Fat Raymond and the Ossie Guinea Pigs

A moment's silence for East Germany...

LAST WEEKEND was beautiful here in County Waterford, writes Bill Bonner in his Diary of a Rogue Economist, reporting from Youghal, Ireland.

Windy, cold, sunny, rainy – everything.

This time of year, the sun is so low in the sky, it barely gets above the trees at noon, and then just rolls over the fields until finally dying in the west.

Down the hill, now that the leaves have dropped, we can see the Norman castle and the abandoned church more clearly. Both are stone towers...standing like sentinels guarding the Blackwater River.

The castle is said to have been built by Raymond le Gros (Fat Raymond) in the 12th century. The Irish had no towns or castles. But the Normans built castles everywhere...probably to protect themselves from the Irish.

Except for a few still standing, almost all of them are in ruins or have been completely demolished and erased. Of Fat Raymond's castle, only the keep remains, covered in ivy.

The Normans were a hard-fighting, restless lot. They began as Vikings, raiding what is now the coast of France and driving up the rivers even to Paris. Finally, in 911, they signed a treaty with Charles III, the Frankish king, giving them the fiefdom now known as Normandy.

Scarcely four generations later, these Vikings were speaking a form of French and ready to attack England. This they did in 1066, with surprisingly good results. By 1072, England had been pacified, with Norman castles under construction throughout the country.

Then, less than a century later, they were on the move again...this time to conquer Ireland.

Led by Richard "Strongbow" de Clare, this time the conquest was confusing and incomplete...involving Norse, English, Norman, and Irish forces in a blur of alliances, backstabbing, and bloody battles.

And in the end, the Old English, as they were later called, installed themselves, learned to speak Irish, and gradually became "more Irish than the Irish."

History is rarely neat and easy to follow. Neither is economics. The closer you look, the more complicated it gets...and the more you realize you don't know.

That's why the arguments – especially at the macro level – go on interminably. There is no way to settle them; nothing is ever clearly proven one way or another.

In that respect, Saturday marked a great anniversary: the end of one of the biggest, boldest, dumbest experiments in economic history...

After WWII, Germany was divided in two. The West half continued with win-win capitalism. The East tried a different system – win-lose communism. Neither was perfect.

In the capitalist system, there was still plenty of room for flimflam, government meddling, and incompetence. In the communist system, too, there were still black markets and a tendency to imitate the successful innovations of the West rather than create an original or completely new economy.

Still, economists with open eyes and a sense of humor were delighted. Both sides shared the same language, culture, work ethic, and resources.

This was the best test of the rival systems that could be imagined. And just to make sure there was no mixing and canoodling at the edges, the easterners put up barbed-wire fences and concrete walls between the two sides, threatening to kill anyone who tried to cross.

They explained that they had put up the barriers to prevent westerners from crossing the border to take advantage of the East's higher-quality/lower-price goods and services.

After all, the commies had eliminated the excesses and abuses of capitalism – its inequality, its advertising, its flagrant profits, its catering to the foolish whims and fads of customers. Now their economy could operate more efficiently – without the dead weight of parasite capitalists!

Amazingly, many American economists believed them. One of the believers, Paul Samuelson, even won a Nobel Prize for making economics more scientific! He should have just gone to East Berlin and opened his eyes.

During the entire length of the experiment, as far as we know, not one person even attempted to sneak into the East. Meanwhile, 4 million succeeded in crossing from East to West, most of them before the barriers were erected.

Even after the East sealed itself off, the exodus continued, with around 900 people killed trying to flee, by some estimates.

And here, on this 30-year anniversary of the fall of the Berlin Wall, we would like to thank all the "Ossies" who participated in such a grand test. They deserve some recognition. And some thanks.

They endured a blockheaded system for four decades...with its dreary buildings...its moronic orders...its soul-deadening organization...its secret police...its price controls and trade barriers...its central planning...lies...and claptrap.

It was apparent, almost from the get-go, that the East's system was, economically, a mistake.

Without competition to provide more and better products to consumers, managers responded to their bureaucratic directives in the easiest way possible, without regard to what the customers really wanted.

Given a quota based on the number of nails produced, for example, a factory made tiny tacks – millions of them. Then, when the authorities shifted to a weight-based quota, the factory shifted to making huge railroad spikes.

In politics and economics, people are always tempted to take a top-down, macro view – simply because it is the only thing available to them. Based on statistics and averages, they come up with grandiose plans for improving the world...and sweeping "truths" for understanding how it works.

But in a real economy – based on win-win deals between consenting adults – it's micro that counts, not macro. It requires detailed, specific information about what people really want...and how best to give it to them.

One figures out that he can make a pencil more useful by putting an eraser on the end. Another learns how to freeze orange juice so it can be preserved, shipped, and enjoyed far from the orange groves. Still another develops an app that makes taxi stands almost obsolete.

Broad theories and impressive visions are mostly worthless. Nobody knows what people really want – not even consumers themselves. That's why every new business is an experiment...every new product is a guess...and every profit is a surprise.

And it's why central planning is impossible. A decent economy cannot be designed or modeled by a person or a group or a computer. It is the product of millions of these innovations and win-win deals...always changing...and never predictable.

West Germany, after it loosened its economy from its postwar American administrators, began its "miracle" of regrowth. The East, however, lagged. An Indian economist, B.R. Shenoy, wrote in 1960...

"The contrast between the two Berlins cannot miss the attention of a school child. West Berlin, though an island within East Germany, is an integral part of West German economy and shares the latter's prosperity. Destruction through bombing was impartial to the two parts of the city. Rebuilding is virtually complete in West Berlin. [...]

"The main thoroughfares of West Berlin are near jammed with prosperous looking automobile traffic, the German make of cars, big and small, being much in evidence. [...] The departmental stores in West Berlin are cramming with wearing apparel, other personal effects and a multiplicity of household equipment, temptingly displayed."

The story was very different on the other side of town:

"In East Berlin a good part of the destruction still remains; twisted iron, broken walls and heaped up rubble are common enough sights. The new structures, especially the pre-fabricated workers' tenements, look drab.

"[...] Automobiles, generally old and small cars, are in much smaller numbers than in West Berlin. [...] Shops in East Berlin exhibit cheap articles in indifferent wrappers or containers and the prices for comparable items, despite the poor quality, are noticeably higher than in West Berlin. [...] Visiting East Berlin gives the impression of visiting a prison camp."

What conclusion did he draw?

"The contrast of the two Berlins...the main explanation lies in the divergent political systems. The people being the same, there is no difference in talent, technological skill and aspirations of the residents of the two parts of the city.

"In West Berlin efforts are spontaneous and self-directed by free men, under the urge to go ahead. In East Berlin effort is centrally directed by Communist planners. [...] The contrast in prosperity is convincing proof of the superiority of the forces of freedom over centralised planning."

But the East Germans stuck with it for more than 40 years. For all their trouble, they got clunky automobiles that people laughed at...food that tasted like sawdust...and incomes that were 69% lower than those on the other side of the frontier.

At least, here at the Diary, we will give these guinea pigs a moment of silence.