“It’s corruption, not socialism, that brought down Venezuela,” claims an article in PSMAG (March 14, 2019, by Thor Benson). More worrisome is that some economists—but probably just a small number of them—seem to agree, or have been tricked to agree, ignoring a structural component of economics.
It is not false but misleading to write:
Corruption, not socialism, is the malignant tumor on democracy worldwide—in Venezuela, yes, but also here at home.
The author forgets that corruption is a matter of degree and of individual incentives, and ignores what comes first. The more collectivist—socialist or fascist—is a society or, more precisely, the government that rules over it, the more incentives individuals will have to engage in proactive or defensive corruption. The common denominator of socialism and fascism is that they are founded on the supremacy of collective choices over individual choices and thus favor state power. They ignore the individual incentives of a large part of the citizenry. (The courtiers’, soldiers’, and policemen’s individual incentives are not ignored, though.)
The more powerful the state is, the more individuals will be incited to ask favors to this tutelary power. They will work and expend resources to grab these favors or to avoid being on the wrong side of redistribution. In other words, the more rent-seeking (as economists would say) there will be.
The mirror image of rent-seeking is the diminished incentives to productive exchange. The more individual destinies depend on the state, the fewer incentives individuals have to engage in mutually beneficial exchange instead of trying to cheat others.
Note that the democratic mantra does not abolish incentives. Democratic socialism or democratic fascism generates perverse incentives. To Noam Chomsky’s rhetorical question “What socialist policy failed in Venezuela?”, the answer is: increasing the power of the democratic state.
Perverse incentives for legal or illegal corruption is what’s happening on a large scale in Venezuela. It is happening but on a much lower scale under Western countries’ crony capitalism. As the saying goes, “Venezuela is real socialism”; or, what amounts more or less to the same, real fascism.
READER COMMENTS
Floccina
Mar 21 2019 at 2:59pm
Corruption in socialism would include people not working as hard, efficiently creatively and smart as they would if they were in a different system.
Mark Brady
Mar 21 2019 at 3:26pm
I suggest that international sanctions against Venezuela have greatly accelerated the decline of the Venezuelan economy and the suffering of the Venezuelan people over the past few years. I wonder where Pierre Lemieux stands on the question of U.S. sanctions against Venezuela. As an advocate of free trade, is he opposed to the sanctions that the U.S. has imposed and strengthened since President Obama’s initial measures in 2014, and the series of sanctions imposed by Canada, and by many European and Latin American countries? I say let a socialist (fascist) country go to ruin as a result of its own unaided efforts so that the U.S. is not blamed for its demise.
Pierre Lemieux
Mar 21 2019 at 5:07pm
I agree, Mark. And remember that sanctions imposed by the US government against country X are prohibitions of US citizens (or residents) to trade with residents of X. Often, the prohibitions also hit citizens of other countries—contrary to Trump’s incoherent panegyric of nationalism.
Shayne Cook
Mar 22 2019 at 8:08am
Pierre:
Mark Z’s comment (below) is interesting, and precisely on point – as you note. But the much broader and more relevant concept is one you seem to have missed. In your response to Michael Sandifer, you state:
” … sanctions imposed by the US government against country X are prohibitions of US citizens (or residents) to trade with residents of X.”
While that statement is true on its face, the assumption underlying your statement – namely that the “residents of X” are denied benefit from free trade – isn’t supportable.
In regimes such as Venezuela, Cuba, North Korea, etc., it is not the residents of X that ever benefit from trade (or aid, for that matter). It is always and only the regime of X that accrue the overwhelming majority (if not all) benefits of trade (aid). And that is true of all such regimes, be they labeled “Communist”, “Socialist”, “Fascist”, “Corrupt” or whatever.
That is the larger issue, and that is the explanation of why Mark Z is correct (and “interesting”) in describing the details and focus of the U.S. sanctions, both from the Obama administration and the current Trump administration.
If you can understand that broader point – and issue – you may realize that Trump’s “panegyric” – and sanctions policy – is far more coherent than you assume.
