A Personal Reflection on “the Night that Changed the World” – November 9, 1989

Posted by Jeffrey Brown on Nov 10, 2009

Filed Under (Uncategorized)

Twenty years ago today, I stood – along with hundreds of German citizens – on top of the Berlin Wall in front of the Brandenburg Gate.  The night before – November 9, 1989 – East Berlin’s Communist party spokesman, Gunther Schabowski, had announced that East Germans would be allowed to travel to West Germany.  After 28 years of travel restrictions, East and West Berliners alike immediately took to the streets.  By the time I arrived at the Brandenburg Gate on the night of November 10, chaos still reined.  Indeed, as I climbed up the wall and jumped down onto the East Side of the Wall – after ceremoniously taking a whack at it with a hammer borrowed from an ecstatic West Berliner – my progress was immediately blocked by a line of East German soldiers.  There they stood, shoulder-to-shoulder, standing before a line of water cannons that were aimed straight at those of us foolish enough to jump down onto their side of the Wall.  Coming only 5 months after the Tiananmen Square massacre in Beijing, none of us knew just how the East German military would react.  Fortunately, this demonstration turned out very differently. 

 

I knew at the time, of course, that I was witnessing history.  After all, the Berlin Wall was the ultimate, tangible symbol of the East-West divide that marked the Cold War.  As an undergraduate at the time (it would be another decade before I earned my economics PhD), however, I did not have the training to fully appreciate that I was also witnessing the end of the most powerful and persuasive economic experiment ever conducted on the relative merits of free-market capitalism versus central government planning.  Even lacking the terminology to fully describe it, however, I could see the results of the experiment.  As I walked the nearly-deserted streets of East Berlin on November 11, I was stunned by the obvious economic decay in the East: the old cars that spewed emissions, the often-bare shelves in the stores, the poor quality food, the decaying buildings.  Not to mention the enormous display of “revealed preference” by the tens of thousands of East Berliners so anxious to escape to the West. 

 

It was one of those experiences that left an indelible mark on my thinking.  And while I could not quite find the words to describe it at the time, I instinctively understood that whatever they were doing in East Berlin, it clearly had not worked.  In the following weeks, as I also visited Prague during its democratic demonstrations, as well as Budapest, I quickly discovered that the failings of central planning were not unique to East Berlin.  It has been a disaster everywhere.    

 

I credit Alan Greenspan’s book, “The Age of Turbulence,” for helping me put it all into appropriate perspective many years later.  He noted (page 131) that:

 

“Controlled experiments almost never happen in economics. But you could not have created a better one than East and West Germany, even if you had done it in a lab.  Both countries started with the same culture, the same language, the same history, and the same value systems.  Then for forty years they competed on opposite sides of a line, with very little commerce between them.  The major difference subject to test was their political and economic systems: market capitalism versus central planning.  Many thought it was a close race.”

 

He goes on (page 132) to note that:

“The fall of the wall exposed a degree of economic decay so devastating that it astonished even the skeptics.  The East German workforce, it turned out, had little more than one-third the productivity of its western counterpart … The same applied to the population’s standard of living.  East German factories produced such shoddy goods, and East German services were so carelessly managed, that modernization was going to cost hundreds of billions of dollars.”

 

Finally, (p. 382) he notes that “The fall of the Berlin Wall exposed a state of economic ruin so devastating that central planning, earlier applauded as a “scientific” substitute for the “chaos” of the marketplace, fell into terminal disrepute.  There was no eulogy or economic postmortem.  It just disappeared …”

 

The economic and financial market disruption of the past 24 months has been difficult for many in the U.S. and around the world.  To those who have lost jobs, witnessed their 401(k) values plummet, or watched helplessly as their house values fell below the balance of their mortgage, it is tempting to want the government to protect us from these risks. But we should be careful what we ask for. 

 

The lessons learned from the failed central planning experiments of the Cold War are not just lessons of history.  They are fundamental lessons about how to successfully structure an economic system.  Given a choice between a system that assumes the government knows best and a system that allows individuals and markets to operate freely, I will always choose the latter.  

8 Responses to “A Personal Reflection on “the Night that Changed the World” – November 9, 1989”

  • Rajshree Agarwal says:

    Going down memory lane, I can’t help but compare the India that I grew up in, and the India of today.

    The India that I grew up in was a depressed state, in material and in mind.

    In the 20 years since I left, the Indian Government gave up its reliance on the “Government knows best” in favor of a more decentralized, entrepreneurial economy. And the results speak for themselves. While poverty is far from eradicated in India, the economic progress cannot be doubted, and the sense of hope, entrepreneurship and “can-doism” is pervasive.

    The way out of poverty towards economic security and prosperity is NOT central planning and control. A Government cannot CREATE wealth when redistributing it, but it sure can destroy the structure that enables wealth creation.

    Those that are disturbed by the “relative poverty” in the US in the past 24 months and prior to it should look at the lessons that history and other countries have to offer on what government planning can achieve, in terms of creating or sustaining abject poverty.

    There are lessons we can learn, and the best among them is that we not give up on the roots of what has made this country great and a beacon of hope for immigrants such as myself.

  • Puzzling how a system so discredited can find new places to roost, new followers at every level of the food chain and nary a peep without a calendar reminder. On behalf of the Academy, I’m glad those soldiers didn’t shoot.

