Venezuela, given the odd detail of counterclaims, has finally admitted that it cannot pay back the debt it has. That is, the country is bankrupt. It’s worth leaving aside exactly what happens next in the halls of banking and asking how this all came to be? The answer being that they entirely wrecked the economy of the country with the world’s largest oil reserves. This happened not because the oil price fell, the problems started and were evident long before that.
They tried to create a non-market economy, and non-market economies simply do not work. For things just cost what they cost, something that we cannot sweep away in the pursuit of social or economic equality nor for any other reason. We can indeed change who pays but we can’t change what is paid, it just does not work.
The basic idea was that perhaps Venezuela’s poor should get more of the oil wealth. Well, why not? I might not, you might not, agree nor desire that but it’s a reasonable enough political goal. Promising it to them so as to get their votes isn’t any different from Sen. Bernie Sanders, I-Vt., promising free college, The Donald free money for rich people and Hillary Clinton — well, what was it she did in fact promise? What does matter though is how that promise is to be effected. And in Venezuela, the Bolivarian socialists decided that prices were just made up numbers that could be assigned at near random. This does not, to put it mildly, work.
We might, for example, think that cheap basic food for the masses is a good idea. Why wouldn’t we want all to have full bellies? In Venezuela that’s arepas (somewhere between cornbread and a tortilla, but not really). We could subsidize the farmers to grow the maize perhaps, or give poor people more money so they could buy them. Perhaps it’s not necessary to do either but they would work to an extent. What doesn’t work is shouting that since arepas should be cheap we’re going to fix the price of them nice and cheap.
What happens then is that the farmers don’t grow the maize as what they get for it is less than the cost of production. Any millers who do get maize won’t make arepas flour because they can make more selling it for something else. Bakers who do get limited amounts of flour won’t make arepas similarly. The decision to make arepas nice and cheap has made it so there are no arepas.
It’s not as if this isn’t known, It’s on page 2 of every economics book ever, that supply and demand chart. As the price falls fewer people are willing to make something. And, as here, lowering the price below production cost entirely disappears that thing.
It’s even in popular culture — most of us know Marie Antoinette’s “Let them eat cake!” comment. OK, it was a character in a play, it was brioche not cake, but it was the same point. Pre-revolutionary France fixed the price of bread but not that of other things made from wheat flour. When the price of wheat rose the bakers would make those other things not bread. So, a bad harvest and there was no bread but lots of brioche.
Fix the price of arepas nice and low and there are no arepas. We know this, we know this is how reality works. Prices are not just random numbers they are the essential information of who is willing to produce, who desires to consume. Fix those prices high and we get gluts (much American farming), fix them low and we have shortages, even a dearth to the point that Venezuelans are dropping several clothing sizes as they cannot eat.
Then they went off and did this with the rest of the economy too. To the point that Ricardo Hausman (used to be a minister there, now an economics professor in the U.S.) insists that outside oil Venezuela doesn’t actually have an economy anymore. There just isn’t anything being made.
That is, destroy the price system and you destroy the economy.
The basic truth here is that we cannot do without markets and the price system. We can indeed still make the lives of the poor better, if that’s what we want to do but let’s not drive the entire country into bankruptcy as we do so, eh?
So, for example, perhaps we want working people to make more money. That means giving them more money through the EITC, not trying to fix the price of labor with the minimum wage. We think that being able to afford housing is a good idea – great, subsidies through Section 8 vouchers, a program of building on every square foot perhaps, but not fixing prices through rent control. Sure, neither of those alone is going to kill off the entire economy, as Adam Smith pointed out there’s a lot of ruin in a nation. But they’re still the wrong way to get to our desired goal.
The important underlying point to grasp is that non-market economies won’t provide a standard of living much above the Stone Age. We can have redistribution lite market economies like Hong Kong, or redistribution heavy market economies like Sweden and the Nordics (all at least slightly more free market than the U.S. under the tax to pay for that redistribution), but attempts at non-market economies lead to there being no economy.
Something we really should bear in mind as we try to design our own economy, don’t you think?
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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