Bloomberg subtly mangles its takedown of a big, failing chavista Co-Op

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iz_9x3LKhn0wAs Juan noted earlier, over on Bloomberg, Anatoly Kurmanaev takes the grand tour of the oversized, underused William Lara Agricultural Commune near Calabozo, in Guarico State,

The harvesters imported to overcome food shortages are gathering cobwebs near a burnt corn field in central Venezuela. A short distance away is the shell of a fertilizer plant and rows of empty red-roofed bungalows.

As I finish stories like this one – and by now, this kind of take-down of a hulking, grandiose, misplanned, maladministered chavista project is something of a journalistic genre in Venezuela – I often find myself struggling to put my finger a certain dissatisfaction. It’s hard to begrudge a guy like Anatoly the gumption it takes to haul on out there and report from the middle of the llanos, but I just think the analysis behind it is subtly but seriously garbled.

The blame for the failure of these initiatives is typically laid at the feet of some obvious planning blunder. In the case of the William Lara Commune the problem, we’re told, was with water: nobody had thought through that a massive agricultural concern like this one would use tons of water, and there isn’t enough on site to keep production going.

The tendency is to look for technical explanations like that. The economics of it all, if they’re mentioned at all, are treated as supporting characters and shunted to the end of the piece, as they are here. Just three grafs before signing out, Anatoly lets us know that “A decade of price controls on basic goods has exacerbated the situation.”

But treating price controls like this, as just one factor among many “exacerbating” the situation, is sort of like describing the death of Kurt Cobain by talking about his drug use, his sporadic homelessness, his bad nutrition, and then towards the end noting the way that gunshot wound to the head “exacerbated the situation.”

Giant chavista projects fail not because chavistas are hopeless at project planning. They fail because the prices are wrong, and when prices are wrong project managers are left without any good reason to fix the planning mistakes that are inevitable in any large-scale project, public or private.

Look at it this way: say the Venezuelan government had created an environment for high farm profitability. Say food imports were blocked with high tariffs, seed and fertilizer were subsidized and farmers were allowed to charge what they wanted for their produce. Say price signals were used to turn farming into a high-return activity in Venezuela. Are you seriously trying to tell me the 2 or 3 caciques in charge of William Lara Commune wouldn’t have figured out a way to solve the water problem then?

Of course they would have, whether that involved ponying up a few thousand dollars for some portable Honda diesel pumps  or digging a groundwater well or even a rainwater harvesting pond themselves. If water availability was the thing standing between them and a whole lot of money farming, they would’ve found a way.

Water availability is a red herring. It’s not that water is unavailable. It’s that producers respond to price signals, and what controlled prices tell them is “don’t bother fixing the water problem here.”

The commune structure itself is another red-herring. Sure, real socialist communes zap work incentives by creating hard-to-deal-with free rider problems, but this is Venezuela, where co-ops and communes are usually run by a handful (or even just one) well connected regime figures with the other comuneros working as all-but-acknowledged farm-hands. Where prices send a clear signal that says “do-this-activity-now”, even socialist state employees react like coked-up capitalist workaholics: is there anyone in Venezuela today who puts in longer work hours than a National Guardsman stationed in San Antonio del Táchira?

So let’s get is straight: William Lara didn’t fail because it was a commune. And it didn’t fail due to bad planning. The planning failed because the prices are wrong.

1 COMMENT

  1. Well, I think you are right failure was not due to water issues – which is something Llaneros know for thousand years already and something for which they started to developed some solutions over 50 years ago – but because of wrong prices…but then wrong prices are intrinsic to “central planning”, which you might consider as a word for “wrong prices”, but that’s a matter of terminology.
    Ultimately it was not the gun that fired itself but Kurt Cobain who pulled the trigger.

    If the national government left “comunas” or any other entity to decide about prices, their local planning would improve.

    The problem here is “central planning”, which always fails but is particularly destructive when the country is in reality dependent on imports from market-driven economies

  2. Its not just prices but a much ignored factor that people just assumme is always there , the knowhow and capacity of individuals and groups for doing things in an organized and effective way , motivation is important , character is important , prices are important but knowing how to make things happen ,how to do things i.e. functional COMPETENCE is a key element in any human endevour and its not just something you learn through books and schooling , its takes practice , experience , the accumulated collective learning and experience of the organization or team thats entrusted with a job.and does it well .

    We take practical knowhow and competence for granted and its really a rather scarce resource , the bigger the organization , the more complex the job, the more combined and concentrated knowhow you need to carry it through with a reasonable measure of success.

    In a market sytem you either have it or you go broke but in a state run system which privileges ideological loyalty and fervour and where the govt puts in all of the resources the probabily of getting an organized team of people with the requisite integrated knowhow is very low..

    We tend to overestimate the capacity of people for doing things, for being effective just because they are inspired by noble and beautiful ideals or are possesed of a nice character but that simply is very naive and unrealistic .

    In a market system COMPETENCE at doing things well both individually and as part of an organization is essential to economic survival so that its become part of the business culture ( in a competitive environment) , In a govt run system competence is less crucial because politics and bureaucratic criteria of success demands a different kind of capacity or gifts.

    The thing is that functional competence is not a universal trait of all people and of all groups , in actual fact its rather rare , so that we should price it more , pay it more attention .!!. worry more about having competent rather than merely nobly inspired goody goody people in charge of things.!!

