Inflation, Shortages, and Social Democracy in Venezuela

Venezuela’s economic policy is proving that economic intervention, leads to complete socialism and economic destruction

by Matt McCaffrey and Carmen Dorobat

The economic turmoil in Venezuela has received increasing international media attention over the past few months. In September, the toilet paper shortage (which followed food shortages and electricity blackouts) resulted in the “temporary occupation” of the Paper Manufacturing Company, as armed troops were sent to ensure the “fair distribution” of available stocks. Similar action occurred a few days ago against electronics stores: President Nicolás Maduro accused electronics vendors of price-gouging, and jailed them with the warning that “this is just the start of what I’m going to do to protect the Venezuelan people.”

Earlier this month, in another attempt to ensure “happiness for all people,” Maduro began to hand out Christmas bonuses, in preparation for the coming elections in December. But political campaigning is not the only reason for the government’s open-handedness. The annual inflation rate in Venezuela has been rapidly rising in recent months, and has now reached a staggering 54 percent (not accounting for possible under-estimations). Although not yet officially in hyperinflation, monetary expansion is pushing Venezuela toward the brink.

In such an environment, paychecks need to be distributed quickly, before prices have time to rise; hence, early bonuses. This kind of policy is nothing new in economic history: Venezuela’s hyperinflationary episode is unfolding in much the same way Germany’s did nearly a century ago.

Consequently, Venezuela’s economic policy is proving to be another example of Ludwig von Mises’s argument that economic intervention, if left unchecked, leads to complete socialism. The ever-expanding price controls testify to the fact that governments always search for new scapegoats in the market instead of admitting the failure of their own policies, and that it is always easier to increase government control than reduce it.

Maduro clearly knows the ropes when it comes to anti-market propaganda; like his predecessor, Hugo Chávez, he has placed blame for soaring prices on speculators and the “parasitic bourgeoisie.” But no witch-hunt for “price-gougers” will stop the eventual collapse of the economy that will result from further monetary expansion combined with crippling price controls. Inevitably, as Mises argued, “once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum.”

As we speak, Venezuelan shoppers are queuing outside seized stores trying to spend their rapidly depreciating currency, and the economy is marching steadily toward a dénouement when bolivars (Venezuela’s currency) will be useful for little more than kindling.

Venezuela has in fact been fueling the fire of economic disaster for quite some time. The socialist programs of Chávez’s administration squandered the country’s scarce capital in wasteful production. As chronic shortages set in, the government turned to price, capital, and foreign exchange controls to keep the economy afloat, each of which led to further chaos. Currently, Maduro’s administration is planning to extend the controls to all commodity prices, in yet another doomed effort to fix the country’s dire economic problems, but new controls will only make things worse. The only way to truly prevent soaring prices is to stop the printing press and give the reins of the economy over to the market by eliminating price controls. The nationalization of private businesses and establishment of total price controls will not cover up disastrous monetary policies, but only prolong and aggravate their effects. They merely add to ever-higher price increases and ever-lower supply of consumer goods and more capital consumption, further eroding the country’s economic foundation.

Venezuela’s dire straits might seem far removed from the problems faced by other nations, and it is easy to believe that hyperinflation is impossible “here.” Yet as Mises warned, the seeds of disaster are sown from the beginning of government intervention in the market, although “the first stage of the inflationary process may last for many years.” But the final stages of economic collapse occur far more quickly: as Peruvian-Spanish writer and political commentator Alvaro Vargas Llosa points out, “going from 60 percent [inflation] to 1,000 percent is a lot easier than going from 3 percent to 40 or 50 percent.” As disturbing as the thought is, the difference between the U.S. and other Western economies and Venezuela is merely one of degree, not of kind.

After all, Chávez carried out his Bolivarian Missions through a program of nationalization, subsidies, and affordable healthcare. This is a familiar refrain in Western economies.

Venezuela’s problems are more easily visible and have escalated more quickly because its capital stock has been largely depleted by an unbridled 15-year commitment to socialist economic policies. Other states such as the US still rely on large capital stocks accumulated in years of freer markets. Therefore, Western economies may not see their toilet paper disappear from supermarket shelves, yet, but rising prices and numerous bankruptcies indicate that the tendency is the same. This cements once again Mises’s idea that no country will find a stable “middle-of-the-road” economic policy. All movements lead toward one extreme: markets or socialism. Mixed economies are just pit-stops in between. The games all central banks play with the purchasing power of money may be more subtle, but they are ultimately just as harmful as conspicuous socialism.

Some have argued that the crisis in Venezuela will most likely “undercut Chavismo’s viability” as a political program. Yet the critical issue is not a political one, but the economic fact that Venezuela is frantically squandering its resources, consuming its capital, and impoverishing its people. If Maduro’s policies persist, and if after the seemingly inevitable collapse the legacy of chavistas loses its viability — “vaccinating” Venezuelans against a return to such destructive regimes — it will be the only good thing to come out of these tragic events.

Although the odds are against it, let us hope other countries learn something from this episode before they too approach the brink of economic disaster.