The roadmap, part V: One order of markets, but hold the dogma

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    QUinta Crespo(A few years ago, a group of academics and practitioners got together and looked at the types of policies that most countries with high growth experiences had implemented. Their results, published in “The Growth Report,” are as close to a recipe book on growth as you’re going to find.

    This is the fifth part in a series of essays exploring the common policy choices made by high-growth countries, and what Venezuela needs to do to implement them. The motivation for the series can be found here. In Part II, I tackled the importance of inserting Venezuela into the global economy. In Part III, Quico discussed getting the macroeconomic fundamentals right. In Part IV, we highlighted the importance of having a financial system that fosters savings and investment.

    The policy we deal with now is how to let the market tell us what we have a comparative advantage in.)

    Take a stroll to your nearest produce market – Quinta Crespo, Las Pulgas, La Vega, La Boquería, Marché Jean Talon, Zabar’s, whichever one is closest. What do you see?

    You probably see a lot of stuff. You see transactions, prices, shoppers. There is also a lot of stuff you don’t see – the stuff that people simply don’t purchase at produce markets. For example, you probably won’t see sales of luxury villas, or heavy machinery, or cruise ships.

    The reason is that people who go to these markets are not looking to purchase a trip on a cruise ship, or a piece of heavy equipment. They don’t value those things enough to pay for them … at least in those places they don’t. In other words, the value of these things to the sellers exceeds the value the purchasers are willing to buy them at, and when that happens, transactions usually do not take place on their own.

    Markets are providers of information – they tell you what you are good at selling, and what you shouldn’t be selling. Having workable markets for your products is an essential component to development – without them, you simply end up producing junk.

    During the 1960s and 70s, Venezuelan policy makers mirrored what everybody else in the rest of the world was doing: sheltering the home market via high tariffs, fixing prices, and creating artificial industries that provided the local market with everything from cars to steel beams. By isolating our countries from market forces, we were growing industry alright, just not an industry that could survive on its own. The market – the real one, that is, the international one – was not there to provide us with discipline, to tell us whether or not we should be producing cars and steel beams.

    A lot of people hear the word “market” and they think of ideology. Either you’re “pro-market,” which in the words of the current government in Venezuela means you probably eat infants for breakfast, or you’re “anti-market.” The whole debate on “markets” has become so politicized, it obscures the best thing that markets provide: information about what you’re good at. That is one of the many things that years of chavista innoculation have taken away from us, the very notion of discovering what we should be doing.

    Of course markets on their own cannot succeed. You need something else, a key component: property rights. Everybody who goes to a market must be confident that the rights of all will be respected: the cash in my hand, the credit card in my wallet, the tomato in my stall – unless everyone knows what belongs to whom, markets will not flourish.

    The most succesful countries in the world have learned what they are good at thanks to the market. How exactly have they done it? Well, it varies. To quote “The Growth Report”,

    “Countries varied in the strength and clarity of their property rights. But in all cases, firms and entrepreneurs felt they had enough of a claim on their assets to invest heavily in them.

    In Hong Kong, China, the administration was famously laissez faire. Other governments in our list were more hands-on, intervening with tax breaks, subsidized credit, directed lending and other such measures. These interventions may have helped them to discover their comparative advantage – revealing how best to deploy their endowments of labor and capital. But they did not defy their comparative advantage, as Justin Yifu Lin, the chief economist of the World Bank, has put it. This distinction is conceptually subtle, but economically consequential.”

    Now, if you’re dogmatic about this, you’re probably thinking I’m going to suggest free markets for everything. The problem is that this approach rarely works.

    Markets provide information on what you’re good at, but sometimes they are not good at doing that. The problem they face is externalities.

    When a country has never manufactured something before, it doesn’t know it is good at that economic activity. If an entrepreneur blazes a trail and begins to succeed in it, this person is providing an important externality. Pioneers in markets are informing the country what they can succeed in, what “comparative advantages” the country has. (Ricardo Hausmann and Dani Rodrik have a nice paper on this “process of self discovery.”)

    As it happens, new industries are riddled with externalities. They are also plagued with coordination failures. For example, nobody studies to become a software engineer in Curiepe because there are no software firms there, and there are no software firms there, in part, because there are no software engineers. As it happens, Curiepe could be an ideal place for software companies, and yet the market simply doesn’t make it happen, because it can’t solve this coordination failure on its own.

    What I’m trying to get at is, yes, Venezuela needs markets, but markets alone won’t lead us to development.