  • Jundie Wei says:

    It is really an interesting comparison between the current US government involvements to the situation in Germany.

    It also reminds me the history lecture I had about Russia at that time. When Soviet Union dissolute in 1991, Boris Yeltsin had a radical reform: changing the central planning system into free market. He adopted the “shock therapy” designed by western economists for transition economies. However, his reform caused a long-term depression in Russia and he lost many support after this.

    I don’t know whether I got it right. But I think this suggested that there are some backwards for free market. I believe the reform done by Yeltsin is very beneficial for Russia in the long run. However, the complexity of the reform doesn’t only lies in economics, but also lies in other factors such as politics, social stability and people’s standard of living.

    I do agree too much government interference is not good for a healthy economy in the long run. However, the ethical, political concerns make it difficult to find a rational and effective solution for the problem we are facing today.

  • Michael Yam says:

    It was interesting to read what it was like to be there when the Berlin Wall was being torn down. I feel that the excitement going on there would be quite similar to when we beat #1 Ohio State 2 years ago and people swarmed Green Street or when President Obama was elected and students swarmed Green Street again.
    I do agree that a 100% planned economy has never worked and history elsewhere has shown it. Before China opened up, life there was unquestionably depressing and was probably comparable to many Eastern Bloc countries. But now that they’ve reformed into what they call “socialist market economy” or as what we observe: “capitalism”, it is clear that the way of life for its citizens has improved greatly.
    In my opinion, how a country responds to a capitalistic, controlled, or mix of each type economy depends on the people as well as the leaders in the government.

  • Gagan Bhatia says:

    I see this blog as a good opportunity to understand the free market.

    I understand the context of the blog and really appreciate the vivid description of the then East Germany.

    I am also afraid of one thing with Government taking over the free market. Will the higher government intervention increase the corruption in the system? The government is inefficient because there are participants who believe that they are not a part of the system or government but they are themselves the government. This kind of attitude and red-tapism has not worked in any country. The govt workers seek a premium to do their job as they are in power.

    Even in India, there is a state led by a party that believed absence of free market and more government control is good. The party ruled the state for 35 years and brought the state from once an investor’s paradise to investor’s nightmares. That also serve a great example of how absence of free market is bad.

    Free market is good but bad too.
    Here is my observation. In free market, every company has a motto to increase the customer’s value and reduce the cost. That is fine as it creates value for the stock holders. But then the company keeps on laying off people just because they could get a cheaper labor force outside the country. Then the companies try everything to reduce the cost. They cut other benefits and bring in more technology to reduce workforce. If every company keeps on doing the same, in order to serve the customers at a cheaper price, companies layoff workforce and pay them less. But the same people are the customers of the overall market. Is not the free market making the customers poor and thus asking them to demand a cheaper product? Is it not a kind of vicious cycle?

  • Jeffrey Brown says:

    Gagan,

    Sorry not to have replied to this comment earlier. The question you raise requires a more detailed reply than I can possibly give in a short response. But let me make a few observations. Perhaps the most obvious example of a firm in the US driving down costs relentlessly is WalMart. WalMart is also often criticized for all sorts of things, raising from not paying “living wages,” to having skimpy benefits, etc. But the evidence suggests that – on net – WalMart has been enormously beneficial for the low-income households in the U.S. My favorite analysis of this issue was a paper done by my friend Jason Furman, who now happens to be Larry Summer’s deputy director of the White House National Economic Council. To be clear, Jason is no conservative! But in his article (which you can find at http://www.americanprogress.org/kf/walmart_progressive.pdf ) he shows why lower prices have been a huge plus for the millions of low income Americans that shop at WalMart.

    The difficulty with your line of reasoning is that you are looking at only a small part of the overall picture. Consumers who spend less in one area have more money to spend in other areas, thus creating jobs in other sectors. You are also ignoring that technological progress raises productivity and thus wages.

    Jeff

  • Jeffrey Brown says:

    Jundie,
    Thanks for that interesting perspective. I have no doubt whatsoever that a free market system is preferable on nearly every dimension to a centrally planned one. But I have plenty of doubts about how quickly is optimal when transitioning from one to another. Yeltsin’s “shock therapy” was one model, but there are many other models too that involve slower transitions. I am not an expert on transition economics, so I should leave it to others to share the lessons from that literature. But I suspect that the success of any transition must also take into account the history, culture, values and political institutions of the country making that transition.
    Jeff

  • Yuan Zhang says:

    Whether to perform a free-market capitalism or a central government planning is not simply decided by the thoughts of the government or even the economics factors. Various aspects should be taken into consideration. Take China as an example, it experienced both central planning and the socialist market economy for the past 60 years. When newly founded, the negative factor such as productivity backward, society instability and trade embargo blocked the way to perform the market economy. Although every Chinese cannot ignore that hard times we went through, the central government planning did make the primitive accumulation of capital for the industrialization. However, it could bring the economics decay if the central planning continues after the time of capital accumulation.
    For the example of East and West Germany, and also North and South Korean, it seems to be that the central planning failed. But central planning might not be the only thing to fail but also the policy maker.
    All in all, it is the market’s thing, then we let the market say. Whenever the market said I can’t, then the government should help.