    • well said. The human aspects behind the failures of so-called socialist experiments need to be examined.

      Ever notice that technological know-how and task-based merit are practically non-existent in these grandiose ideas that rarely if ever materialize successfully? What is more important is the mastery of ideological palaver, moreover if it confuses the lower rungs — wouldn’t want them competing with the upper caste. Noooo. How well one bamboozles is what determines mobility in socialist endeavours — assuming these even last.

      Ever notice, too, that in these endeavours few have the appropriate training for the task at hand? Not needed! If you can dream it, you can be it — poo-poo educational credentials! I/we know better! So add delusions to those human aspects behind the failures of ‘socialist’ experiments.

      All told, this model is a poor-man’s version of the motor needed to move an economy forward. And all Venezuelans have to pay the piper for these fantasy pirouettes.

    • Bill Blass,

      This is so true, and I would add that the ability to recognize competence in others might even be more important.I have observed this time and time again when I watched my eldest son start businesses.Knowing how to pick the right people who are competent in their particular fields is one of the keys.None of us have all the skills needed, and someone has to have the ability to recognize the right traits in others.Just recently he started a business that he postponed until he got just the right Web designer for the job, and partly because of that the business was an overnight success.

      Team work and the value of it is so important.

    • You can have competence in a public company or institution. You just have to take your function or project seriously and you have to be accountable and have some pressure.

      When the project you get assigned to is only taken because it makes good press for a while, and then it is impossible to fail because if you dont deliver the worst that can happen is that a NEW project/mission/whatever is called with great fanfare to solve the same issue while nobody is ever acknowledging any error or wrongdoing because that would be harmful to the “revolution”…

      They breed incompetence by several routes. Not recruiting the best professionals because they are ideological suspect. Not having any real cost for failure. Magical Socialist Thinking that if you put somebody that really really really really has the correct ideology passion they will overcome all obstacles instead of creating new ones due to being blind and prideful. The fact that half of the time all involved know the real reason of the project IS the corruption, small or big (This William Lara thing? It was done for Chávez to sign some stuff with Bielorussia and throw them some money. Mission accomplished). Etc…

    • Again, where serious incentives are at stake, chavistas magically turn competent: is there any organization in Venezuela more competently managed than the smuggling rings in Táchira and Zulia?

      • Francisco Toro,

        That’s because prices incorporate competence as one of the factors that affects them. Prices are a measure of efficiency, of costs, of systems, of related infrastructure, of values, of ethics, of demand, of supply, of fear, even, and then some. Price is the final measure of the value at which everything that the provider of a good or service considers makes the whole provision worth it, plus whatever bonus the provider thinks can be obtained above that. If it sells easily, the price goes up. If it is difficult to sell, the price goes down, but never below the “worth it” amount.

        You are absolutely right in your price is it assessment. Those attributing the failure to any aspect that free market price already incorporates forget or never figured out that the egg came before the chicken…

        • Oil is mostly sold at market price. So when the big bucks start to come in, what do we do? Well, let’s double our head count, how about giving some away. Oh, there’s so much money coming in, they won’t miss a buck or two. With all this money, let’s finance some misiones to make the boss and the revolution look good. So, I guess is not just market price. To me accountability has a lot to do with it, but to be accountable, one would need some freedom to do what is right and not just what revolutionary correct. To do what is right one needs knowledge and expertise. So I guess for a project to be successful one needs a combination of the above, and then some.

          • Charlie, I see several communication gaps, here.

            Firstly, oil is not being sold by Venezuela quite at market price. Consider Cuba reselling it.

            Secondly, you describe one of the key drawbacks of the petrostate model, the few with control over the oil and its revenue get tempted in so many ways that the oil is not spent as efficiently as a free market would spend it (e.g., if each citizen received their equal, daily portion of it, at will). By eliminating the petrostate model, the accountability issue dissipates. If the only money the government would get to spend is out of its taxation resulting from the success of the market, the government incentive would be to ensure the most successful market, which would imply a free, but competitive one, resulting in optimal pricing.

            Since the incentive would be to make the market successful, knowledge and expertise would increase in value, versus the current “enchufado” value. Knowledgeable and expert people would charge an appropriate market value for their services, a cost that would gets incorporated into the price of any good or service that uses their services.

            Basic economics of a free, competitive market: price ends up reflecting all the things you mention, and then some.

          • Charlie your comment is spot on , accountabilty is crucial for state run activities and that means looking at results from a apolitical economic or practical perspective , not just from the point of view of its ideological correctness . In private business the role of ‘accountant’ is taken by the market which very clearly lets you know whether your being competent at what you do or not ( excluding of course the effect of random external circumstances) . Prices and personal incentives are very important but they certainly dont tell the whole story , a certain measure of organizational adeptness is no less important than the other two factors. !!

          • bill bass, you are missing the point. In two competing businesses, the one with the better “accounting” will make a greater profit, thus the value of hiring accountable people, whose value will be higher than less accountable people and will be included in the final price of the good or service offered. The competence is *included* in the price.