    The Asian experience should provide for a healthy skepticism about the faith in markets, one that should prompt us to re-think the role of the State in promoting different industries without isolating these industries from market forces. In other words, help out different industries, and see if they succeed in the international market place. Give them a nudge at the beginning, and if the market says we shouldn’t compete in that industry, pull the plug.

    So yes, free up local prices and open up our borders to international trade. Let the forces of the market flourish in Venezuela, but don’t overdo it. The market should not be a dogma, it should be a tool.

    The market is essential to let us know what we’re good at. But, sometimes, you need a little bit of help getting to it in order to find out.

    1 COMMENT

    1. The market has given us a very clear path: drill a hole in the ground, pump out a dark gooey substance and sell it for ten times what it costs to extract it. We are so pathetic that all we need to do is increase the production and we would probably be able to afford even more populism, the problem is that it is hard work…

    2. “For example, nobody studies to become a software engineer in Curiepe because there are no software firms there, ” Really?! No other reason comes to mind?

      “As it happens, Curiepe could be an ideal place for software companies, and yet the market simply doesn’t make it happen, because it can’t solve this coordination failure on its own.” Really?! No other reason comes to mind? Or perhaps the possibility that it could solve the failure, but it had reasons not to choose Curiepe?

      • I think he was been metaforic.

        In the supposed case Curiepe had comparative advantages thet made it a good place for the software engineering.

        • mosquito, so is my question: for any place that does not have software companies, there can be countless reasons for their not being there, yet the post points to it being “because [the market] can’t solve this coordination failure on its own.”

    3. I think the critical pivot is finding where there’s just enough intervention without overly distorting the market feedback. Having dealt with Chinese SOEs, I think they are still getting close, but are far enough out that their champions couldn’t function without massive subsidies. Arguably, Venezuela has a looooooooooong way to go before it ever gets to that point one way or the other, but still…

      That and oil will pollute everything for the foreseeable future.

      Aside from removing the ridiculous degree of regulation (if even remotely possible) the best possible thing that Venezuela could do to promote business investment and development, both domestically and through FDI, would likely be heavy government investment in that ole public good known as infrastructure. Something where literally everyone could come out a winner.

      Venezuela has several opportunities, but a lack of infrastructure will more or less doom most of them. I suppose if an extractive economy is the only comparative advantage that is desired, then what it has now will work. But the building blocks of joining a future high tech global economy require fundamental building blocks that are either rotting or non-existent in today’s Venezuela. Imagine a Cupertino-level fiber optic ring paid for in oil revenues in Curiepe compared to ISDN equivalent speeds now. Bet you’d get local developers all frothy and moist over that.

      • Yes, one of the grand ironies is, after all this time, this ostensibly socialist regime has put the country in a position where it needs to spend a mountain of resources on public goods like infrastructure. They can build shopping malls almost overnight, these boli-revolutionaries, but something like a simple bridge? Fix a pothole? It requires a *revolution within a revolution*, and it still doesn’t happen.

        • That is one of the most profoundly frustrating things about Venezuela for me whenever we are there. Yes, crime is rampant. Yes, the economy is collapsing. Yes, shortages are profound. But, sweet jeebus, how hard is it to build basic infrastructure such as functioning roads and bridges, electricity and water/sewage systems.

          Tackle that, and it will be easier to attend to some of the others. Plus the boon to businesses will start the ball rolling in other avenues.

          But, no, money to corrupt and unaccountable programs, ministries and “the process” is so much more important. And the people who believe the most in the revolution, the truly ideological chavistas, remain impoverished.

    4. Wonderful piece Juan , congratulations , very balanced and insightful , also concise and clear . Wish I could have had you as a professor in my younger years !!

    5. Communists are megalomaniacs who seek to control everything. Since Venezuela has decided to morph into Cuba, there isn’t much hope and the oil money can’t sustain them forever, since they have done irreparable harm to PDVSA. Enjoy standing in line for 3 hours for a loaf of bread, and hopefully you can find a casket when your child gets shot dead in socialist paradise. You better hope the evil gringos you hate keep buying oil or you will really starve.

    6. This is the kind of posts that for me are quite insightful, well thought and interesting, and at the same time, very depressing!!

      Why?

      Because there is absolutely no hope these ideas will be implemented in Venezuela any time soon. We have absolutely no power to change things. What’s the point of these posts? To dream about how a new government could do things better? Sorry buddy, it ain’t gonna happen. Chavismo is here to stay for a very, very long while, and there is no way it will ever listen to you, or anyone with similar ideas.

