The (True) Legacy of Two Really Existing Economic Systems via SSRN
Duke University – Fuqua School of Business
ValueWalk's Raul Panganiban with Maurits Pot, Founder and CEO of Dawn Global. Before this he was Partner at Kingsway Capital, a frontier market specialist with over 2 billion AUM. In the interview, we discuss his approach to investing and why investors should look into frontier and emerging markets. Q2 2021 hedge fund letters, conferences and Read More
Duke University – Fuqua School of Business
By running an experiment among Germans collecting their passports or ID cards in the citizen centers of Berlin, we find that individuals with an East German family background cheat significantly more on an abstract task than those with a West German family background. The longer individuals were exposed to socialism, the more likely they were to cheat on our task. While it was recently argued that markets decay morals (Falk and Szech, 2013), we provide evidence that other political and economic regimes such as socialism might have an even more detrimental effect on individuals’ behavior.
Does the political and economic system affect people’s honesty? A recent article suggests that market economies decay morals (Falk and Szech, 2013). However, this study compared decisions in bilateral and multilateral market settings to individual decisions rather than an alternative economic allocation mechanism. Demsetz (1969) was the first to point out that the comparison of real institutions with an idealized arrangement constitutes a nirvana fallacy, and that one should instead compare only existing institutional arrangements with one another. To understand how experience with real economic systems influences honesty, we compare dishonest behavior between East Germans, who were exposed to socialism for over 40 years, and West Germans, who were at the same time living in a social market economy.
While Falk and Szech (2013) found that market interactions erode moral values, we hypothesize that socialism might have an even more detrimental effect on human behavior. Socialist systems have been characterized by extensive scarcity, which ultimately led to the collapse of the German Democratic Republic (GDR) in East Germany. In many instances, socialism pressured or forced people to work around official laws. For instance, in East Germany stealing a load of building materials in order to trade it for a television set might have been the only way for a driver of gravel loads to connect to the outside world. Moreover, socialist systems have been characterized by a high degree of infiltration by the intelligence apparatus. In East Germany, the secret service (Staatssicherheit) kept records on more than one third of the citizens (Koehler, 1999). Unlike in democratic societies, freedom of speech did not represent a virtue in socialist regimes and it was therefore often necessary to misrepresent your thoughts to avoid repressions from the regime. Thus, comparing the West German social market economy with the so-called ‘really existing socialism’ in East Germany might reveal that under socialism, morals decay even more.
Earlier studies have shown differing degrees of national solidarity between East and West Germans. In a laboratory experiment, Ockenfels and Weimann (1999) found that East Germans showed significantly less solidarity five years after the German reunification. When they asked Germans how much money they would be willing to hand over to anonymous future losers if they won 10 Deutsche Mark in a solidarity game, East Germans were willing to give up roughly half as much as West Germans. Interestingly, East Germans also expected to receive much less from potential winners. This result was recently confirmed by Brosig-Koch et al. (2011), who showed that there was no convergence in solidarity 20 years after the German reunification, which they attribute to high levels of interpersonal coordination required to shift societal norms.
Using data from the German Socioeconomic Panel (GSOEP), Alesina and Fuchs-Schündeln (2007) provide evidence that East Germans have stronger preferences for public policies that involve redistribution. They found that individual preferences are deeply shaped by the economic and political regime and converge only slowly. According to their estimates, one fourth of this effect is due to the fact that East Germans became poorer during the socialist epoch, while the remainder can be attributed to the impact of socialism on individual preferences itself. One weakness of the study by Alesina and Fuchs-Schündeln (2007) is that people might distort their true preferences when responding to a survey like GSOEP.