of disposable income, high unemployment rates, and is generally less prosperous. This in turn has led to the old East Germany having fewer young people, many of whom move west for better jobs. Fortune‘s Chris Matthews went on to observe “If you look at statistics such as per capita income or worker productivity, they also point to the large disparity in economic development between east and west.”

And Claudia Bracholdt further notes: “Today, Germany’s east has many structural problems similar to those of countries like Greece and Spain, though on a much smaller scale.”

During the Cold War, numerous opponents of Communism pointed to Germany as the perfect example of how soviet-style communism destroyed economic prosperity. But that was then. Nowadays, the East German regime is gone, and Germany is, relatively speaking, one of the most market-oriented economies on earth. Eastern Germany shares a government with western Germany. So, why is eastern Germany still poor compared to its western German neighbors?

The answer lies in the fact that even though the legal and political systems in eastern Germany are the same as in the West, the East suffers from the fact that it lost out on decades of capital accumulation and growth in worker productivity while under the boot of the Soviets.

The German case offers the most excellent comparison of course, because prior to World War II, western and eastern Germans enjoyed similar political systems for many decades. Moreover, the western and eastern Germans were similar both ethnically and culturally. Thus, the comparison allows us to focus on regime differences in the age of the Cold War.

We can look beyond just the East Germans as well. We might ask ourselves, for example, why Poland, with its Western orientation and long tradition of parliamentary and decentralized governments remains so relatively poor.

The same might be said of the Czech Republic as well, where the principal city, Prague, was once the second city of the Austrian Empire and was a center of European wealth and culture. The Czechs too, have never regained their relative place in terms of European wealth.

Part of the explanation lies in the fact that the legacy of an abandoned political system can live on for decades even after regime change. As Nicolás Cachanosky has observed in the context of South American regimes:

Institutional changes ... define the long-run destiny of a country, not its short-run prosperity. ... For example, as China opened parts of its economy to international markets, the country started to grow, and we are now seeing the effects of decades of relative economic liberalization. It is true that many areas in China continue to lack significant freedoms, but it would be a much different China today had it refused to change its institutions decades ago.

Clearly, the fact that the old Eastern Bloc countries have moved toward liberalization has set those countries on a path toward greater economic prosperity. That by itself, however, cannot put it on a par with countries that never suffered the effects of decades of communism.

Smash Capitalism: And Replace it With What?

The experience of the Eastern Bloc should serve to inoculate us against the idea that a market based system can be replaced wholesale, and that a decent standard of living can still be achieved.

It is one thing to advocate for a five-percent increase in government spending on the pension system. It’s another to advocate for the nationalization of the banking sector or — even worse — expropriating every major industry. Yet, the smash-capitalism crowd thinks they want the latter.

But the US isn’t as far from the socialist end of the spectrum as many think. After all, the United States is itself already far down the road of the typical Western welfare state. Contrary to the persistent myth that the United States is some sort of laissez-faire free-for-all, the US welfare state in terms of social spending is already comparable to that of Canada, Australia, the Netherlands, and Switzerland. If the Netherlands is “socialist,” then so is the United States.

Yet we’re being told the US needs to just move a little more to left to be like its European “peers.” Except the US is already there. So how much further must it be moved in the direction of even more government control of its economy?

The socialists give no answer beyond “we’ll let you know when we get there.”

But it is not necessary to completely destroy capitalism to ensure a less prosperous future. That is, we need not become a clone a East Germany to share at least a share of its fate. Suffice it to say, the further a regime move in the direction of the “egalitarian” states of the old communist world, the worse the impoverishment will be.

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