Economics 101

The Lesson from Venezuela: Making Things “Free” Is No Substitute for Unleashing Human Creativity with Powerful Market Signals

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Some say all press is good press because it brings attention to an issue, idea, or person. Venezuela is getting a lot of press these days, but there is nothing good about it.

Media coverage continues to detail the desperate economic conditions plunging Venezuelans into poverty and despair. The Atlantic ran with the title “The Tragedy of Venezuela,” and the Washington Post declares, rightly, “Venezuela is on the brink of a complete economic collapse.”

We live at a time when we can look at history and see the havoc and violence centrally-planned societies unleash on ordinary citizens. We should know better, but we don’t. Perhaps we think it can never happen to us. We should ask Venezuelans what they think.

The Fastest Route to Poverty

Here’s the situation: Venezuela is a country rich in oil and human capital. But bad economics, poor policy decisions, and terrible institutions will trump the engines of human creativity and entrepreneurship every time.

Let’s give the late Venezuelan president Hugo Chavez the benefit of the doubt and presume he pushed the policies of two-cent gasoline and free housing because he cared about the poor. But caring for the poor is only a necessary condition for helping them and not a sufficient one.

If we want to help the poor, we shouldn’t bite the hand that feeds them. This is what socialist, centrally-planned policies do. Despite the best of intentions, people are left without food, security, or freedom.

The assumption behind such policies is that we can wave a magic policy wand and make things free and eliminate prices – and, somehow, this is a good thing!

It’s counter-intuitive, but prices are the best tool for rationing scarce resources. When allowed to emerge within well-defined, well-protected property rights, prices help us do more than just “not run out of stuff.” Prices help us “get more stuff than we could imagine.”

Eliminating prices and making things free or nearly free is the fastest road to poverty and ruin. Making something free doesn’t make it less scarce. It just means we have to find another way to finance those free things.

Historically, for Chavez and others, this meant encouraging monetary inflation. That’s fancy economics talk for printing money. Inflation is usually a last-ditch effort of a tyrant near their demise. It often results in hyperinflation, which is devastating. Venezuela is predicted to experience a 2016 inflation rate of 720 percent.

What does that mean in real-world talk? It means a dollar isn’t worth a dollar anymore. So much money is circulating so fast it’s devaluing. This causes extremely high, prohibitive cost increases for basic items. You could go to bed with a loaf of bread costing $2 and wake up with it costing $100. That price will continue to rise as money continues to lose its worth. You can see why this is so damaging to the poor.

Economic freedom and personal autonomy are the costs of these damaging policies. Out of 157 countries, Venezuela ranks dead last in global economic freedom.

This hurts everyone, but it hurts the poor especially because they don’t have the extra income to withstand the loss of currency value and the loss of freedom resulting from inflation.

We Know Better

The tragedy of Venezuela’s current economic and political situation is that it is entirely unnecessary. We know how to increase prosperity. We know how to acquire and increase economic freedom. Yet there are still many global examples of countries who have lost both these things.

This happens because we often do not have a biblical understanding of how we fit into God’s design and what he desires for his creation. We were created to use our God-given talents to create value for others. When we do this, we increase flourishing and glorify our Creator.

To do this well – and foster it in places like Venezuela – we must not dampen economic freedom and trade. We need prices where there are none instead of destroying prices where they already exist.

Prices are powerful market signals. Policies aiming to eliminate them are the surest, quickest way to poverty.

Venezuela can change. It can recover economically and politically. Doing so requires good, biblical thinking about fostering human creativity and eliminating the policies that amount to biting the hand that feeds us.

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  • Joel Swensen

    Nice

  • A Sanchez

    Great advise for those presidential candidates who are advertising free services.

  • Russ McCullough

    Well put Anne!

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