How to Fix Venezuela Part 1: Value-Trade Analysis

SORAnomics (our proposed alternative science to Economics) uses the Value-Trade Theory to diagnose the economic health of societies according the maxims of Adam Smith. A society, whether it be a family, corporation, or country, is wealthy if its productivity (value produced) exceeds its own demand (value needed). This productivity is shown in the “Industry” column (below) while its demand is shown in the “Demand” column.  A society is wealthy if its Industry bars are higher than its Demand bars and poor if it is lower. Societal industry is dependent on capital and influenced by trade. Capital is anything that produces value via Industry while Trade is any exchange of the valuable produce of that Industry.

We start our analysis at 1999 when Chavez came to power and before his policies were fully implemented. We compare this to 2013, the year which has the latest data and when his policies have had its full effect. We include 2007, as the middle point between the two years to establish a basic trend.

Venezuela 2014: Low Industry, High Trade

 

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1999 (black bars): The low Capital, Industry and Trade columns indicate that the country was in recession. As this is the starting point of our analysis, we shall not discuss the roots of this recession.

2007 (gray bars): Venezuela’s Capital, Industry, and Trade all rise relative to its 1999 proportions much greater than the rise in demand or population. This indicates a better economic condition for its population as industry is catching up to demand.

2013: Capital: The rise of the employment (Capital) column becomes less, relative to 2007. A 9% unemployment indicates that its economy is still far from running on all gears as 2-4% are the ideal numbers, despite 13 years of policy. Although the current employment levels are not so good, it is still an improvement from the previous years.

Industry: More surprisingly, its Industry column has declined, instead of rising with the Capital column. Normally industry rises together with capital. A baker normally sells his bread with some profit to have some extra funds to increase production or replace his equipment in the future. If he sells at cost, then he can produce only what his current capital or equipment permits. His future production will be the same as the current one. On the other hand, his production must decline if his capital is reduced. But Venezuela’s main capital — its employed people — was not reduced. So what is causing the decline of industry?

The main culprit is price controls. In SORAnomics, price control is a short-term emergency measure during shortages such as famine, war, and disaster. This is because prices are subjective and are ultimately psychological in nature. More precisely, Smith defines it subtly as the pleasure and toil arising from the effects of work. If I get a high price for my work, then I get more pleasure from the more goods that I can buy. This will encourage me to keep working and even work harder. If I get a lower price than what I needed, then I would have suffered some toil by having less goods than what I needed. It would make sense to work less until my toil becomes tolerable. During a famine or war, it is acceptable for all to undergo more suffering, eat less, abstain from enjoyments, etc. so that everyone has a better chance of surviving. But enforcing long-term suffering or non-pleasure, after the crisis has ended, prevents the natural progress of society.

Another culprit is forcibly changing the ownership of capital, manifesting as nationalization and land redistribution. In a fair society, everyone has his role to play. Each person has his own dharma* — purpose,  natural inclinations, direction, and natural limitations. Governments govern, farmers farm, manufacturers manufacture,  labourers labour. No society will be able to sustain itself if its governments manufacture, farmers govern, manufacturers labour, and labourers farm.  Whatever they produce will be less than optimal. This low productivity is seen in the shortages in food, cement, and even US dollars used to buy imports (in Smith’s system, currency is treated just like any other tradeable commodity). Expropriations were largely done from 2007.

* Both price controls and ownership changes are part of the subjective or psychological "socio-analysis" in SORAnomics. Current economics cannot explain it deeply because "economic analysis" is purely objective.

Trade: Normally, if industry is low, then trade must be low as well, as a person can only sell whatever he has in stock. So why is 2013 GDP much higher than in 2007?

Understanding GDP

This is because GDP (even ‘real’ GDP) is measured nominally in terms of currency. Smith’s real valuation, based on food, has never been implemented:

  • “a commodity which is itself continually varying in its own value, can never be an accurate measure of the value of other commodities.”  (WN Book 1, Chap. 5)

Ultimately, GDP estimates the total sales of businesses which are always measured in currency, which in turn is fiat or arbitrary in nature. This makes GDP an deceptive measure of national wealth because it really only reflects the nominal wealth of businesses. A country may have a high real, nominal, or per capita GDP  while having rising poverty.

Since Venezuela has nationalized many big industries within the past 10 years in addition to its oil industry, its government has gradually usurped its GDP from the business sector. For example, its 2012 GDP was very high because oil prices were also very high. Thus, its GDP does not reflect its real productivity. The discrepancy between the high nominal Trade (GDP) and low real Industry (production) is accounted for by inflation.

Understanding Inflation

SORAnomics properly defines inflation and deflation as demand inflation and demand deflation, instead of price inflation or price deflation. When a country prints more money, increases wages, or allows an influx of foreign cash as foreign investments, it increases the demand for the produce of society. If its produce does not increase with this demand, then people compete for whatever is there, leading to higher prices. Thus, nominal ‘price inflation’ is merely an effect of ‘demand inflation’. Higher nominal prices naturally cancels out nominal value of the extra money printed, the extra wages, or extra value of the foreign capital. Rather than leave this new demand unsatisfied, these extra money, wages, and capital naturally try to leave the country to seek real produce elsewhere by leaving the country as ‘capital flight’.

However, instead of allowing money-capital to leave naturally to avoid inflation, Chavez created currency controls in Feb 2003. In 2008, he introduced the “strong bolivar” to replace the old currency and printed much of it in 2012 instead of denationalizing some industries. As these measures did not address the root cause of productivity, inflation rose sharply in 2003, 2008 and 2013, naturally cancelling out his policies and even producing the opposite of its intended effect. In addition, his social programs funnel the country’s oil dollars (productive capital) to the poor (not-so-productive capital), reducing their poverty but further increasing the demand for goods without increasing productivity proportionally in the short term. It remains to be seen whether Venezuela’s huge bet on its poor will pay off in the long term:

  • “In towns which are principally supported by the residence of a court, the poor are chiefly maintained by the spending of revenue. The inferior ranks are generally idle, dissolute, and poor as in Rome, Versailles, Compiegne, and Fontainebleu” (Wealth of Nations, Book 2, Chap.3)

Part 2: Solutions

Now that we have pinpointed the root cause to low productivity (low Industry) made worse by demand inflation and policies leading to price inflation (high Trade) we can create solutions that deal with those causes in a systematic manner, in Part 2.

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