University of Michigan - Ann Arbor

In 1936, prior to the war, living standards in the regions that later became East and West Germany were equal, making it an appropriate setting for a natural experiment. Before the war, companies in Saxony and Thuringia led the world in automobile and aircraft production, chemicals, optical equipment, and precision engineering. Central planning in East Germany led to the virtual disappearance of private property, markets, and firms. Government officials, not private individuals, made decisions about production, quantities, and locations. These officials were not required to follow capitalist principles by producing goods and services that customers would purchase at a price above manufacturing costs. In 1948, a functioning capitalist economy was reestablished in West Germany with the Currency Reform.

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