What Would Ludwig Von Mises Do In Venezuela?

in Economics by
   

The crisis in Venezuela is the most modern illustration of the horrific consequences of socialism and the devastating reality of hyperinflation. What makes this disaster all the more infuriating is that it could have been avoided with a basic understanding of history. We’ve seen the disaster of socialism and interventionism in various forms play out across the world time and time again with similar results, and yet new generations of central planners — backed by ideologically aligned intellectuals — are consistently able to fool people into believing that “this time will be different.”

Ludwig von Mises himself lived through one of these historical episodes.

Following defeat in World War I, the Austro-Hungarian Empire was in a state of crisis. The Habsburg monarchy ended in 1918 and with it came the dissolution of the Empire. The German-speaking population formed what we now know as Austria, and the nation soon faced a severe economic crisis. The government, led by a coalition of Social Democrats, Christian Socialists, and a Nationalist Party, implemented an ambitious economic program of price controls, food subsidies, nationalization of industries, protectionism, and welfare — and funded it with a printing press.

The result was catastrophe, just as Mises predicted.

Faced with this unbearable reality, Mises used his position as chief economist of the Austrian Chamber of Commerce to push for a series of economic reforms. Given some similarities between today’s situation in Venezuela and the crisis that struck Austria, looking at Mises’s prescription from the past can illustrate a path to prosperity for Venezuela’s future.

1. Abandon and Condemn Socialism

This one is obvious, but it’s a vital first step. Venezuela is a nation of abundant resources, including the world’s largest oil reserve and awe-inspiring tropical beauty. The crisis that Venezuela finds itself in is purely one of ideology, and there is no hope for the country until that is understood. This was the same problem Mises faced in Austria. Writing in 1923, Mises lamented that:

“Austria is suffering from a fundamental problem: the dominance of socialist ideas in the country….The Social Democrats rule because they have armed forces behind them, and because at every moment they can impose their will upon the populace by shutting down the transport facilities and the power stations. As long as their unbroken dominance continues, every attempt to put the country back on its feet must fail.”

Until the power of Nicolás Maduro’s United Socialist Party of Venezuela is broken, Venezuela has no hope.

2. It Must Abandon the Bolivar

While the official numbers have Venezuela’s annual inflation rate at over 180%, there are many who say the real inflation number is still higher. Whatever the “real” rate is, we’ve seen the Bolivar literally reduced to toilet paper as its value has evaporated to the point that thieves won’t even bother stealing it.

Faced with a similar climate, Mises prioritized monetary reform as the first step in reversing Austria’s situation. As he wrote in 1922:

“The continued depreciation of the Austrian crown destroys all prospects for reestablishing the state budget until a new bank of issue has been founded. It is not an improbable assumption that the state will be compelled to suspend all payments once it has become impossible to increase the circulation of banknotes—a possibility that entails almost unthinkable social consequences.
Mises’s ideal solution was for Austria to adapt the gold standard, with the chief reason being that it was a “stable medium of exchange that is independent of the crown.” While I favor any country returning to the gold standard, it is worth noting that there are other currencies that could be used in a Venezuelan reform package.”

Daniel Fernández Méndez has written about the possibility of Venezuela adopting the US dollar, and there is certainly a great deal of logic in this approach. While there are many reasons to have doubt in the long-term stability of the Federal Reserve note, it remains the world reserve currency and would represent a major source of stability after the Bolivar. Zimbabwe adopted the dollar following its bout with hyperinflation in 2008–2009.

While adopting the dollar makes sense on paper, it’s fair to question whether such a move would be accepted by a Venezuelan populace who have been warned for years of the dangerous reach of American imperialism. The necessary economic reforms will be painful enough, adding the adoption of the dollar could be too much for Venezuelan people to accept.

An alternative option could be adopting the Chinese yuan. China already has a lot invested in Venezuela, with Chinese banks having pumped billions into the country even while oil prices were plummeting. China has made the stability of the yuan a key part of the Communist Party line, succeeded in having it included last year in the IMF’s basket of currencies.

It is worth noting that Zimbabwe’s financial minister floated the suggestion that Zimbabwe could adopt the yuan in exchange for billions of dollars in debt relief. While that suggestion was eventually shot down by The Reserve Bank of Zimbabwe, it’s a concept that could work in Venezuela.

3. Mass Privatization of the Venezuelan Economy

In 1921, Mises wrote a memo titled An Economic Policy Program for Austria. After stressing the importance of monetary reform, Mises turned his attention to government deficits, writing:

“The federal, provincial, and municipal budget deficits principally all spring from the same two sources: the inefficient management of public enterprises and of the food subsidy scheme. The goal should be to transfer the public enterprises into the hands of private businessmen and to dismantle the food subsidies.”

Mises spent most of his career writing about the inefficiencies of government bureaucrats trying to replicate the vital societal function of true entrepreneurs. There is perhaps no better example of this than Venezuela today, who — in spite of sitting on more oil than Saudi Arabia – is having to ration power and import oil. By selling off Venezuela’s publicly owned oil companies — and returning formerly private oil rigs that were taken by the Venezuelan government — Venezuela will see oil production rise and a key industry restored.

Similarly, privatizing Venezuela telecommunications would solve the problems that currently face that industry. International telecom companies in business with publicly owned Venezuela companies have begun suspending service as they have no ability to pay bills. One of the biggest drains for these Venezuelan companies is that price controls have prevented the company from raising rates to meet inflation, forcing providers to take major losses over time.

Other Recommendations from Mises

Of course, the necessary reforms that must take place within Venezuela do not end with these three broad actions. In fact, a number of the bullet points in Mises’s Economic Policy Program would also apply here. Substituting Venezuela wherever Mises wrote Austria, these include:

  • Currency trading is to be decontrolled. (Ending its current system of bizarre exchange rates.)
  • All import prohibitions are to be lifted.
  • All impediments to exportation and transit are to be removed.
  • Venezuela can cover its need for raw materials and foodstuffs only by importing them. In order to pay for imports it must export finished products, on the basis of which businesses may earn profits. Venezuela needs free trade.
  • Government oversight of industrial production of manufactured goods and the use of raw materials is to be ended.
  • The government management of food supplies is to be abolished.

Embracing these solutions, combined with a legal system dedicated to the protection of property rights, would empower Venezuela into a leading economic power in the world. With the establishment of Mises Institute Venezuela, and the presence of Austrian scholars within the country, there is hope that the works of Ludwig von Mises can obtain the same following they have obtained in Brazil.

Menos Marx, Mas Mises.

Originally published at Mises Wire.

  • Quantum of Soulace

    It’s not just an economic question. Wenn man die Hauptfrage weißen will müß man auch fragen was für eine Frage man nich stellen darf. And having some spic-ass monkey in charge means shit is necessarily going to go downhill fast.