The Venezuelan-Socialism Disaster: Part 3

Ninety percent of confiscated and nationalized companies and farms no longer produce anything. ... In addition, a draconian system of price controls that forces most local businesses to sell their wares at a loss has halted any attempts by local entrepreneurs to keep their businesses alive.

The Venezuelan-Socialism Disaster: Part 3

Ed. Note:  Venezuela, once held as the shining city on the socialism hill, now faces imminent famine.
The one bright spot of this resounding failure is that perhaps many in the world will recognize that socialist economic policies have now been tested in modern times and in the middle income world. All should learn that an economy that does not include a free market and prices is destined to fail.
This resounding failure is standing on the world stage for all to learn the pitfalls of people becoming dependent on government, willingly and gradually surrendering their freedom.


Republished from Forbes.com by Tim Worstall, June 26, 2016. Image credit:


venezula empty shelves

Congratulations To Bolivarian Socialism

Venezuela has been held up for years as a glorious example of what socialism could do for a country. And of course now we can still hold up Venezuela as a glorious example of what socialism can do for a country. Which is, if current reports are to be believed, manage to create actual famine in a middle income country. It’s really a quite extraordinary result for any economic policy at all, to be able to manage that. And it does need to be put down to that Bolivarian socialism, not to anything that has happened to the oil price. And it’s most certainly not because of any conspiracies by the US nor even any domestic opposition. This is simply what happens when gargantuanly stupid economic policies are imposed upon a place. Adam Smith did indeed note that there’s a lot of ruin in a country but “a lot” is not synonymous with “infinite amount”.

We ourselves also need to take note of what that gargantuanly stupid policy was. I don’t, and I would not, claim that a $15 minimum wage, nor an extension of rent control, are going to turn New York or LA into downtown Caracas. But they are the beginnings of that same policy mistake, the belief that prices don’t matter, that prices can be arbitrarily applied.

This is from February this year:

AT 9.30am on a Thursday six Venezuelans wait for a guided tour of the former military museum that is now the mausoleum of Hugo Chávez, the country’s populist president of 1999-2013. Across the road around 120 people are queuing for food at government-controlled prices from a state-run supermarket. The food queue starts at 3am. “Sometimes there’s food and sometimes there isn’t,” one would-be shopper says.

This is from this weekend:

Venezuela: mass famine is imminent due to the Chávez-Maduro regime’s destruction of the productive economy.

A humanitarian crisis, the likes of which have never been seen in the Western Hemisphere, is brewing in Venezuela and it will be inevitable in a few weeks.

As to why the theory is simple enough:

Hayek would not be surprised.

Well, quite. His Nobel lecture was called The Pretence of Knowledge. And the essential point was that it is simply not possible to gather the information needed to be able to plan an economy. No, not difficult, simply impossible. We must therefore rely upon the market and the price system to do that for us. Sure, we can make useful interventions. We can tax richer people to provide welfare for poorer people, no problems with that (as even Hayek pointed out we can and even should). We can correct some of the grosser problems that markets have like public goods and externalities (neither of which markets deal well with if at all). But we do still have to use markets and prices as our allocative methods as they’re the only things which contain the information necessary to make said allocations. Even Kantorovich, the only Soviet to gain the Nobel, insisted that we really do have to at least start from market prices.

And so what was it that Bolivarian socialism did wrong?

Also, even now, with oil below USD $50/barrel, Venezuela has an export income larger than that of Peru, a country with identical population and where there are zero reported shortages of any kind.

The estimate for Venezuela’s export income this year would place it at an amount almost equal to that of Colombia, a country with nearly double the population of Venezuela. Thus, it is incontestable that the decline of oil income is not the cause of the tragic situation in which Venezuelans find themselves.

So, it’s not the oil, is it?

The fact is that Venezuela, while still pumping oil, no longer has a functioning economy. Seventeen years of nationalizations and confiscation of private industries, farms, cattle ranches, distribution companies, sugar mills, and even shopping malls have completely destroyed not only the local production, but the distribution networks necessary for the normal functioning of the economy.

Ninety percent of confiscated and nationalized companies and farms no longer produce anything.

That’s bad but this is the real killer:

In addition, a draconian system of price controls that forces most local businesses to sell their wares at a loss has halted any attempts by local entrepreneurs to keep their businesses alive.

That’s the complete killer. Prices tell those producers what people want to consume and what they’re willing to pay for it. Without that information no one, not even soldiers given factories for free, know what to produce nor do they have an incentive to produce anything. And thus everything stops actually happening.

I am not convinced that famine is about to break out in the next few weeks in Venezuela but I am absolutely certain that it will in time unless things are changed. Simply and entirely because an economy without a price system just does not work. We cannot just randomly assign numbers as we wish them – there’s too much important information in market prices for us to be able to do that.


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