“I can turn this $100 bill into 100 pennies!”*

In their book From Poverty to Prosperity, Arnold Kling and Nick Schulz examine a few natural experiments of side-by-side countries with varying economic “software” or economic systems.

I think this nicely sums the results of these experiments (p. 135):

Another dramatic example of the effect of bugs in the software layer [their term for economic systems and institutions] is the difference between Communist and non-Communist countries.  In the aftermath of World War II, some countries, notably Germany and Korea, became divided along ideological lines.  North Korea and East Germany were Communist.  South Korea and West Germany were capitalist.

The results of this “natural experiment” were striking.  By 1997, North Korea’s GDP per capita was $700, while South Korea’s was $13,590, or nearly 20 times as high.

They then quote the work of Jaap Sleifer which showed that East Germany’s per capita income was 103% of West Germany’s before World War II and shrunk to 31% by 1991.

That should be sobering to anyone who holds romantic notions for a centralized economy.  The opportunity cost in living standards is enormous.

They go on:

Another telling phenomena is the immigration of workers from Latin America to the United States.  Crossing the border appears to make the productivity of a low-skilled worker ten to twenty times higher, based on the wage differential for low-skilled workers in Mexico or Central America and the United States.

These natural experiments are good to keep in mind as some folks encourage centralization of large swaths of our economy.  Years down the road it will be difficult to know how much improvement we traded away, but the outcomes of these natural experiments should give you an idea.

If you have a tough time imagining these differences in living standards in terms of numbers, then imagine it in terms of time periods.  A low-skilled worker crossing the border from Mexico to the U.S. is similar to someone from around 1900 to 1930 America being transported to around the year 2000.

If you still have a tough time imagining this, watch Back to Future III, where Marty McFly journeys back to 1880s Hill Valley.  While eating dinner with his great-great grandad, he’s shocked when he discovers that the meat he’s eating contains buckshot from the fresh kill and his water looked fresh from a mud puddle.  I liked this scene because it’s little improvements like that that we never think about and we take for granted.

*The title of the post is a quote from the television series Arrested Development.  Gob impressed the Board of Directors with this magic trick.  His brother, Michael, pointed out that the Board didn’t realize that Gob’s magic just cost them $99.  Similarly, folks who hold grand visions of centralized planning never seem to realize how much those truly cost when implemented.

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