Is the Venezuelan economy suffering from a deficiency of demand?

The Venezuelan economy is in a mess. Everyone knows it; no one denies it. There has been a catastrophic fall in real incomes and wealth. Why?

Is it because everyone has decided to save rather than spend? Is it because there has been a fall in aggregate demand? Is there not enough public spending?

Here’s the real question. Is there anything in modern mainstream macro that will explain what has gone wrong in the Venezuelan economy? If so, how does modern theory explain what has happened?

In my view there is hardly a thing in the way we teach economics that will explain the problems of the Venezuelan economy. Nor would a modern text tell you what to do or to change if the problems are to be fixed.

I do think economists do understand why it has gone so badly wrong. I just don’t think we teach any of it any more. We certainly don’t spell it out.

AND I’VE JUST COME ACROSS THIS: I’ve just been reading through John McVickar’s illuminating Outlines of Political Economy written in 1825, and a wonderful book it is. And there I found this sentence.

The capitals of England and of France have not increased, because of the vast expenditure of their governments, but in despite of it. [p 33]

The language is a bit archaic but then so too is the economics. Perfectly clear, however, both the syntax and the economics.

The socialist nightmare – Venezuelan edition

This is about the collapse of the Venezuelan economy post-Chavez. It has seemingly taken place almost out of nowhere. Things limped along for a longish while and then, almost overnight, fell apart.

The problem in being unable to recognise what’s going on is due in large part to our economic notions now so firmly based on “flows” rather than “stocks”. We look at how much we are able to buy and not at the underlying productive apparatus. A bridge collapses and the effect on GDP is either nothing at all or perhaps even leads to an increase in output as more effort is required to get from place to place while there is activity in re-building the bridge. That’s the flow side of the story. The stock side, however, is to note that the actual productive apparatus of the economy has been impaired. It cannot produce as much as it could the day before the collapse.

What happens in a socialist economy like Venezuela, or the US at the moment, is that there is a time during which the capital is being run down and there is little recognition that there is major structural damage taking place. Then, in what seems almost inexplicable, the entire economy falls apart all at once. This is from an article on the collapse of the Venezuelan economy.

Welcome to Hugo Chavez’s Venezuela, a country with the fifth largest oil reserves in the world and absolutely broke. It’s a remarkable achievement for Chavismo. A just-wow moment. Socialism is useless at everything except for smashing things in record time. There it excels. It’s hard to imagine that as late as the 1980s Venezuela had the highest standard of living in Latin America. But then in 1960 Detroit was the richest city in the world in per capita income. Now it’s well … Detroit. . . .

The genius of the Left — Chavez’s for example — is that it destroys things from the inside out. They pervert religion, collapse the mores, abolish the family, shred the constitution and gradually expropriate the property. The differences from one day to the next are apparently imperceptible, but it is harder and harder to go back until finally there is no reversal of ‘progressive gains’ possible at all. The public is finally faced with the stark choice between chaos or authoritarianism. And most people will chose the Boss over the Mob.

The capital, both physical and social, is eaten away and then completely breaks down. Building is hard and requires patience. Destruction from the inside by socialists looks great for a while while the wealth is spread around. But when it falls, not only does it crumble, but no one knows how to put it together again, least of all the socialists who promise everything but deliver nothing but misery in the name of equity and justice.