          • I guess what I as trying to say es that no matter the business, the government will manage to screw it up because it’s allí about their agenda hidden under the ideology they procesos. That has happened and will continúe happening under allí por most socialista/comunista governments because there will never be accountability. They usted to say that if the Soviet Unión were to manage the Sahara desert, it would soon run out of sand. The sale applies to Venezuela

          • Ex Torres evidently your reading list is rather shallow and short , To understand what I mean by accountability please read what Fukuyama has to say about the term in ‘The Origins of Political Order ‘. ,Accountability is one of the pillars of the Modern State . It means having a system of checks and balances that makes public organizations have to face their failures and flaws and thus have a chance of correcting them . It cant be done from the inside , there must be an independent or outside source of vigilant appraisal ( a free press , rival political parties etc) which critically scrutinizes their performance and tells them what is wrong about their performance , not necessarily with an inimical spirit. bur recognizing that all human efforts are subject to mistakes and flaws which need correcting and that people are reluctant to recognized their own mistakes out of overweening pride.or political interest.

            When talking about business organizations who operate in a competitive market , the job of outside critical appraisal is normally done by the market which tells these organizations if there are things they are doing wrong..

            There are many circumstances however where a badly run operation or failed performance will not ellicit a critical appraisal ,because the accountability mechanism doesnt work for example a govt which has failed so miserably in its job as the one that rules Venezuela ought to have minimal popularity ratings and yet its manages through ‘smoke and mirrors’ media manipulation , playing to peoples grossest interests and passions and repression to retain a firm popularity rating of 30% and the waning additional support of some 20% of the population . Some business are awful but are monopolies or do things so that their failings are never made public until its too late etc. e.g. all those banks and financial institutions that both in Venezuela and on an international level have carried on their business in very imprudent or even corrupt ways and thus manage to charge big fees for their services and make huge profits . . . .

            Ex Torres Sometimes you appear to have a problem in really understanding other peoples messages , perhaps because you are too quick on the draw or carry a big baggage of formed opinions that stymie the accuracy of your readings. Please be more mindful of what you write about things you dont quite understand . I say this with all the respect due to you as an intelligent and well meaning person . Please dont be offended , because no offense is meant. I really appreciate the enthusiasm of your contributions !!

          • bill bass, thanks for the lesson.

            Allow me to point out that the post was about how price was the key to prevent cases like those mentioned in the post. Your original message implied, that “COMPETENCE” was the key. Francisco Toro countered your comment by restating that competence seemed to take care of itself when price is right by providing an example. My comment merely agreed with Quico’s post, and his comment to you. My reading was fine to that point.

            You did not reply to Quico, nor me. You replied to a comment to Charlie, bringing up Accountability, mixing it with Accountants in the market, and implying, again, that these terms were key, going hand in hand with competence, as “measure of organizational adeptness”. My reading, again, fine to that point.

            My reply to you, perhaps too short, indicated that the measure of organizational adeptness would be reflected in a proper price. Businesses with low accountability will fail for the reasons you have pointed out, while those whose accountability systems and competence are more advanced will fair better. Without a high enough price, however, they would not be able to afford those features; without a low enough price they would not be able to outsell competing businesses.

            Proper pricing in a free and competitive context leads to accountability and competence as a consequence. You seem to be sidestepping this argument, “perhaps because you are too quick on the draw or carry a big baggage of formed opinions that stymie the accuracy of your readings”. Oh, wait, that’s your lesson…

            Lesson learned.

          • Ex Torres, must commend your for taking the care to go over your words and recognize your mistakes , Of course I am not inmune from making mistakes which I assumme and try to correct as much as I can.

            Going further I dont think I disagree with Fco all that much . I also think that prices are important and that to the extent a decent incentive is given tor people engaged in some complex organizational or managerial tasks thats also important , except that I think that its naive to believe thats the whole story ,

            Through observation and experience inside some serious business organizations ive discovered that high incentives alone arent enough to make an individual functionally competent and that high profits and high prices alone are not enough to make organizations functionally competent , Take the example of Pdvsa , high oil prices and the many monetary incentives given its current managers havent made them any less incompetent that they always were. The cuasi medics the regime graduates in 3 years get paid more than the younger physicians that graduate after 7 tears from recognized universities , and yet that doesnt make the former as competent proffesionals as the latter.

            The secret to good results include ( not exclusively) having the capacity , the expertize , the knowhow both individually and as a group or organization to do things efficiently and competently , if you put a group of ninconcoops to run an organization and reward them with great incentives and external circumstances allow it a decent profit their disfunctional performance is ultimately going to cause their failure.

            That why you need acountability , a system that allow mistakes and blunders to be picked up and to be corrected by people from outside the organization operating incompentently ( people inside the organization will often turn a blind eye or even hide the incompetence to salvage their pride or to avoid having people withold it their business or political support ,, as applicable ) . Accountabilty of course is sometimes difficult to achieve and doesnt always protect people from the mistakes they make .

            My problem is with the way people ignore the importance that the functional competence of organizations and indiviuals has in shaping sattisfactory results and tend to feel that this factor doenst matter at all provided some idolized political or economical system or model is put in place. Competence is neither automatic nor universal but a scarce difficult to create resource and very important in order for things to actually work .

            To me a well run competent organization is worth more than a huge oil reservoir or mineral deposits , becaue competent organizations are just concentrated well integrated systems of expertise and knowhow and THATS the ultimate source of all wealth ( in this respect please find in U Tube a lecture by Ricardo Hausman on the ‘the Puzzle of Development ‘ and youll understand more of what I mean ).

            if we had a Harvard or Stanford university or MIT in Venezuela , and a Mitsubishi or a Shell company or a Civil Service such as they have in Singapore and they had the run of our education and economy how would we fare as a country ?? (observe that none of these organizations are run on populist (democratic) principles and some arent even designed to produce any profits.)

