Basic Economics Part 6 – Capitalism vs. Socialism

This is the sixth in a series inspired by Basic Economics by Thomas Sowell.

Previously I had argued that wealth is created whenever there is a voluntary transaction as each side believes they are better off due to the transaction.  In my last segment I poked holes in my own argument by showing that just because a person believes he is better off, it doesn’t mean he is actually better off.

This leaves us with one huge question.  Do we create more wealth in a decentralized capitalistic economy relying on people to make good decisions more often than not, or do we create more wealth in a centralized command economy where experts make the key decisions for everyone?

You could design this as a scientific experiment where you randomly divide people into two groups and have one group follow a capitalistic model and one group follow a command model.  While this is the most scientific method, it would be very difficult if not impossible to simulate all of the complications or real life.

Alternatively, you could take a country and split it down the middle.  This way you start with a common culture and similar natural resources.  The key differentiating factor would be the economic system.

The real world has conducted this experiment for us, twice.  West Germany and South Korea employed the capitalist model.  East Germany and North Korea employed the command model.  West Germany and South Korea produced thriving, growing economies.   East Germany and North Korea became economic basket cases.  The results of these inadvertent lab tests show unquestionably that capitalist economies greatly outperform command economies.

The Heritage Foundation maintains an index of economic freedom.  This chart clearly shows that greater economic freedom strongly relates to greater Gross Domestic Product (GDP)   

Changes within a country can make a dramatic difference.  Following the fall of the Berlin Wall, both China and India have moved away from a command economy to a more capitalistic economy.   As a result, nearly one billion people have been lifted out of extreme poverty.

http://www.economist.com/news/leaders/21578665-nearly-1-billion-people-have-been-taken-out-extreme-poverty-20-years-world-should-aim

Capitalism clearly outperforms socialism.  It isn’t even close.  Despite this obvious fact, socialism is still very popular in the world today.  Why is this?  This will be the focus of the next and (I think) final installment in this series.