As the world watches with horror, the crisis in Venezuela continues. For years, the population has suffered from rampant inflation, shortages of basic necessities (like toilet paper), high murder rates, and an autocratic government. On April 19, the mother of all protests involved hundreds of thousandsor perhaps even more than a million peopledemonstrating against the regime. President Nicolas Maduro has authorized paramilitary groups to crack down on protesters and has called for a new constitution, a move that cynics think is merely to weaken his political opponents.
As awful as the Venezuelan crisis is, it is not surprising. Indeed, the pattern we see there is a predictable outcome of populist policies that ignore the basic laws of economics. The distinguished Austrian school economist Ludwig von Mises (1881-1973) explained decades ago that government intervention into the economy only causes problems, inviting further rounds of destructive intervention. Ultimately, Mises argued, the people must decide if they want to live under the institutions of a market economy or of outright socialism. There is no stable third way between capitalism and socialism because interventionism creates unintended consequences that no one likes.
Former Venezuelan President Hugo Chavez described himself as a Trotskyist, and while in power he nationalized major companies in key industries and engaged in large-scale wealth redistribution. To protect the people from the greed of the capitalists, Chavezs government imposed price controls on private merchants.
For a while these policies seemed to work, and Chavez was a hero to many on the left. For example, after his death in early 2013, Salon.com ran an article by David Sirota entitled Hugo Chavezs Economic Miracle. Sirota claimed that Chavez became the bugaboo of American politics because his full-throated advocacy of socialism and redistributionism... represented a fundamental critique of neoliberal economics. Sirota also wrote that Chavez racked up an economic record that a legacy-obsessed American president could only dream of achieving.
For another example, in 2011 Sen. Bernie Sanders published an essay on his official site which ended with this remarkably obtuse statement: These days, the American dream is more apt to be realized in South America, in places such as Ecuador, Venezuela and Argentina, where incomes are actually more equal today than they are in the land of Horatio Alger. Whos the banana republic now?
Even Nobel-laureate economists on the left were oblivious to the crisis Chavez was setting up. For example, in 2007 Joseph Stiglitz visited Venezuela and praised Chavezs positive policies in health and education. Stiglitz dismissed the then-current 15 percent rate of inflation as not necessarily bad for the economy. The consistent theme of all these fans of Chavez was that the reactionary attacks against him from orthodox economists showed the weakness of their blind faith in market capitalism. These fans thought the strongman was showing how socialist policies could work.
Yet its Chavezs critics who seem to have been right after all. Venezuelas GDP shrank 19 percent last year, and annual price inflation is currently running above 700 percent. The pattern here is just as Mises described: a populist government runs the printing press and expropriates wealth from the rich (especially foreign investors) in order to fund popular social programs. Rising prices (caused by the monetary inflation) then lead to price controls. Yet this only ensures that merchants will refuse to stock their shelves because they cannot legally charge the market price for goods. The suite of populist policies thus leads to a collapse in foreign investment and a paralysis of domestic businesses. Formerly middle-class households must resort to desperate measuressuch as crossing the border into Colombiamerely to obtain toilet paper.
The worst part of Venezuelas tragedy is that it was so obviously predictable. Economists familiar with the work of Ludwig von Mises understood the necessary results of socialist policies. A sound money and freely floating prices provide a society with functioning markets that deliver the goods to the people. The market economy is true populism.