            Again respect for the market model and the prices and incentives it allows are essential but if you lack the organized knowhow and expertize that makes it all work you still are far away from achieving anything.!!

          • bill bass, I hope you realize that I have not disagreed with your points regarding the importance of competence (and accountability) in successful organizations. I agree with them. I will continue to agree. But the examples you give to diminish Francisco’s and my focus on price as key (in your latest comment, PDVSA) are not, as I pointed out in an earlier comment, in a free and/or competitive context. I put those forth as the two criteria that must be met for my stance on price to hold water. Any example that you wish to provide to raise the focus on something other than price would have to meet those two criteria before they will cause me lower my focus on price. I explained that this is because I see all those other aspects (e.g., expertise, know how, accountability, competence) as consequences of proper pricing in a free, competitive environment. You gave examples of universities as successful organizations; note how free they are to price and evolve, and how competitive their environments are.

          • sorry, cut off. You pose the hypothetcal of those suuccessful universities being owned or run by non related private industries. There are several angles to this. One angle is that it is perhaps precisely as a result of what Francisco and I are saying that those companies do not own or run those universities. Another angle is that if those companies ever chose to do so, it is my position that in a free and competitive environment they would do everything possible to run them just as well or better than they are run today. Failure to do so would mean there was no reason for it, so the incompetent people responsible would be out. I’ll counter your hypothetical with real world examples. Take a look at the holdings of a Procter & Gamble, or a Gillette, or most of the Fortune 500s, and tell me if a company that sells detergent can’t be a top seller of coffee, in the world.

          • Gosh Ex youve writing really really well , kudos !! Maybe your inspired by the need to explain yourself to someone whom you feel is challenging your belief in the ability of free and competetive markets to always produce prices that will inspire people operating in those markets to be competent because of the incentives such prices allow them to get. .

            I cancertainly agree with that except maybe for the ‘always’ as i believe circumstances may sometimes arise which allow an industry operating in a competitive and free market and with no price controls to fail because of the incompetence of those that run those industries.

            Im thinking ‘off the cuff’ of past incidents in the banking and finance industries. also of one very important international Computer company that was going broke unbeknownst to the world because of bad management even if they were operating in an open and free market with no price controls .

            Also remember before the Venezuelan bank crisis that brought down some 10 banks attending a presentation where a group of independent economists using econometric methods were able to predict out of some 20 banks, which would fail in a crisis and which wouldnt , A few months later all the banks they foretold would go broke went broke and of the other all but one survived , they were looking at management factors .

            I am always a bit reticent of believing in magic bullets and miracle formulas as infallible , the world is too complicated for that . !! I certainly dont believe that just paying people more for their work will necessarily turn an incomptent professional into a competent one , incentives help but they cant do miracles. However I am as convinced as your and fco are that market set prices in a free and competitive markets will allow for organizations that produce better results than those that work under controlled prices . Personally I must add I know of cases and companies in the US that work under controlled prices (under a common carrier regime or a public power generation and distribution regime ) and do quite nicely .

            Agree that Pdvsa was a bad example to make because even though most of its income comes from operating in a free and open export market with no price controls and the incentives their top management get are higher than most their problem is the result not only one of mangerial and organizational incompetence but of the way the regime mishandles its activities to further its political agenda.

            Thank you for the time and trouble in helping me understand your point of view. !!.

          • bill bass, thanks for your examples. I have issues with at least one of the two criteria in each of the cases. The banking and finance industry, in particular, is far from being considered a free and competitive market when governments are constantly controlling their main instruments. In fact, it was government interventions that caused the banks to start offering loans with greater leniency than is considered acceptable in any banking training course. It’s government interventions causing student loans in USA to be a greater bubble than mortgages ever were. It’s government intervention that is allowing Merril Lynch to find loophole ways for weasle governments like Venezuela’s to circumvent standard banking rules to exceed loan amounts. More generally, consider how much governments love to meddle with interest rates, especially through bonds.

            As to the Computer company example, that supports my argument. Mismanagement was leading it to bankruptcy. That’s what is supposed to happen, unless they correct their direction. Companies that don’t manage well, or don’t correct mismanagement, get weeded out. And those managers will should have a hard time finding a job in a free, competitive market.

            You’re wrong about my thinking that free and competitive markets are a magic bullet. They’re not. What I stand by is that *against anything else* they win in the long run. The success of these markets is akin to the success of the simple rules of evolution. The key, as humans, is to rise above the savage nature of evolution to allow for a capitalist system that has no poor. A free and competitive market, together with an unconditional bonus income, is the answer, not because it won’t be without its issues, but because no other proposal seems to offer fewer and/or lesser issues, not to mention that it’s an easy sell to win votes, while still being based on sound economics.

          • Ive found your explanations and defenses very enlightening and useful , so once again thank you .

            Regarding the bank and finance examples there is very respectable and hefty body of expert opinion that ,contrary to your view, sees the lack of regulatory oversight as the main cause of many of the ills and failures this industry has suffered in recent years . What i strongly suspect is that whatever the contributory role of the regulatory bodies in allowing the debacle to happen , corporate incompetence also had something to do with it .!!.