      When I read this kind of things, I feel like a slave in Mississippi in the 18 century discussing about how to run a slave-free plantation successfully.

    7. You can’t have it both ways in sometimes posting regarding the evils of price controls based mainly on how they screw up natural market effects, then other times posting support for market subsidies pretending they don’t screw up market effects. Subsidies are simply another form of price control, so are “special” taxes, and tax “breaks”.

      You also can’t have it both ways in sometimes posting regarding the lousy business managing of politicians, then other times posting in support of political market intervention as if you were a business expert who, for example, would know better where to set up software development shops. The way to do it is to sell the idea of Curiepe to those in the business, but let them decide if it is in fact the best place, no subsidies. Governments should provide information, not intervention, to markets. If the government butts in, it should be to take over because it’s an activity that does not belong in the market; it should not play market. Otherwise what you get is politicians and economists playing entrepreneurs with public monies.

      • This is absolute hogwash. Of course you can have an activist industrial policy as well as markets. Of course you can criticize price controls while at the same time advocate for a smart state intervention in the markets. These dogmatic, black-and-white approaches are really unhelpful, and are not part of mainstream economic thinking.

        • Letting someone believe in good witches opens the door to them believing in the scary ones. Same with market controls. You can’t have only the good controls and not expect the bad ones to exist. This has got to be the first time someone accuses a ying/yang philosophy of being dogmatically black and white instead of the advanced view of complex, chaotic systems that it is.

          What is dogmatic is your position that governments must intervene via market controls. Why cannot you envision government policies that achieve the very same developments without having government officials making business decisions? Is it the Lord of the Rings syndrome: so long as you get to decide the greys and where the lines are crossed into the “too dark” or “good light” then it’s fine?

          Do you hear yourself? Are you really betting on one of the candidates available to get to lead this nation in “smart state intervention”?

          That kind of consulting advice is what is a really unhelpful approach to Venezuela’s reality.

        • By the way, JCN, do you consider the externality of helping one industry flourish as it affects negatively other industries? For example, you develop local solar power, thus stunting the growth of wind power, which may have become naturally a world leader, but because of the intervention made it all the tougher for wind power to develop. Also, these “smart interventions” are quite similar to subsidies that when they are gone may render the location less than ideal (I’m reminded of Atlantic City casinos going bankrupt).

          There are some rules of market interventions that are not dogmatic, but quite simply best practices. Price controls, exchange rate controls, subsidies at the non consumer level, etc., they are in general a no-no. I have no problem in dealing with exceptions so long as we frame them as such. It’s your dogmatic claim that this is *the* way to go that I have a hard time accepting, especially coming from you who have so often seemed to understand the value of the inherent information of prices in free. competitive markets. Anything that messes with that information will necessarily suffer for the distorted information.

      • I think you are completely missing the point of this post. Read again the following paragraph:

        “The Asian experience should provide for a healthy skepticism about the faith in markets, one that should prompt us to re-think the role of the State in PROMOTING DIFFERENT INDUSTRIES WITHOUT ISOLATING THESE INDUSTRIES FROM MARKET FORCES. In other words, help out different industries, and see if they succeed in the international market place. Give them a nudge at the beginning, and if the market says we shouldn’t compete in that industry, pull the plug.”

        • Getashrink, OK, let’s read it piecemeal.

          The first part of the first sentence, what part of the Asian experience should make us skeptical of markets? Just because they had successes by intervening the markets does not mean they couldn’t have achieved success without intervening the markets, nor does it mean it couldn’t have been done even more successfully without intervening the markets. As I have pointed out before, correlation never establishes causation. Correlation between intervention and success does not establish cause, let alone eliminate alternatives from equivalent or even better results.

          The second part of the first sentence, “PROMOTING DIFFERENT INDUSTRIES WITHOUT ISOLATING THESE INDUSTRIES FROM MARKET FORCES.” Sounds great, but when you implement in a corrupt petro-state, the devil is in the details: the incentives are for the government to push for industries in which they can make personal gain, and for the market to find a way to get a piece of the money tree, which will include pressures to eliminate competitors and whistle blowers.

          The second and last sentences points to the path, which in other words means, the government plays business entrepreneurs, deciding which industries they would like to try or bet on, and if they fail, well, pull the plug. Really?! With public monies? Why not let business people know that as a government you are interested in developing those industries and find out why they are not choosing to develop them in Venezuela. *If* any of the reasons are policy or infrastructure reasons, *then* the government can help remove those obstacles, but it should *not* partake in the business. Or do you have *any* reason to have a system in which politicians chosen by people who never looked at the resumés of the politicians, should be meddling in business and pretending this is the *optimal* way to develop a nation’s industries.

