When the Berlin Wall fell, it marked the end of perhaps the most extensive controlled experiment ever undertaken in economics. One country, divided into two zones: one organised as the archetype of the social market economy, the other on the basis of central planning within a controlled trading bloc. After forty years, the difference in living standards were not just appreciable, but very large – perhaps a factor of two or three. This experience is repeated even more starkly if one compares the post war economy development of Estonia and Finland, or – in the most bizarre comparison of all – North and South Korea.

That outcome did not seem inevitable before it was observed. In the advanced economies of the West, increased government intervention in the economy was more or less unchecked through the twentieth century. In the 1960s most European governments adopted national economic plans and it was generally assumed that the route to successful development in...