            While markets might weed out the incompetent organizations ( dont look on incompetence as merely something that affects individuals , it also affects organizations ) the prize paid whenever a company or a whole industry fails can be very harmful to a countrys economy and well being , sometimes markets arent so efficient at weeding out the incompetent in time to prevent those dreadful consequences from ocurring . sometimes intelligent state intervention helps avoid the worst consequences of those failures or even prevent them from happening.

            I see market as organic realities which human history have produced no differently form the way evolution has given us bodies that by and large work so well , and yet they sometimes fail and break down and have their bad moments which require medical intervention to set aright .

            People who oppose any kind of government intervention in the operation of markets seem to me the equivalent of those fanatically pious parents who let their children die because they want to use prayer to heal their illnesses or believe that blood transfussions are sinful !!

            Certainly you and francisco are too smart and sophisticated to think that the market model is a magic bullet , that its a panacea that can alone by itself produce an economy that serves the needs of human life in all its complexity . Market models whatever their many virtues are not guaranteed to always work perfectly , its has its limitations but on the whole no rational system of economic organization can dispense with it , Most of the worlds ‘socialist’ regimes have come to realize that markets are not to be destroyed but rather to be nurtured albeit with some restrictions which assure their political control over the countries they rule , this is now the case of China , of Vietnam , even Cuba appears to be slowly moving towards a market economy . Our Regime is perhaps one of the few hold outs in the world that doenst recognize this reality.

            Im afraid you appear to have missed the point I was trying to make with the references to the universities and world class companies , if your see the Hausman lecture it becomes obvious that given a market model ( he takes that as a given) It is the existence of concentrated well integrated accumulations of human expertise and knowhow, capable of doing or achieving things, what constitutes the source of all human wealth progress and wellbeing , an expertise and knowhow which to me is represented by the concept of Competence .!! Im not as skillful a writer as you are so my messages sometimes get fudged .

            Still thank you for your kind attention to my interventions !!

            . .

          • bill bass,

            Of course the banking fiasco has to do with incompetence. But the incompetence was not allowed to suffer the consequences of its incompetence.

            The point is that the incompetence existed because of the sudden government elimination of certain regulations which imposed certain accountability. These impositions make sense when the government is the one that insures the deposits, which was the case. Having the regulations lifted while keeping the federal insurance (and bailout policies) in place was almost an invitation to disaster.

            Let’s look at savings and loans. In banking, this is very basic: I try to get you to deposit money in my bank by offering to pay you back with interest, which I can only do if I can lend the money to someone else for an even greater interest that will cover my costs, your interest, and some profit, while still remaining competitive. An S&L bank can therefore be seen as merely serving as an intermediary for your lending the money to others while charging a commission. The same way you would not lend the money to someone who you thought could not pay you back, a bank should not either. That is why serious banks only lend to those who have sufficient collateral. A bank that takes greater risk needs to charge and pay higher interests to cover the higher costs of the higher percentage of failed loans.

            In a free and competitive banking market, banks that don’t do their numbers right (i.e., are incompetent), go under, as they should. As they should have. But the government stepped in. For years, government set up regulations and incentives that transferred some of the responsibility of competent banking to the government.

            Then, by suddenly removing some of the regulations for the political reason of getting a higher percentage of people receiving mortgages, banks became more about making money off of buying lousy loans from each other. It was ridiculous, from a theoretical banking perspective. So much so, that banks maintaining proper banking principles were not able to compete.

            Again, the same thing has been building up with student loans, to a worse extent. Students are getting loans with zero collateral, other than the ever iffier assumption that their work will pay it off, in the future. This is a bigger than mortgage bubble ready to burst.

            Going back to the main point, and reminding you that no one is claiming that there is a magic bullet, if banks are incompetent, then those banks should be allowed to go under like any other business, letting the more competent ones remain afloat. In evolution, it’s at all about preventing failed DNA from dying; it’s about preventing failed DNA from succeeding. Since society should not be as heartless as evolution, it should still be about preventing failed DNA from succeeding, but it should also preventing failed DNA from falling below the poverty line.

            Government regulation is back, but the more regulation, the less freedom and competition there is. It’s like Formula One forcing all teams to have the same model vehicle with all identical parts! Remove the regulation and the incompetent teams start doing worse, because suddenly they are not as good at choosing the better parts. As it should be.

            bill bass, I reiterate, I have not disagreed with you in the importance (/necessity) of competence. Your examples to prove the requirement of competence for success are wasted on me because you are preaching to the choir. My argument is that, by setting up a system in which competitors that are less competent are allowed to fail, the remaining competitors will be the competent ones. Price takes into account the cost of hiring competent people and letting them spend on whatever is necessary to remain competent. Companies that skimp on competence get weeded out, as they should.

          • bill bass, note the common root of the words competence, which you are pushing forth, and competition, which is the context in which I claim takes care of determining competence and weeding out incompetence.

