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Ich Bin Ein Berliner

Learning from failure.

John Rekenthaler, 11/04/2013

Bad Economics
Before returning to Chicago, I took a short trip to Berlin. Quite the contrast from Paris. The latter is the most northern of Mediterranean cities, with glitz, espresso, and scooters. Everybody wears black. Berlin, in contrast, has a Northern European flavor, offering open space, bicycles bicycles bicycles, and bio-organic food.  

My favorite 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 The country's exports were so shoddily built, and so outdated, that they could only be sold at very lower prices.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 labor 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 specialized 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 skepticism about advanced knowledge were the country's pay scales. A chemical researcher made roughly the same monthly salary as a manual laborer. The former needed several years of university education to do his job; the latter needed to have graduated eighth grade. Not only was the supply chain for education limited but also was the demand. 

is vice president of research for Morningstar.

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