PREDICTION: Venezuela Will Become Another Textbook Example of Why Socialism Doesn’t Work

June 25, 2010

I don’t know if you’ve been keeping up with the situation down in Venezuela or not, but it’s really interesting. We have witnessed Hugo Chavez nationalize various industries over the last few years. Most of this was started back when oil prices were high and could support Chavez’s ambitions.

Fast forward to today…

Now Venezuela is faced with both a recession on rampant inflation. Why? This article in today’s WSJ explains why:

Economists say Mr. Chávez’s populist economic policies are at the root of the problems, and that his attempted solutions are only likely to make matters worse, lengthening a painful recession that began last year.

“Venezuela’s economy is becoming so inefficient that it is having a harder time growing even with higher oil prices,” says Tamara Herrera, an economist at Global Source Partners, a Venezuelan economic forecasting group.

At the root of the current trouble was a huge run-up in public spending under Mr. Chávez’s government during the past few years on the back of high oil prices. To try to limit the resulting inflation, the president’s team resorted to price controls, which led to shortages and other problems.

One of the prices the government has tried to set is the exchange rate. But the system has grown in complexity, with effectively four different exchange rates, three set by the government and one set by the market—the black market.

I swear I could have read those paragraphs in Thomas Sowell’s Basic Economics 3rd Ed: A Common Sense Guide to the Economy*.

So why would Chavez pursue such a strategy as socialism? He claims it’s to help the poor but I think his motivation is much more sinister: total control. Chavez isn’t living with the mistakes of socialism. If he were living like the typical Venezuelan, he might have a different take on his policies.

Regardless, Venezuela deserves its own chapter in future economics books.

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11 responses to PREDICTION: Venezuela Will Become Another Textbook Example of Why Socialism Doesn’t Work

  1. At some point, Chavez, or his successor, will feel the wrath of the people just like other dictator/socialist regimes. He may get lucky and see the system collapse rather peacefully like the USSR in 1989. Or, he may experience a more violent end like most other regimes.

  2. Venezuela (socialist),
    Mexico ( conservative) (and United states ( (Imperialist) both massive drop in GDP –
    Bolivia (Socialist) and Peru (Right wing) both grew.
    Honduras grew under Centre Zelaya;
    Shrunk after fascist coup.

    Therefore No Correlation between GDP and type of economy y

    Gap between rich and poor widens in Colombia, Mexico, United States. Gap shrinks Venezuela & Bolivia,
    Gap shrinks Honduras before coup,
    Gap grows ever since coup

  3. @kirk – at some point the regime would collapse, but it may take a long time. The USSR existed for 70 years. Cuba’s regime is still unchanged as is North Korean.

    As much as I’d hope for Chavez to feel the wrath of the people, it may well be his successor to have to deal with the mess.

    I agree that Chavez simply wants control and power for himself.

  4. It won’t matter. No matter how many failures there are, the left blames the implementation, not the underlying theory. THEY can make it work. Gun control never works as advertised, and socialism never works as advertised. But they don’t care. It can best be summed up by Ambassador Molari: “Ah, arrogance and stupidity all in the same package. How efficient of you!”

  5. “Gap shrinks Venezuela & Bolivia”

    Well, there wasn’t much of a gap in the Soviet Union except for the party elite, but it was simply because everyone but the party elite was poor.

    If you make everyone poor you’ll remove the gap, but it’ll not make you live better. Personally, I don’t care if someone is much richer than I am as long as I am doing OK. Poor in the US live a whole lot better than most of the population in the Soviet Union.

    As to Venezuela, you don’t know how Chavez lives and how much gap is between him and the rest of the country.

    Also, there is socialism and there is socialism. Europe’s socialism is not the same as Chavez’. Not sure about Bolivia, don’t know much about it.

  6. Luke,

    GDP may have fallen recently for countries that aren’t socialist. But, what does that tell us? Nothing unless you’re looking at long-term trends.

    Also, your gap argument is weak. The gap between the poor and the wealthy will expand. It makes perfectly good sense that it would expand as a country is prosperous since the wealthy have more ways with which to grow their wealth.

    I encourage you to go live in one of those socialist countries and then write back to us about how great it is.

  7. It is natural that the gap between rich and poor expands as wealth expands. The classic example is the farmer and the plowman….

    A farmer hires a plowman who, with a couple of horses, can plow an acre each day. Then, the farmer buys a tractor, and the plowman can now plow ten acres a day. Does the plowman deserve more pay, because he is more productive?

  8. Margaret Thatcher once said, the trouble with Socialism is that you eventually run out of other people’s money.

  9. What is the aim? If the aim is social well-being, check out a book called Spirit Level: Why Greater Equality Makes Societies Stronger.

    It reports on a massive research project showing (to the authors’ surprise) that smaller gaps between rich and poor make for happier, healthier and better in all metrics societies, even for the rich. Apparently wealth is not all its cracked up to be.

    There’s quite a bit online that you can read without getting the book. Do the g thing.

  10. “Why Greater Equality Makes Societies Stronger”

    And if someone wrote a book, it must be true.

    Like the Soviet Union was stronger? How about Albania? Cuba?

    Seriously, I’ve lived in the Soviet Union. I don’t need to read your book to see that the gap between rich and poor is meaningless, and that greater equality doesn’t mean a thing.

  11. Still waiting for the promised collapse
    Venezuela is growing again,
    So too is that island nation 90 miles from Florida

    So too are all of Latin America – Left right or centre.