          • I fully agree with you that competition is key in making markets work their magic , We both share a place in that choir , I also agree with Francisco that well crafted personal incentives are very important in motivating people to do their best . Usually wages are higher in private businesses which draws talent to those business that are more generous in their pay . In the singapore elite civil service, wages of succesful officials are tied to the wages they would earn in comparative position in a private business . that was also the policy in the old Pdvsa . What experience and observation however have taught me is that some people can have high salaries and yet lack the level of competence that a job requires of them . that competence in a challenging work environment is something difficult to develop , specially organization level competence which is more than the individual competence of those that belong to it . An orchestra of gifted soloists would sound awful , the ability to work together in a team , which pulls everyones performance upward is also part of competence , and that doenst grow on trees although that seems to be the general assumption

            The germans are very good at this , in their army greenhorn young officers are given good veteran master sargents to help them learn to command their plattoons . A good talented person if part of a dysfunctional organization will fail at his task . building a good competent organization is hard and chancy , specially were the tasks are complex and difficult and involve dealing with lots of uncertainties.

          • bill bass, I agree on all counts of your latest comment. But it does not counter what Quico and I mentioned about price. Before I refer to your orchestra example, however, let me note that when I speak of incentives you seem to think I only refer to salaries. That is not the case. Paying someone more does not teach them any new skills. Hiring people who are of greater value by getting them to want to take up the job usually includes a higher pay, but usually also includes offering the kind of environment in which they think they will flourish, and that implies that it will include all the criteria that you mention in your examples. No great orchestra musician will accept a job in an orchestra of all soloists. Regardless of pay. It would be torture for such a talent.

            The point to counter, if you still disagree, is that a proper price of a good or service will include the cost of the salary of the musician, and the cost of the salaries of other non soloist musicians, and the cost of a music hall where they all get to play well together, and the cost of having an audience come listen to them to show appreciation, and all other costs. Any orchestral organization that does not *competently* put together the orchestra and *properly price* it, will fail. But without a free and competitive environment, the organizers will lack the *incentive* to provide the best orchestra possible at the prices that the market can support. Note how the use of incentive is not about salary.

            In a government that receives most of its budget income from oil, the incentive is for that government to focus on the oil industry. To get a government to focus on market success, its income should be dependent on market success, the more exclusively the better.

            Remember, this whole discussion boils down to your unease with Quico and my boiling it all down to price. You have not managed to counter that yet. I have not disagreed with your emphasis on other aspects of success; I have only insisted that proper pricing in a free and competitive context includes those aspects. They are redundant to what Quico and I are pointing.

          • Glad we both agree on the general importance of right prices , a competitive market enviroment , good retribution and the need for organizational competence for an economy to achieve developed status and all it usually entails in terms of the welfare of the people who profit from it. Context may put a different premium on one or more of those factors and change the equation a bit but generally those factors are all key.

            Wonder how that translates into the business of politics and government where the market is the market of popularity which is gained not always by producing and selling a good product (through good govt performance ) but by advertising sometimes shody but showy products or creating emotional addictions that bring you the number of customers you need. . its about creating appetites and once you have enough people hooked peddling them with what you sell . Think of the snake oil salesmen and the great business they did .

            The nice victorian and gentlemanly brits of the late XIX century created a nice market for themselves by teaching the heathen chinese to enjoy the pleasures of opium , the incentives where great for those who did the marketing , the prices where very attractive although the results were not so good for those that got hooked into becoming opium consumers . Think of this as a metaphore for whats happening in Venezuela .

            . if you distribute free opium does that solve the problem ?? not good business for those that sell it at good prices , . Not sure the problem here is one of controlled prices or low incentives for those that play this market nor one of low competence at selling their product. !! its something else !! wonder what it is !!

          • bill bass,

            In a free and competitive market of goods and services, power is measured with money. In a democratic market of politics, power is measured in votes, which implies that popularity rules. What people call, negatively, populism is merely the use of money from one market to control the votes of the other market. In a petrostate, the cycle is self-perpetuating because the politicians use the votes from one market to control the money of the other market, too. (Consider that what I propose breaks that cycle by promising the money in present, so that it can no longer be used to buy votes in the future, but that’s another discussion.)

            Your example about snake oil salesmen is different. This example is non political. It deals strictly in the realm of the goods and services. As such, if consumers are satisfied (even if by being fooled) then the salesmen are fulfilling a valid market role. Consider the adrenaline rush that people feel when they watch a sport. Some athletes take advantage of the hook of sports and peddle the excitement to snake oil salesmen limits, for example WWF. Now, if society decides that making invalid claims about a product is not allowed, regulation is created to prevent snake oil salesmen from peddling their stuff. Fines and time away are the typical means for deterring and preventing undesirable behaviors. (I’ve mentioned in the past that I am a strong supporter of restitution and compensation for unlikely repeat behavior, as deterrents, whereas any limits of freedom should be reserved for likely repeat behaviors, as prevention, but that, too, is a whole other discussion.)

            Your example of opium is different to the issue of snake oil making false claims. In the case of opium, society has determined that it is harmful to its users. It takes the snake oil false claims to a whole other level of irresponsibility. But, like snake oil, opium need be addressed through regulation aimed at deterring and preventing. Distributing free oil merely kills the competitiveness in the market. You’re wrong about this not being one of controlled prices and low incentives. By distributing opium at a price of zero, that is the same as setting a controlled price of zero, but with no need for a police force to enforce it because a price of zero with good quality and good distribution would create a situation in which no other distributor would be able to compete. The low incentive to enter this market translates to all would-be competitors moving on to more profitable businesses.

