austin-murphy-the-triumph-of-evil

184 THE TRIUMPH OF EVIL
West German goods, which were more prestigious and better marketed
but not necessarily better, as documented by Von Dohnanyi (1991),
Fox (1991), Zeitmagazin (1992), and others. The restricted demand for
impo�ed goods would require foreign firms to produce in East Ger­
many _ If they wanted to generate significant profits from that potentially
lucrative market. The plan would thereby prevent the large decline in
East German output and employment that resulted from the actual eco
nomic unification. Moreover, the freezing of prices for necessities using
KM � ould _ reduce inflationary pressures, while still permitting market­
cleanng pnces for foreigners and excess domestic demand so that there
�ould be less waste. The overall system would also promote confidence
� n the East German economy and thereby enhance morale, which was
Important not only for productivity but also to motivate workers to stay
in East Germany (as opposed to emigrate to West Germany, where they
were freely welcome as citizens).
In addition, the Murphy plan also called for putting East Germany's
state businesses into a mutual fund owned by all citizens of the country.
The citizens could vote for management of the mutual fund but shares
.
m th � mutual fund could be sold only after 2- 10 years (and perhaps
only mcrementally and/or with a sales fee) in order to prevent a cheap
sell-out of the nation's wealth (Murphy, 1992a).l The book value of
East German capital was over M 100,000 per capita (Statistisches Amt,
! 990), and so the market value of each share would clearly be nontrivial
m a healthy local economy (and might be far in excess ofthe book value,
especially if the shares paid an annual growing dividend). The possi·
bility of accessing cash in the future from such shares might provide
furt�er encouragement for East Germans to stay in their country, since
leavmg would result in forfeiture of shares. Once domestic and foreign
investment had generated sufficient economic growth and competitive·
ness, unrestricted sale of securities and currencies could be allowed
to occur (at future market prices that would obviously give East Ger·
mans communal motivation to work productively). The East German
people could then vote independently on whether they wanted to pre·
serv � some or all the advantages of their socialist society without eco­
nomic pressure/blackmail.
'
CHAPTER 5
185
THE ECONOMIC MODEL FOR EXAMINING THE 1989 EAST
GERMAN SITUATION
To evaluate what would have happened if the Murphy plan had indeed
been used, a basic economic model is employed by applying well­
accepted th.eory (Byrns and Stone, 1995) to the situation in East Germany
at the end of 1989. In particular, National Income is set equal
to gross East German disposable income (that equaled Ml68 billion in
1989) plus government revenue from taxes and profits to East German
government-owned firms (that equaled Ml07 billion in 1989), which
summed to M275 billion in 1989. National Income, plus any change in
credit issued to East German entities or any net withdrawal from East
German savings (which consisted ofM160 in money market checking
accounts in 1989}, is spent as consumption (for both domestically pro­
duced goods and for net imports) and investment (government spend­
ing is incorporated in the form of consumption or investment here).
National Income in the following period equals consumption plus net
� xports (i.e., exports minus imports) plus investment plus the return on
�vestment. The general framework of this simple economic model and
Its parameters/functions are described in this section, while the exact
mathematics will be delineated in the relevant subsequent empirical
sections for ease of understanding the discussion as it goes.
Inflation equals last year's price increase plus any growth in National
Income that is not earned by return on investment or by an increase in
�he number of workers employed. Because East German firms are run
Y the state, there can also be a tradeoff between profits to East German
firms and inflation. Since there was actually deflation of 1.1% in East
G�y in 1989 (as computed from the fact that real and nominal eco­
;:nlc growth � ere 2.1% and 1.0%, respectively, in 19�9), _ and since
state can simply avoid further deflation by not havmg Its owned
��panies lower prices, inflation at the beginning of the simulation (at
end of 1989) can be assumed to be 0%.
Wages are determined by the number of workers and the annual wage
per �orker. The annual wage per worker can be increased with eco­
�te can be offered in orde; to keep labor in East Germany and possibly
nomic growth. In addition wage increases above the economic growth
a 80 motivate workers to greater productivity improvements (albeit at