Pierre Lemieux
Mar 22 2019 at 6:56pm
Shayne: My point was that Trump’s (or Obama’s) sanctions are mainly against the freedom of Americans to trade–although they also affect the capacity to trade of the foreigners they are officially designed to hit. Most sanctions prevent some foreigners to trade with Americans by forbidding Americans to trade with the former. It is indeed because Americans (or citizens of third countries) fear the sanctions that they are enforceable. So Trump is very coherent: like his tariffs, his sanctions hit the freedom to trade of Americans. (Moreover, it is probably false that trade only helps the foreign regime’s rulers and courtiers, but this was not the point I was making.)
Shayne Cook
Mar 23 2019 at 1:54am
Pierre:
I accept your clarification. But I suspect you may still be operating under false assumptions. First and foremost, sanctions do not “forbid” Americans to trade with the sanctioned party/state. They merely preclude direct trade with the sanctioned party/state – thereby, of course, adding transaction costs, in economics parlance. But in actual fact, those added transaction costs are not borne by American producers/traders.
After the fashion of Mark Z, I’ll offer an (actual) example to illustrate.
Let’s say I’m an American mid-west grain producer, and that I have “surplus” production that I’d be more than willing to sell, say to Cuba (Castro), for $5.00 per bushel. Alas, I’m precluded from selling directly to Cuba (Castro), due to “sanctions”.
But I’m not precluded from selling my grain to a commodities broker in Madrid for $5.00 per bushel. Thereupon, I can even organize transport of that sold grain directly from my grain bins to the port in Havana, on behalf of the new owner, and no laws or sanctions have been violated. At the very instant I’m paid by that Spanish broker, it becomes Spanish wheat, and the new owner can do with it whatever they wish. All perfectly legal. And no impact whatsoever on American trade.
On net, Cuba (Castro) is going to have to pay more than the $5.00 per bushel to cover the cost of the wheat, plus the Spanish brokerage commissions, etc. – added transaction costs, in economics parlance. But it is Cuba (Castro) that bears all of those added costs – thereby decreasing Castro’s excess “rents”, as you alluded to in your original post.
One other dynamic: If I (the farmer) were permitted to trade directly with Cuba (Castro), it is highly likely that Castro would insist on “offsets” – a trade phenomena where the buying party will only buy at the stated price ($5.00 per bushel, in this example), if the seller (the farmer) agrees to an “offsetting” purchase of Cuban exports. While that may seem superficially reasonable, such “offset” arrangements dramatically increase transactions costs for the seller – in this case, the American farmer. These “offsets” requirements are extraordinarily common in trade agreements. I’ve been directly involved in negotiating several of them. And those with un-sanctioned trade partners in Europe and elsewhere.
One might argue that such machinations are a violation of the intent of the Cuba/Castro trade sanctions, even if not a violation of the letter of the law. I would argue the opposite. It is precisely the intent – and the net effect – of properly implemented sanctions to increase the transactions costs to the sanctioned party/regime. They do not “forbid” American trade, as you’ve asserted.
Having said all that, I, like you and others, generally prefer the U.S. Government not interfere with free trade, Ceteris Paribus. But all else is not equal. Not even with our “approved” trading partners.
robc
Mar 25 2019 at 9:04am
Shayne,
I doubt the demand for wheat is perfectly elastic (or is that inelastic?) so the farmer isn’t only going to sell some fraction of his surplus wheat to Cuba at $5 per bushel, instead of selling the whole batch at $5 per bushel. The leftover he is going to have to sell at a lower price.
Mark Z
Mar 21 2019 at 6:09pm
“I suggest that international sanctions against Venezuela have greatly accelerated the decline of the Venezuelan economy and the suffering of the Venezuelan people…”
This is almost certainly false. Sanctions imposed on Venezuela have been very limited in scope. Restrictions prior to 2017 were just asset seizures and account freezes on government officials. Obama’s 2014 executive order froze assets and restricted travel of individuals involved in the Venezuelan regime. Sanctions by Europe were of a similar character. The 2017 sanctions banned the purchase of Venezuelan government bonds (or bonds issued the state-owned oil company).
