Socialism Works its Wonders in Venezuela — also in West Bengal

I was talking today to a friend in Boston who was recently in India for the Pravasi Bharatiya Divas (Non-resident Indian Day) in Gandhinagar. He reported that it was the worst managed PBD he’d seen in his 15 years of attending the event. Among his other observations, he noted that some of the states are trying their best to attract investment from within and outside India. But, he said, he was distressed to see how poorly his ancestral state of West Bengal was doing. Nothing at all is happening there and it appears to be in terminal decline. I said that that’s too bad but I could have told you that decades ago. Have you been following the news about Venezuela, I asked. No, he replied. I pointed him to a Jan 13th Forbes article: The Impending Collapse Of Venezuela.

Venezuela is having a hard time. It has a balance of payments problem, made worse by the falling gas prices. And there are shortages of consumer goods. Here are a few lines from that article:

Shortages are nothing new in Venezuela. Indeed, a shortage of toilet paper has been the subject of global amusement for quite some time. But recently, the shortages have become much worse. Last week, a government official was jeered for saying that long lines indicated that “Venezuela has plenty of food”, when rows and rows of empty shelves in stores were telling a different story. Bloomberg reports that people are queueing overnight for necessities such as soap, milk and diapers. This is very dangerous. Venezuela is already one of the most violent societies on earth. And when shortages start to affect little children, people get angry.

Fearful of public unrest escalating into something more serious, the government has now deployed troops to control queues of disgruntled shoppers at the country’s half-empty stores. And it has introduced a system of rationing, limiting shoppers to two days per week at government-controlled stores. As Bloomberg cynically put it, “Venezuela reduces lines by trimming shoppers, not shortages”.
. . .
Over the last fifteen years, the Venezuelan government has nationalized hundreds of companies and seized assets on a massive scale. . . . Often, these nationalizations have come in response to falling production due to government price and exchange controls. For example, production in Venezuela’s car industry dropped by 85% between January 2013 and January 2014: in February 2014, Toyota suspended production for six weeks citing inability to import parts, resulting in calls from trades unions for the industry to be nationalized. All too often, the Venezuelan government has given in to such calls, rather than addressing the underlying problems.

Widespread nationalization of private enterprises and seizure of assets discourages both domestic entrepreneurialism and foreign investment, and nationalized companies too often end up less efficient and less productive than they were when in private hands. The Venezuelan government has mismanaged its nationalized oil industry, resulting in revenues far below what would reasonably be expected from its vast oil reserves, and misallocated those disappointing revenues into the bargain: instead of using the revenues to diversify its economy and develop domestic production in other sectors, it has diverted them into politically popular but unproductive social programs and distortionary price controls and subsidies. Consequently, Venezuela has become far too dependent on oil revenues, its fiscal finances are in a parlous state and its industry is highly inefficient. It was in a mess long before the present fall in oil prices. [Emphasis added.]

The keywords are shortages, nationalization, asset seizure, rationing, government control, falling production, price and exchange controls, discouraging entrepreneurialism, mismanagement of resources, misallocation of assets. All these are defining features of a socialist economy. And lead to predictably distressing outcomes for the citizens of socialist economies.

These are predictable for analytical reasons alone and the empirical evidence only adds to the argument that socialism is the surest road to impoverishment, decay and decline. Pure reason can tell anyone that socialism cannot but wreak havoc. Yet they do it. Who are these “they” that choose socialism? They are the policymakers, the leaders of socialistic states. But why?

They — the leaders — do it because socialism is good for them. Socialism is as certainly good for the leaders as they are bad for the society. That’s the irony: socialism is bad for society as a whole. It is good for those who get to call the shots because they become rich. But it immiserizes the rest. Indeed the immiserization of society is guaranteed by the very fact that a select few can get very rich only at the expense of the many. Socialism is a zero-sum game: the leaders’ gain is the society’s loss. This is in sharp contrast to the other way of organizing society: the market system.

In the market system, the game is positive sum instead of a zero sum game. In any market exchange, no one’s gain is at the expense of another’s loss. In voluntary exchange, both parties necessarily must win because otherwise they would not enter into the exchange. A market system is one in which there is no coercion and all trades occur between consenting parties that enter into the transaction voluntarily. Add up all those positive sums that innumerable trades give rise to and you end up with social welfare increases that no participant actually intends to promote. No one intends to promote social welfare but by merely engaging in their self-interested trades, they collectively promote the greater good.

Socialism works — but only in the limited context of a very small group, usually a family. Within a family of closely related persons, socialism works because of two reasons: first, people genuinely care for the others’ welfare; and second, the people doing the allocation of resources have the necessary information. When people genuinely care, they don’t cheat, steal or do things that benefit them at the expense of the others. The information requirement is also easily met: the parents (the leaders of the small socialist state of the nuclear family) know who needs what and who is capable of doing what. All transactions occur between people who know each other well.

But in any large economy — large in the sense that people are strangers to each other — the conditions under which socialism works are not met. Nearly all exchanges are done between strangers, and therefore there are enough opportunities for “opportunistic” behavior and there is not enough information about who needs what and who is capable of doing what.

But then the question is: why then do leaders who loudly proclaim that they are only interested in the social good ever go in for socialism? The simple answer is of course because they personally gain. Ask yourself: if you had the opportunity of becoming immensely wealthy at the expense of an unknown number of anonymous people who would never know that you gained at their expense, and who could not do anything to retaliate, would you be tempted to go for it?

If your answer is “no”, I congratulate you on your character and integrity. But you will agree with me that there are people who would go for it. And these are precisely those people who claw their way up to the top to become leaders — and end up choosing socialism. Those who get to the top choose socialism if they had the opportunity to do so. And the opportunity is usually given to them by the people — the victims of socialism — themselves provided they are sufficiently stupid.

I make no apologies for using the word “stupid.” We are all stupid — to varying degrees. What’s worse, we are ignorant too. Present company not excepted.

West Bengal has had communist governments for decades. Communism or socialism was not imposed. The people of West Bengal, in their collective stupidity, chose to vote for those governments. The leaders chose policies that ended up in the economic mess they are in now and are guaranteed to impoverish them further.

It is all karma, neh?

You does your actions and you reaps your rewards. It’s inescapable. The rewards of socialism is poverty. Persistent collective poverty and misery. Like what they are suffering in Venezuela. Like what the people in West Bengal have come to regard as normal.

My friend said that India is a socialist country. Apparently it is not doing too badly. This is a common refrain. “India is on its way to a super power.” Really? You could have fooled me.

Author: Atanu Dey

Economist. View all posts by Atanu Dey