Venezuela Shows What Happens When Planners Pretend Prices Don’t Matter

The disastrous state of Venezuela’s health system is yet another example of the calamity that has befallen that country under dictatorial socialism.

Of course, defenders of the cause always like to argue that the failure of a socialist experiment doesn’t devalue socialism at all. If only they had implemented “real” socialism, things would have been different. Radical leftwingers are so often applauded when they start out for their desires and aims, only for those desires and aims to be rejected as not being the real thing when their plans inevitably fail.

The “real” socialism argument would have more logic to it if there were a real-world example of a successful socialist economy. Then again, insisting on comparing agitprop to reality is most uncouth, and possibly even a right-wing conspiracy.

Destroying the Price System Has Disastrous Consequences

Whatever any government anywhere’s plans for the future, keeping the price system in place is of paramount importance.

That being said, the unfolding disaster in Venezuela isn’t really a failure of socialism, and it’s no surprise that it just happened to coincide with the Bolivarian implementation of it. The real lesson from Venezuela is to be more precise about what happens when we destroy the price system. There are no exceptions to this, either—whatever any government anywhere’s plans for the future, keeping the price system in place is of paramount importance.

The great mistake of the Bolivarian socialists, leaving aside all the corruption, favoritism, over-reliance on oil revenues and so on, was that they killed off the best mechanism for running a complex economy.

Of course, we would all love for food to be cheap enough for everyone to be well-fed. But trying to engineer cheapness by fixing the price below the cost of production just means that no one has any incentive to produce anything, the result of which is famine. Expand the idea of price-fixing across all basic goods, and none of those goods are produced, which is exactly what has happened in Venezuela. Outside the oil industry—and that is now dwindling, too—there’s not really anything we could call an economy in Venezuela anymore.

It’s Impossible to Plan an Economy

It’s the same problem we see every time. It’s simply not possible to know enough about a complex economy in order to be able to plan it. Actually, as Cosma Shalizi has shown with reference to the Soviet Union, it’s not even possible to know what to plan for.

Planning can’t support the fine-grained part of the economy because of a lack of information, so a planned economy will always be a non-complex and thus poor one.

There’s a fairly simple choice here—use central planning and have a simple economy, or use another method and have a complex one. This itself has a corollary—simple economies will be poor ones. A complex economy supports fine-grained division and specialization of labor with the resultant trade in production—that’s what the complexity is. And the division and specialization are, as Smith and Ricardo—backed up by even Marx—told us, what produces the wealth and high incomes we all so enjoy. Planning can’t support the fine-grained part of the economy because of a lack of information, so a planned economy will always be a non-complex and thus poor one.

Friedrich Hayek was not the High Priest here—more the recorder of a generally agreed upon conclusion. Given that we cannot use planning, we must use that only other calculating engine we’ve got: the economy itself and the price system. That’s the only system that will support complexity and thus wealth generation to any degree.

This should, but sadly won’t be, a warning to our home-grown enthusiasts for socialism. The proper definition of socialism is an economy where productive assets are held in common by those who use them to produce. Workers’ co-ops and the like, mutually owned organizations. Those kinds of organizations already account for a substantial chunk of our current economy, and as long as everything is voluntary, they work just fine. But they only work provided they are part of the floating in that ocean of the market and the sea of prices.

The sad part is that all too many on the left are not just fans of this system but also harbor something akin to a hatred of the market and price system. They take the idea of controlling the economy beyond state management of industry and insist on planning prices—that could include minimum and sometimes maximum wages, the prices of housing, healthcare, and so on throughout the economy.

If Venezuela hadn’t killed off prices and the market, then it wouldn’t be the disaster it is today. What’s happening there ought to be a salutary lesson for anyone, Corbynista or otherwise, thinking of undermining the price system here in the UK.

This article was reprinted with permission from CapX.