            By the way, distributing free drugs would certainly solve the opium related killings on the streets, and the health issues regarding bad opium and unsanitary places of using, but the harmful effects of the opium would still exist, so that kind of solution is not considered acceptable. A creative solution which I support is distributing free opium at rehab clinics, in which users would have free opium in clinical settings for as long as they want, with a single condition: can’t leave until you are off of opium. This solves what is considered the number one problem of getting people to choose to quit, which is constant contact with people who are all promoting and are experts in rehabilitation, as opposed to exclusive contact with other users and pushers. But, this, too, is a whole other discussion.

            By the way, both examples, the snake oil and the opium, brings us back full circle to Quico’s example of how proper pricing does seem to produce competence in the market.

          • In the political market its not only money which is used to acquire or accumulate votes but speeches , lies , promises etc, things that give people emotional sattisfactions which are not just about money or purchasable goods . My reference to snake oil and opium is because the kind of things that people use to penetrate a political market using emotional inducements remind me of these products !! My own fantasy is some day people will give their votes to whoever gives them the best governemnt as measured by the welfare and opportunities and chances for personal development that gubernamental action allows them and to me the best government is one which knows how to do its job , in short the most competent ones .

            Competence is more common in the private business sector than in the public sector perhaps because the latter deals with these non measurable emotional gratifications to market its wares . sometimes very succesfully even if their performance as provider of government services or goods is very poor to awful. !!

            A sample of how things in the political market can get distorted is how the current regime which as imcompetent as can be still retains to me such scandalous level of popularity not just because of the clientelar use it makes of the govts money but because the dear departed leader gave many people a sense of emotional belonging that they still pine for .

            My take was never on prices or markets in the business sense , Ive had my share of experience working in these areas close range in some serious organizations and the flat simple tidy innocent picture you have of the ideal competitive and open market doesnt resemble the much more fuzzy, messy , variable , often chaotic way prices and markets behave when looked up close , the way they are so often manipulated and gamed to suit someones interests or predatory agenda . look for example at how the market was supposed to determine the libor rate .

            If for example you used the perfect open competitive market standard to determine what venezuelan manufactures should be purchased by Venezuelan organizations capable of accesing the international market ( as in the old days) almost the whole of the countries manufacturing business would be swept away by cheaper better quality imported products ( even if the exchange rate were to be set more rationally than currently is the case )

            Pricing dynamics is much more complex and dirty than people figure , you dont have one price , you have dozens of prices for the same product depending on when exactly the deal was made or the specific conditions of the moment or variable circumsntances of all kinds . the picture looks tidy but when you go inside the picture there are a lot of accidental variables affecting its oscillations and range.

            Markets cannot be guaranteed to be always rational nor can the prices it gives us be guaranteed to be always reasonable , the world is too complex and the human imagination is always finding ways of gaming a better result for themselves , the rest of the players be dammed. !!

            Just as human bodies are perfectly designed by nature to do all kind of wonderful things even if they are not inmmune from illnesses or conditions that make its operation less than perfect , markets are organically evolved phenomena which are structured to work logistical miracles but still they are not inmmune from failures and flaws and sometimes fall into proceses that make them disfunctional and in need of deep repair .

          • bill bass,

            I did not say that only money is used to acquire or accumulate votes. What I said meant that in a goods and services market, dollars are the currency, whereas in a democracy, votes are the currency. Of course, politicians will use any way possible to gain votes much like business folk will use any way possible to gain dollars. I only mentioned politicians using money as a means to gain votes because that is the case of a populist petrostate, that is, Venezuela, a place where most of the empty promises and false claims made by the politicians are being supported by oil revenue illusions. This does not blind me from seeing how much of the chavismo story is about pride, not just money, as you well point out.

            You bring back the term competence as a central one, yet you know my position: competence is incorporated into pricing in a goods and services market. In a political arena, not so much, merely because, the way democracy is set up, politicians are not as regulated in the way they get votes as business folk are regulated in the way they get dollars. The moment you have a politician with dollars, his hardly regulated means of getting votes goes turbo. Take those dollars to a petro quantity level and a politician goes rocket powered. Competence is not included into the currency of politics, unless politicians are both: properly strapped as well as with proper incentive.

            If politicians have no way to pay for their charm to reach everyone, or have no way to pay for the illusions they wish to create, the politicians have to actually produce results for word to get around and for their build over time. If the only way for politicians to have money is to *first* get the voters to succeed, then only the *competent* politicians will get voters to succeed, before they can win their votes. So, it *is* key to remove the currency of a goods and services market out of the political market, so that politicians get their incentives into the right channels and stop using dollars to get votes.

            All the promises and emotional garb directed at people’s pride will still be used. And some politicians will be more successful than others with it. But Lincoln was right about fools and the wear of time, so long as money is not in the equation. chavez would have gotten nowhere without the preexistence of a failed state caused by the petrostate. His words could not have offered any hope to anyone if they had not been hopeless to begin with. He would not have gotten as far, nor for so long had he not had the record high petrodollars, either.

            The same is true with advertising. Advertising also tries to reach an emotional level with its consumers to build loyalty. But there is rarely a level of advertising that can cause consumers of a quality good or service to convert completely to a lousy good or service. Only if there is no existing consumer base does that usually work. Note that chavez never relied on his charm; he heavily complemented by closing all channels to the opposition. He knew charm alone could not beat out against a competitor of more substance.

