Must-Read: Ricardo Hausmann: Overdosing on Heterodoxy Can Kill You

Must-Read: The very sharp Ricardo Hausmann on the catastrophe of Venezuelan Peronismo. Peronismo is, in a nutshell, manipulating market prices to affect the distribution of wealth and attempting to use government controls and commands to guide the pattern of economic activity. This commits both market prices and the government commands to focus on their competitive disadvantages, and ends badly.

I have scattered thoughts on why Peronismo is popular–why the descamisados–whether voting for Peron, for Chavez, or for Trump–would much rather have the government take steps to boost the incomes they receive via labor and capital than rely on the stinking charity of a sensible social-insurance system. But I think I should leave them for another day…

Ricardo Hausmann: Overdosing on Heterodoxy Can Kill You: “Venezuela’s current catastrophe…. A country that should be rich is suffering the world’s deepest recession, highest inflation…

…and worst deterioration of social indicators. Its citizens, who live on top of the world’s largest oil reserves, are literally starving and dying for lack of food and medicine. While this disaster was brewing, Venezuela won accolades from the United Nations Food and Agricultural Organization, the Economic Commission for Latin America, British Labour Party leader Jeremy Corbyn, former Brazilian President Luiz Inácio Lula da Silva and the US Center for Economic Policy Research, among others….

Venezuela is the poster child of the perils of rejecting economic fundamentals.
One of those fundamentals is the idea that, to achieve social goals, it is better to use–rather than repress–the market… [which] is essentially just a form of self-organization whereby everyone tries to earn a living by doing things that others find valuable. In most countries, people buy food, soap, and toilet paper without incurring a national policy nightmare, as has happened in Venezuela.
But suppose you do not like the outcome the market generates. Standard economic theory suggests that you can affect it by taxing some transactions–such as, say, greenhouse-gas emissions–or giving money to certain groups of people, while letting the market do its thing.

An alternative tradition, going back to Saint Thomas Aquinas, held that prices should be ‘just.’ Economics has shown that this is a really bad idea, because prices are the information system that creates incentives for suppliers and customers…. Making prices ‘just’ nullifies this function, leaving the economy in perpetual shortage. In Venezuela, the Law of Just Costs and Prices is one reason why farmers do not plant… agro-processing firms shut down… incentives to flip goods into the black market. As a result, the country with the world’s most extensive system of price controls also has the highest inflation–as well as an ever-expanding police effort that jails retail managers for holding inventories….

In Venezuela, subsidies for gasoline and electricity are larger than the budget for education and health care combined…. With one daily minimum wage in Venezuela, you can buy barely a half-pound (227 grams) of beef or 12 eggs, or 1,000 liters (264 gallons) of gasoline or 5,100 kWh of electricity–enough to power a small town. With the proceeds of selling a dollar at the black market rate, you can buy over $100 at the strongest official rate….

After former President Hugo Chávez was reelected in 2006, he expropriated farms, supermarkets, banks, telecoms, power companies, oil production and service firms, and manufacturing companies producing steel, cement, coffee, yogurt, detergent, and even glass bottles. Productivity collapsed in all of them…. Venezuela used the 2004-2013 oil boom to quintuple its external public debt, instead of saving up for a rainy day. By 2013, Venezuela’s extravagant borrowing led international capital markets to shut it out, leading the authorities to print money. This caused the currency to lose 98% of its value in the last three years. By the time oil prices fell in 2014, the country was in no position to take the hit….

Progress requires identifying errors, which in turn calls for heterodox thinking. But learning becomes difficult when there are long delays between action and consequences, as when we try to regulate the water temperature while in the shower. When reaction times are slow, exploring the heterodox is necessary, but should be done with care. When all orthodoxy is thrown out the window, you get the disaster that was the Chinese Cultural Revolution–and that is today’s Venezuela.