It’s fantastical to imagine these measures had a significant affect on the Venezuelan economy. Now, restriction Venezuela has imposed on trade with other countries has probably had a more significant effect, but when it comes to the rather meager and targeted sanctions western countries have imposed on Venezuela, it seems like grasping at straws to lay Venezuela’s failure at anyone else’s doorstep.
Pierre Lemieux
Mar 21 2019 at 9:00pm
Interesting point, Mark Z.
Michael Sandifer
Mar 22 2019 at 12:55am
Venezuela is real socialism, with a lot of dumb economic policies besides. It is not fascist. Fascism is right-wing.
What distinguishes fascism for me is that it is about an in-group opposing out-groups, often with biological(often imagined) roots determining group membership. Members of outgroups are to be excluded from privileged positions in society. In the extreme, fasism leads to torture and murder of members of out-groups. It is also highly nationalistic and hostile to super-national organizations.
Communism/socialism aims at the complete opposite result socially. The aim is complete equality. Communists pressure people to be inclusive and to be included in the communist project. The enemies of communism are political enemies. In the extreme, communists kill their political opponents.
While nationalism is sometimes appealed to by communists, it’s in a very different context. It’s about uniting the proletariat against non-communist governments. Many communists want a one-world comomunist government and they support supernational organizations and even governments.
robc
Mar 22 2019 at 10:11am
I think of it as a circle. Communism is so far left and fascism so far right that they loop back to each other and their policies are indistinguishable.
The rationale behind the policies may be entirely different, but when you are viewing from the far opposite side of the circle (or the top of the Nolan Chart looking down), you can’t see any real difference.
Thomas Sewell
Mar 22 2019 at 8:11pm
Fascism was originally (in the Mussolini/Hitler sense) a subset of socialism. The two popular branches of socialism fighting for control across multiple countries were National Socialism and International Socialism. They chiefly differed in who was going to be in charge of running things (the fascists and their allies, or the communists and their allies), not in how they were going to be run or what should be done, which had about 90% overlap, with the chief policy differences being who was stressed as the “Other” to blame for all the problems.
That’s why Mussolini was a revolutionary Socialist in Italy before creating his own group and why Hitler was in the German Worker’s Party before they renamed themselves the National Socialists in 1920.
Pierre Lemieux
Mar 22 2019 at 7:00pm
Michael: I was speaking of the common denominator of socialism and fascism (collective choices). Both regimes favor some citizens and harm others; it’s just that the privileged and the harmed are not the same (whatever, if you will, the virtuous intentions of the socialist rulers and the wicked intentions of the fascist rulers).
Nick
Mar 25 2019 at 1:07am
To put it kindly, the difference between the two is the technocratic reason behind whacking people. That’s of little comfort to the innocent being subjected to pain.
Pierre Lemieux
Mar 22 2019 at 7:04pm
Michael: On the consequences of the “adversarial state”‘s interventions (whether socialist, quasi-socialist, fascist, or quasi-fascist), you may want to read Anthony de Jasay. As an appetizer, see https://www.econlib.org/library/Columns/y2018/Lemieuxstate.html.
Nick
Mar 25 2019 at 1:04am
They are both coercive and that puts them in the same basket. It matters not whether I whack you with a stick because I want you to participate in either your “inclusive” or “exclusive” project. The reason is only technocratic and makes only one small lick of difference.
Here’s a vastly more superior idea, “Don’t hit people, don’t steal their stuff”.
BC
Mar 22 2019 at 2:26am
I think George Will once pointed out that socialism is not merely susceptible to corruption, it is corruption. What is corruption other than the determination of economic outcomes by political criteria or, as Pierre puts it, by the favor of the tutelary power? Under socialism, all spoils accrue to those most politically favored, by definition.
Vivian Darkbloom
Mar 22 2019 at 3:30am
Lord Acton expressed it concisely and well:
“Power tends to corrupt and absolute power corrupts absolutely…”.
The rest of the quote I’m not so sure about because in my view Hitler, Stalin, Castro, Mugabe, Chavez, Maduro and the like were (are) bad men, but that doesn’t make them “great”.
john hare
Mar 22 2019 at 6:40pm
I disagree with another quote though I can’t remember the origin.