          It boils down to this: How can you support the claim that such a flaw in the selection of decision makers leads to the best possible decisions? I have to remind you that for every success story using intervention, there are thousands of failures. Sin ir muy lejos, look at all the half-baked businesses chavez thought would succeed. You’re suggesting the same, but with someone “smarter”? How about giving the Venezuelan experience a little more weight before trying to convince anyone about the Asian, or Norwegian, or some other experience?

          • I will concentrate on your last paragraph because, as you said, “it boils down to this:

            How can you support the claim that such a flaw in the selection of decision makers leads to the best possible decisions? I have to remind you that for every success story using intervention, there are thousands of failures. Sin ir muy lejos, look at all the half-baked businesses chavez thought would succeed. You’re suggesting the same, but with someone “smarter”? How about giving the Venezuelan experience a little more weight before trying to convince anyone about the Asian, or Norwegian, or some other experience?”

            I’m giving the Venezuelan, Asian and Norwegian experience exactly the weight they deserve. Venezuelan have done interventions in a certain way, it doesn’t work, the lesson? Don’t do it that way. The Asians have done it in a very different way, and it has worked, so why not try that one? This is all I’m saying, and what I believe Juan Nagel is saying.

            Your logic is fallacious. You say “for every success story using intervention, there are thousands of failures”, but from there you cannot conclude that interventions should never be tried. An open minded (i.e., non-dogmatic) person would analyze each case and try to find out what the successful ones did different. Suppose out of a thousand interventions 980 come out wrong, and only 20 come out right. From that you cannot say “See? Just 20 out of 1000, the chances of success are only 2%”. That would be the case if all interventions were similar, but if the 20 successful interventions were done in a radically different way, maybe it is worth trying that approach.

            A fallacious reasoning analogous to yours would be this one: “For every medication that cures a given disease, there are thousands that don’t cure it. Conclusion: don’t use medicines”.

            See the fallacy?

            • Getashrink,

              1) I did not say the lesson in the Venezuelan experience is “it doesn’t work.” I merely pointed out that for any success there are countless failures, then pointed to the failed half-baked businesses of chavez. I could have pointed out to intervention successes of Venezuela, but I that wasn’t the point.

              Why not try the different Asian way? Again, because you have not provided reasons as to why they would work in Venezuela, other than they worked in Asia. I pointed out some of the premises on which the Asian ways depend that are not applicable in Venezuela, therefore reasons for skepticism in that they would work in Asia, namely the corrupt, inefficient petro-state starting point of Venezuela.

              2) My logic was not fallacious because I did *not* conclude that interventions should never be tried. I merely pointed out the ratio of success:failure so that JCN and you would stop using the logic that because of the successes we should try them. That there were successes is not reason enough, especially in light of all the failures. My reasons for avoiding interventions have to do with principles not with inadequate sampling as you and JCN seem to want to use as support.

              I have analyzed many of the cases and not one has shaken the foundations of the principles on which I base myself to continue to suggest that we avoid interventions. It’s me asking you to present the principles on which you think the successes of Asia are based that would all but guarantee a success in Venezuela, yet you only point to the fact that they succeeded as a basis for attempting them.

              Not once have I insinuated that the ratio in any way translates to a probability formula, so spare me the strawman argument regarding medicine.

              My original comment against the intervention pointed to the very argument presented by JCN that there was important value in the information contained in free, competitive market pricing. I pointed out that interventions inevitably muddle up that very information, so it’s him who would need to provide support going against the very principle he presented, with which I agree. I also stated that, non dogmatically, I am fine with exceptions so long as we don’t lose sight of the guiding principle. The dogma seems to come from those who want to shove the intervention idea down our throats.

              See the fallacy?

            • “2) My logic was not fallacious because I did *not* conclude that interventions should never be tried.”

              Yes you did. You said in your original post that started this thread:

              “Governments should provide information, not intervention, to markets. If the government butts in, it should be to take over because it’s an activity that does not belong in the market; it should not play market.”

              I’m a very busy person, so if you are going to deny things you’ve said previously, I think I’ll rather stop here.

    8. Hahahaha!! I love the fact that JC repeatedly reminds his readers that he is not being dogmatic about markets…. while being entirely dogmatic about markets throughout the whole piece.