            I’ve been mentioning ideal markets merely as a way of making sure we are understanding the concepts equally. Of course markets can never be perfect markets. The key in those of us who support establishing free and competitive markets is that the more we approach the ideal end of the spectrum, the better things work. I shudder to think that what you are implying is that just because we can never reach a perfect market situation then we should stop making that the goal. I do like that you see markets as the complex systems that they are. I just hope you realize that it is precisely for that reason that we must get them to be as free and competitive as possible so that they best do what they do better than any other system. Control over markets is far above the competence of any small group of individuals. Thinking otherwise is like thinking that one can control a brain better than what the neurons can do themselves in a healthy well nurtured brain. Let the market do its thing; make government merely ensure its health and nurture. Populist charmers get weeded out if this is done, the way chavismo and corruption gets dissipated if the oil money ceases to be up for a power grab.

            I’m reminded of an old Native American question regarding praying: “You’re in communication with the Supreme Being, and you’re the one doing the talking?!” Give the oil money to the consumers, and let the market it do its thing; politicians will have to help people succeed to get their votes, because the only way to have the money to do anything else will be to help them succeed. That is self-sustaining.

          • Charlie, I agree. The basic problem of communism is that it only works with non humans. Anyone who has observed children knows that the communist mentality is not human nature. Communism requires to get everyone to accept their mentality, and that’s unrealistic.

            The funny thing is that communists seem to refuse to accept that the price, supply, and demand factors are not ideologically bound. That even in the harshest of communist implementations, these factors still apply, which is why corruption, mismanagement, and misappropriation all flourish in those contexts.

            The point about price is that by forcing a free and competitive market, the communists lose control, so they are left without the power to impose their religion. And let’s face it, it’s a religion, given that it requires everyone to adopt it for it to work. I laugh at communists trying to explain how the Cuban system requires that USA open its trading floodgates for their system to flourish. How chavismo is choking despite the record breaking income from oil, no less ironic. And all can be reduced to their not accepting that price is a measure, not a control mechanism. They need to let prices float, and, instead, manipulate the factors that affect free, competitive pricing. A free and competitive price is what will let them know if they are doing well. Of course, this would be against the communist premise, since it would accept that capitalism is the way to go.

            For this reason, I insist that a capitalism with zero poverty is the way to get converts away from communism. Their flagship is the poor. If we can offer a system of freedom, with zero poverty, communism loses its reason for existence. That’s what the opposition should be offering.

          • Totally suscribe to Ex torres comment on the communist blindness to some of the universals of human nature and the basic efficienty of open competing markets to allocate resources in an economy by determining the price of things .!! Of course markets dont always operate to maximum efficiency in all circumstances and sometimes become disfunctional needing a bit correction . The thing is being able to recognize those ocassional dysfunctions and the best most prudent way of dealing with them .!!

      • Some business are so good or for a while become so good from external circumstances that even people who are middling or indifferently competent but unscrupulous or commercially aggresive can make a hefty profit from what they do ,

        High profits are not always a sign of managerial or organizational competence but of artificially skewed circumstances or just plain good luck . . Corruption , drug trafficking , economic monopolies can allow people or organizations to make good money even if not specially competent .

        There are such things as profiteering , price gouging and predatory pricing which are viewed in civilized countries as unworthy of applause .

        This is a complex subject but I dont think that profit motivated cupidity or greed alone makes a person better equipped to run a business efficiently and with competence , In short , although external inducements can be helpful , under ordinary circumstances you need some degree of skill or capacity to do things with enough competence or efficiency to get acceptable results.!!

        • bill bass, you also seem to be missing the given: “free and competitive market”. All the examples you examples you put forth fail at one of those two criteria, or both.

  3. I understand what you say and it is true in many many aspects of life, but it is also good to show how incompetent they are in general at anything, because not everything is just pricing. The same “model” of planification (that is, announcing things for propaganda value while being absolutely not capable to deliver any kind of real plan , much less implement it, because in reality it was never about that but just the propaganda + corruption) is what they bring to bear in everything from politics to education to whatever they touch

  4. Add the price of labor into your analysis. The commune leaders and workers get paid the same if the farm falters or if it is highly successful. They have no incentive to make a profit.

    Of course, prices of everything in Venezuela are distorted. Gas is free but costs money to produce and distribute. Cars are expensive but can be bought outside Venezuela cheaper.
    International travel was cheap with CADIVI.

    Chavismo has been trying to void the law of supply and demand for 15 years but it is not in their ultra-flexible constitution.

  5. I thought the author was just reporting the typical sort of lame excuse, usually invented on the spot, for why projects like this fail. What has seriously declined since Chavez death is the quality of the lying that comes from the regime…and once again, a ‘no comment’ from the ministry in charge if lying!!…

  6. Btw the Governor of Guarico would know how to solve these ‘problems’, what with the large, successful finca he runs in Barinas…but that would be the ‘private sector’ we’re talking about…

  7. “Say price signals were used to turn farming into a high-return activity in Venezuela. Are you seriously trying to tell me the 2 or 3 caciques in charge of William Lara Commune wouldn’t have figured out a way to solve the water problem then?”

    Well, OK, …maybe. But just imagine that there were ‘profits’ to be had at said commune, where and to whom would these new ‘excess’ dollars flow to? Not the laborers, to be sure. My guess would be toward a new condominium in Miami or stuffed in a briefcase going through the back door of a bank in Vaduz, Liechtenstein.

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