“It is not power that corrupts so much as immunity.” All of those bad people you named could have been stopped with an arrest or one shot except for their immunities.
Any of us have the power to do really bad things, but the vast majority of us would be paying a very high price in. The ones you named didn’t have to pay.
Vivian Darkbloom
Mar 23 2019 at 11:34am
I’m not sure why you wrote that you “disagree with another quote” because everything that follows suggests that you agree. In any event, if immunity from punishment explains why bad leaders act as they do, it comes back again to power—they are immune because they hold too much power and thus are not sufficiently accountable to anyone else.
The separation of powers and checks as balances as enumerated in the US Constitution was and is one of the most brilliant formulations of how to deal with the issue of excessive power.
john hare
Mar 23 2019 at 9:08pm
We probably don’t disagree on the end result. I think we might disagree on the semantics of cause and effect. I see it as without the immunity, the bad guys wouldn’t have lasted long enough to do nearly as much harm. It’s probably not really worth a serious argument. I’ve just known a lot of people (wasn’t smart enough to be born on the right side of the tracks) that would do all kinds of bad things if there weren’t real consequences in a very short period of time. I.e. they will do as much as they think they can get away with. Have a good evening.
Thomas Sewell
Mar 22 2019 at 7:55pm
“What socialist policy failed in Venezuela?”
There were plenty, but nationalizing industries is the clearest one to point at. You can look at the hard numbers for industries such as oil, steel, agriculture, aluminum, cement, gold, iron, farming, transportation, electricity, food production, paper, etc… and watch as they grow, are nationalized, then begin to shrink, until many which produce measurable goods are at between half and one-fifth of their (previously growing larger over time) pre-nationalization output. The nationalization timelines of various industries (steel was 10 years after oil, for example) is enough to demonstrate that as the causal factor, rather than something else going on in the economy.
It’s more than just taking the profits and giving them to favored political constituencies, the government simply can’t run things competently “In the name of the people” when they take them over.
Pierre Lemieux
Mar 23 2019 at 7:47pm
Good point. Thanks, Thomas.
Mark Bahner
Mar 25 2019 at 11:46am
Yes, I don’t know much about Venezuela, but the nationalizing industries (especially oil) seems to have had particularly bad results.
Another problem (and one could say, “Well, that’s not socialism”) is the price controls. For example, if bread costs “too much”, simply legislate that bread can’t be sold for more than a certain amount. But of course, then no one wants to produce any bread.
I remember reading a description of a typical family’s day buying groceries. The mother would spend more than 6 hours waiting in line. The father would take off from work to look after the young kids. All for a few days’ worth of groceries.
It’s troubling to me that prominent and popular Democrat politicians in the U.S. (e.g. Bernie Sanders) talk the same language about what things “should” cost (e.g. prescription drugs) and what things “should” be worth (e.g. minimum wages).
Hazel Meade
Mar 25 2019 at 2:51pm
Yes, the important distinguishing factor between “socialist” Europe and Venezuela is:
(a) state ownership
(b) attempts to control market prices
The lesson for the left should be that you can get away with a large welfare state and relatively high taxes as long as you otherwise leave the market alone – private ownership and free market pricing. What always fails is trying to control the market via public ownership and/or regulation of prices. I hope our American leftists catch on because that would result in a massive improvement in the policies they tend to propose.
Thaomas
Mar 23 2019 at 7:55pm
Probably only corruption keeps the economy limping long at all. Real Socialism would bring it to a complete halt
Niko Davor
Mar 25 2019 at 10:00pm
A lot of center-left economists are cheering for “socialism”. One small example is Brad DeLong: he is quite determined to see power transitioned to the far left. Lots of prominent pundits and economists are cheering for Bernie or AOC who have officially embraced the “socialism” banner. I do see broad outrage at economist Stephen Moore, who strikes me as a traditional market-centric economist. I’m not an economist nor an academic, but this post strikes me as out of touch. I wish this author was right that support for hard left “socialism” was fringe, but I don’t believe it.
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