From Korea to Germany, experiments with socialism show markets always win

Paul Ormerod
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Belief in socialism in 2017 is equivalent to believing the sun goes round the Earth (Source: Getty)

A red-hot topic in economics is randomised controlled trials (RCT). Esther Duflo, the MIT academic who has really driven this idea, has surely put herself in pole position for a Nobel Prize at some point.

The idea of RCTs has been imported from medicine.One group of people are selected at random to be subject to a particular policy, and the outcomes in this set are compared to the rest of the population, which are not.

The studies have been almost exclusively carried out in developing countries. Evaluating RCTs often involves some subtle statistical points, but they are a powerful way of identifying what really works. Their policy impact has already been substantial.

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Over 200m people worldwide have been reached by the scaling up of programmes evaluated by the J-PAL network, in which Duflo is the leading light. The RCT studies themselves are carried out on a small scale, evaluating very particular policies. If they succeed, they can be expanded. Examples include encouraging the take-up of school-based deworming, chlorine dispensers for safe water, and free insecticidal bed nets.

A closely related concept is known as a natural experiment. This is when we observe two contrasting policies which have been carried out in the past, either at the same time on different populations or at different times on the same one.

The policies in this case have not been deliberately designed as part of an experiment. They have been introduced as part of the political process.

But good natural experiments can be just as informative as RCTs. Indeed, they can reach the parts which RCTs cannot get to, because we can observe natural experiments which have taken place on very large scales.

By far the most important of these is the series of natural experiments on the performance of market-oriented economies compared to their centrally planned socialist rivals.

The current tensions highlight the differences between North and South Korea. In the 1950s, the latter had living standards similar to African countries. Now, they are at Western levels.

Other countries which were poor in the mid-twentieth century and which have adopted the principles of market-oriented economics have also prospered.

The fall of the Berlin Wall at the end of the 1980s brought into sharp focus the contrast between East and West Germany. The Trabant was a popular car in the East, but it was of such poor quality that its value dropped to almost zero as soon as Western cars could be imported.

The major economic contest of the twentieth century was between the US and the Soviet Union, won easily by America.

India and China practised different forms of socialism until the late 1980s. The Chinese was the most extreme – resulting, for example, in the deaths of at least 60m people in the self-induced famines around 1960. After adopting market principles, both countries have flourished.

The outcomes of these major natural experiments are decisive. Belief in socialism in 2017 is equivalent to believing the sun goes round the Earth.

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