What is Socialism & Why Doesn’t It Work?

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”
Murray N. Rothbard

The lights in Caracas went out. Vandals, says the government. Grocery store shelves are bare of basic necessities, and when they aren’t bare, the prices for food are so high, some people are resorting to looting, because they can’t afford them. The inflation rate hovers about 50,000%, so a 10,000 Venezuelan bolívars printed yesterday isn’t worth the paper it’s printed on a day later. Basic services are breaking down as doctors and other professionals leave the country. Venezuela is on the brink of much worse than just economic collapse now, and no one seems to see any way to save it, not because there isn’t a solution, mind you, but because the government would have to admit being wrong.

This economic horror show begins almost a decade ago, in the heady days of strong oil prices (Venezuela’s primary export), and the rising popularity of the late Hugo Rafael Chávez Frías, leader of the United Socialist Party of Venezuela. With the economy growing rapidly, in true Marxist fashion, Chavez nationalized several industries in the country beginning in 2009 and continuing through 2017, carried on by Nicolás Maduro Moros, who replaced Chavez after his death, when the Venezuelan government seized a General Motors manufacturing plant in Venezuela, prompting several other companies to simply cease their operations in the increasingly hostile economic environment.

venezuela-gdp
GDP from 1995-2016 (last year with clear data)

After the GDP of Venezuela peaked at US$393.87 billion in 2010 after several years of strong growth, the economy of Venezuela shrank rapidly to US$236.44 billion, a loss of 40% of its value. Essentially, for every dollar that was available in the economy, only 60¢ of value remained by 2016, the last year of firm economic data. Given the state of hyper inflation and complete loss of political order, there simply isn’t any way of knowing what the current state of Venezuela’s economy, if what’s happening in that country can even be described as an economy at all, let alone a functioning economy.

“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”
Thomas Sowell

As many experts will point out, from a purely objective standpoint, falling oil prices in 2010 were a large part of the Venezuelan problem, and there’s no denying that crude oil played a significant role in a Venezuelan economy largely dependent on oil revenues, being 73% of their exports, but very few oil exporting nations had the bottom falling out of their economies like the way things have played out in Venezuela. Other major oil exporting companies in the Middle East of similar size and economic structure, such as Saudi Arabia, remained stable throughout the price drop, so falling oil prices themselves didn’t create the desperate situation in Venezuela.

Instead, Venezuela has followed the pattern of heavily socialized countries without any  significant oil reserves such as Greece, a country with a robust secondary market of oil refinement, which only survived its own economic death spiral with the aid of its fellow European Union nations, and there are signs that neither Greece or the European Union are necessarily out of the woods, with the continued slow recovery of the Grecian economy being among their chief concerns. Unfortunately for Venezuelans, however, there isn’t a “South American Union” to bail them out of their predicament.

venezuela-minimum-wages
Minimum Wages from 1995-2016

So, while it’s clear that falling crude oil prices were the first rock to tumble down the Venezuelan hill, it’s equally clear that the entire hillside came down in Venezuela because their nationalized political economic system (with strong similarities to Greece’s economy) made it impossible to contain the spread of financial distress caused by the falling crude oil prices. This should be obvious to absolutely everyone, so let’s draw this out in terms that even a socialist with the emotional disposition of a five year old can understand.

“[T]he only rational patriotism, is loyalty to the Nation ALL the time, loyalty to the Government when it deserves it.”
Mark Twain

If we were hypothetically to give ownership of practically every major industry in a country over to a corporate conglomerate, then have the single largest industry within that conglomerate’s expansive corporate empire suddenly spiral into financial distress, our hypothetical conglomerate would have two equally bad choices. Either sell off the financially distressed industrial unit, in whole or in part, and hope to recover through the other industrial units, or try to ride out the financial disaster by spreading the losses across its other industrial units, risking putting them into financial distress as well.

For the rabid left, even this hypothetical handing of most of the nation’s economy to a “greedy corporate conglomerate” is enough to cause them to lie awake at night in a cold sweat of rage and fear, and yet they are perfectly comfortable to hand the reins of practically every major industry in a country over to just such a corporate conglomerate, so long as that corporate conglomerate is called “government“. They ignore, however, the obvious problem that the “corporate conglomerate government” they would so blithely trust with effective monopoly of our economy is still stuck with the same two bad choices.

Given, however, that selling off of troubled assets is anathema to the leftist dogma, being a clear admission of the untenable realities of their ignorant and foolish ideology, their “corporate conglomerate government” would have no choice but to ride out the financial spiral to its conclusion, without the benefit of the best experts in the industry, because they have already left to work elsewhere, and without the benefit of being able to isolate the struggling sector, because the fact of common ownership makes isolation of the stricken market impossible.

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice.”
Adam Smith

Venezuela’s government did the only thing its ruling ideology allows, throw printed money at the problem and hope that the market will bear the large influx of cash and ignore the rapidly decreasing value of commodities that back the value of the cash in the first place. Unfortunately for both the people suffering in Venezuela and for the rabid leftist ideologues in power, the economic laws of supply and demand are to markets what the laws of gravity are to rocket science, so, not only is there a commodity depreciation problem in Venezuela, their currency is also useless, making it impossible for the rest of their economy to function.

If only Venezuela were freed of the dogmatic delusions of their Marxist leadership, the solution to the economic crisis would be obvious, though not painless. Make no mistake, even in best case scenarios, the economic situation in Venezuela will require years to rehabilitate, as the last opportunity for short-term correction came and went in 2010, when their economy first began its serious decline. The only real solution to Venezuela’s economic woes is to hold a national fire sell auctioning off all of the nation’s economic assets. Then the Venezuelan government could take the much needed influx of foreign cash to stabilize their own currency, structure their long term debt, and focus on necessary government services.

Unfortunately, that’s simply not going to happen, not for a long time.

 


Liberty is For The Win!

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