Venezuela's Troubles and Perry's 19 year-old "Why Socialism Failed"

Mark Perry at Carpe Diem links to a USA Today report on the decline of Venezuela's auto industry. The USA Today piece is interesting as another installment in the saga of Venezuela's economic decline.  The government's currency controls have created shortages not just in consumer goods but also in producer inputs. Auto manufacturers owe $1.5 billion dollars to overseas suppliers, and production has dropped from 500,000 vehicles in 2007 to 100,00 last year. Last month only 296 cars were sold. Meanwhile, consumers are on waiting lists to buy cars (one man is reported to have been waiting over two years). So, it's small wonder that Toyota is closing its plant in Venezuela.

Yet the president, Nicolas Maduro is demanding that Toyota explain its decision and threatening to take over companies. This is on top of setting a ceiling on profits and mandating lower prices.

After covering the highlights of the USA Today piece, Perry ends with a quip and a link to what I think is a really useful piece he wrote in 1995, Why Socialism Failed. In it, Perry diagnoses the fundamental fault of socialism as its reliance on faulty premises about human behavior, specifically that it ignores the role of incentives in guiding it.

Perry then goes on to lay out the role incentives play in capitalism. Here he concisely explains the role of prices, profits & losses, and property rights in the capitalist system. While he might get a little over exuberant in his conclusion at the end of the piece, this explanation of the role of incentives is worth the read.

Indeed, reading Perry's essay after reading the USA Today article, one is struck at the similarities between the failures Perry pointed to 19 years ago and those occurring in Venezuela today.

Additional Thoughts (2/14/2014): Despite my enthusiasm for Perry's article, I am a bit uncomfortable with the ideological tint to the discussion.  It is one thing to argue that capitalism outperforms socialism because it makes better use of incentives.It is another thing to assert that capitalism works and its spread will lead to "a global revival of liberty and prosperity." Doing so edges us closer to translating valuable insights about the role of incentives into doctrinaire policy prescriptions.

Indeed, one could argue that this is what happened with the Washington Consensus. To a certain (and debatable) extent, the WC took the insights of economic theory (such as those discussed on Perry's piece) and translated them into a set of specific policy prescriptions, the very specificity of which obscured the essence of the original insights.

In contrast, it could be argued that China achieved its recent economic growth by harnessing the power of individual choice motivated by incentives without a wholesale transition to capitalism. While their incremental approach has created its own problems and may eventually require the Chinese to fully transition to the capitalist model, their success to date provides a compelling counter argument to dogmatic capitalism if the debate is cast in terms of rigid ideals of economic organization. That is to say, if one argues that capitalism in a specific form is an optimal system, than the success of other systems needs to be explained away (or an argument needs to be made that the success would have been greater if the optimal system was imposed).

However, if we pull capitalism apart to see what makes it tick, then we can recognize the aspects of it that work well not just in a capitalist system, but in other types as well. The case of China then becomes not an apparently successful alternative to capitalism, but a successful  application of one of the key aspects of capitalism. This gives us a better view of what works and doesn't work in the world than does an analysis framed in broad terms such as capitalism and socialism.

Indeed, we can look at the cases of China and Venezuela, both of which might be considered quasi-socialist systems, and note important differences in policy. One could argue that China, while limiting private ownership more than Venezuela, has done a better job of letting prices and markets work. Where Venezuela seems determined to ruin its economy rather than allow its currency to float, China abandoned its peg to the dollar (albeit in favor of a partial liberalization) long before a crisis emerged. Ultimately, Venezuela's obstinacy is all the more remarkable given China's 2005 compromise on the issue.