That Venezuela’s economy is now a basket case is clear to all but the most rigid ideologue. The only interesting question left is why is it such a basket case? How has anyone managed to take over a middle income country and plunge it into starvation, penury and the return of the ancient plagues of childhood diseases? The answer isn’t the socialism they attempted to impose. It’s not even socialism itself to blame. Sure, I love my capitalism as much as the next running dog of the plutocrats but it’s still not communal ownership – the only useful definition of socialism – that’s caused all of this. It’s the destruction of markets and prices which has.
As to how bad things are, here’s the latest inflation rate:
Venezuela’s annual inflation rate measured for today, 6/29/18, is 41,838%, a new, all-time high. pic.twitter.com/2jqEt1n5fr
— Prof. Steve Hanke (@steve_hanke) June 29, 2018
We’re well into hyperinflation here.
But why? Well, yes, the people attempting to run the place – my two year old niece would do better of course, simply by sitting and filling her diaper – do claim to be socialists. But it’s not socialism which has caused the problem. There are socialist organisations in all rich country economies – plenty of worker owned cooperatives all over the place – and we don’t generally have an economic out turn like this. Those attempting to run Venezuela also appear to be crooks and thugs but then we all survived the Clintons, didn’t we? They’ve nationalised this and that as well but then so did FDR and Attlee. Unless we want to say that there’s a bolus of such activity which definitively causes disaster none of those are going to be the correct answer.
But there is something that is. As I’ve said before:
“It is the messing with the price system that did it. Prices are not an arbitrary method of deciding who gets what; they’re vital information about who is willing to produce what and who wants what. By very definition the market clearing price is the one at which everyone who wants at that price can get, everyone willing to make at that price will make. We can’t thus go around changing market prices because to do so entirely destroys that information system. And that information system is the only one we’ve got that can possibly coordinate the individual actions, as producers and consumers, of millions and tens of millions of people.
Think back to the 1970s and the oil shocks. The reaction of the U.S. government was to limit the price at which gasoline could be sold. The immediate effect: five hour long waits at gas stations to get gas. Now imagine that the government decides that cornflour is getting a bit expensive and so decrees that from today it will be one third the price it was yesterday. Give it three weeks and the South will run out of grits and there will be another march on Washington.
Venezuela did this for everything–chicken, toilet paper, rice, cooking oil, coffee, milk, everything. As a result no one can get anything and the economy is falling apart.
Foolish nationalizations don’t make anyone richer as the post-WWII Labour government in my native UK showed, but they’re not disastrous. Vast corruption and drug dealing (if they’re occurring) in government can be survived. I worked in Russia through the 1990s and no one is going to say that corruption wasn’t happening, but the place still did get richer. But start messing with prices, destroy the only large-scale coordination method we’ve got, and you’ll end up with no large-scale coordination. That’s what Venezuela did and that’s what is happening.
It’s not difficult to diagnose or describe at all. It is plain flat out economic idiocy.”
From which there is a lesson. Hey, these Millennials and their dreams of a new economy? Sure, they want to set up worker owned firms then good luck to them. Quite what they think stock options are in tech companies I’m not sure if not that. They think a bit more tax and redistribution would be a good idea, well, we don’t but let’s argue it out. But when they start coming for the price system that’s when we’ve got to put our foot down. For it’s the abolition of that which causes the real economic problems. As, you know, Venezuela is illustrating.
“Inflation is always and everywhere a monetary phenomenon.” Venezuela did impose new costs on a variety of industries — and outright seized merchandise in the case of Christmas toys and one non-compliant department store — and made it illegal for the prices to reflect those new costs. This increased demand, reduced willingness to supply, drove people underground, and massively increased the cost of actually getting goods. The result should be, and was, severe poverty, as one’s available funds would not cover one’s needs. But this by itself would not have wreaked a systemwide destruction of the bolivar. For that, the… Read more »
No Spike, because deficits don’t matter. Must be true, I read it right here a few days back.
The question is, while Obama was shooting for and achieving 20 trillion of government debt, did the value of total US assets go up by at least 20 trn. Probably. So it doesn’t matter, see? I read it right here.
Rhoda, perhaps I ought not intervene if you are chiding me as a rhetorical technique to actually chide someone else. But US deficits do matter to me, mostly because they are instantiated as Treasury bills and bonds, which compete for capital with (and drive up the cost of) borrowings that would be used to do actual work. That the federal debt is “overhanging” the economy, and especially the horror stories that conservative sloganeers tell by quantifying all the promises we have made, are more theoretical. Whether we default on bonds, or default on pensions, or default on the implied value… Read more »
PS “But start messing with prices, destroy the only large-scale coordination method we’ve got, and you’ll end up with no large-scale coordination.” — There is excellent system-wide coordination. Everyone agrees that the bolivar is worth very little and that it is not a reliable store of value.
Everytime my prostate flares up I get all mellow. I even once thought, very briefly I may add, that the ABC here in Oz was actually doing a good job of representing society’s views and not on a mission to counter Murdoch. So when Tim says that ‘Foolish nationalizations…[are]…not disastrous’ I wonder if he should go for the finger test?
Nationalizing the Éxito supermarkets did not per se wreck Venezuela. And the Grenfell Tower fire did not burn down London. Was it then not “disastrous”? It did no good!
Spike, rhetoric it was. And I slyly conflated trade deficit with government deficit. Because the idea of owing money, on a trade, fiscal or personal basis leaves me uneasy. Of course there is no problem on any of those bases while it’s under control…
I missed that conflation. But say you baby-sit my kids, whereas there is no service you want me to do for you. So I pay you cash. I have a chronic “trade deficit” with you! which is not the same thing as being chronically in debt to you. I do agree with Tim, “trade deficits” are an artifact of arithmetic and not a problem at all.
Unless… And that’s the trick…
You pay Rhoda in IOU’s instead of something “universal” that can be traded elsewhere without difficulties.
Which is where Venezuela went pear-shaped. They turned on the Printing Press.