      What you fail to understand, JC, is that your whole understanding of how markets work is based upon the market experience in first-world developed capitalist countries. Markets function very differently in third world countries, for a variety of reasons that have to do with a very unproductive primary sector, and the resulting weak domestic market which inhibits the functioning of market discipline.

      What you have missed entirely is that markets function quite differently when there is a LACK of market discipline. You can expand market forces as much as you want, but where there is a lack of market discipline the results will be negligible. This is the problem in a country like Venezuela.

      • In case it wasn’t clear, by “markets” I’m also talking about international markets. Is there no market discipline in international export markets?

        • But most Venezuelan production isn’t oriented towards international export markets, and there is little to force them to orient production that way. In other words, that form of market discipline is also fairly negligible.

            • Uh, yeah, so expanding market forces isn’t the solution. I’m glad we agree. What you need to focus on is why Venezuela has such a weak internal market that inhibits competition and investment in industry.

            • Yes, much easier to just say never mind…. I wouldn’t want you to actually have to, you know, defend the ideas you present here.

              Opening the internal market to international competition does not produce market discipline in small markets like Venezuela because local capital usually concentrates in sectors that are relatively protected from outside competitors either because transport costs are too high to make imports competitive, or because the local market is unique to foreign markets, or because the local producers also control distribution networks, or because they are service industries which cannot be affected by imports.

              It is easy to blather on about the virtues of markets and needing more market forces. Understanding how these things actually work in the real world is very hard.

            • That’s what he needs to focus on?

              Why not ask him to focus on why there’s so much light outside for 12 or so hours out of the day?

          • No, the biggest chunk of Venezuela’s production is intended for the international market. Of one single product.

            Betty, you are seeing only a small piece of the problem. Indeed, the way that peripheral economies function are not the same as how the function in developed capitalist states. The problem is sustained by the lack of value given to what peripheral nations produce. The state becomes a landlord designed to manage rents and exploits of the land.

            I strongly recommend that you read The Magical State:

            http://www.amazon.com/The-Magical-State-Modernity-Venezuela/dp/0226116026/ref=sr_1_1?ie=UTF8&qid=1408648501&sr=8-1&keywords=coronil

            It is also available in spanish.

            • The value add from intermediary processes is where jobs and economic development comes from. Extractive/resource economies are always cursed with never being adequately incentivized (going to one of Mr. Nagel’s other posts) to change sufficiently to develop into a manufacturing (or middle income) economy (cf China) and then later transform into a developed mixed or service based economy.

              There is nothing in Venezuela at this time that promotes any of that currently. The curse of the devil’s excrement.

            • In 1998 barely 40.000 Pdvsa workers were sufficient to produce, refine , market 3.4 million barrels of oil a day . add 10.000 more which produced the iron ore and other mining exports of that year and you get a total of 50.000 people employed by the extractive industries . Hardly a dent in the total figure of employed people in Venezuela , and yet there were dozens of other businesses and activities which indirectly fed on the work produced by the extractive industries to sustain the rest of the economy .

              Maybe there were other important activities in Venezuela but if you took out the chunk of what the extractive industries produced in Venezuela , the country was left with very little to go on .

              The extractive industries can help an economy get ahead but you need other industries to develop outside the sphere of the extractive industries for the economy to really acquire sustainability .

              When oil prices first fell the economy of Texas was devastated , some years later oil prices picked up, meantime Texas learned to develop other industries unconnected with oil so that when the second drop in prices ocurred later the Texan economy felt the bump but didnt stall instead it kept going fueled by the other industries it had by then acquired .!!

              If we had a different kind of political and economic model we might be able to achieve something like the diversified resilient economy that Texas managed to create after the first fall in oil prices . Maybe thats an experience worthy of study .

            • Nice try Rodrigo. Too bad you didn’t understand the book you are recommending.

              By the way, oil is not the majority of Venezuelan production. It only makes up about 25 percent of GDP. Let’s not get confused here okay?

              Coronil’s book is essentially a dependentista explanation for underdevelopment in Venezuela. It starts from the premise that Venezuela was “assigned” a certain position in the international division of labor, and that this is at the root of the explanation for its relative underdevelopment. I don’t think you endorse this idea, so I’m wondering why you recommend this book?

              You say that there is a “lack of value given to what peripheral nations produce”… but you don’t explain why. Is it some sort of conspiracy theory? And, by the way, last I checked oil was worth quite a bit!

            • Venezuela has been blessed (cursed?) with natural resources. The institutions to develop such resources date from the Gomez era (which according to Coronil is the culprit to our underdevelopment).

              There is no conspiracy theory on why we don’t create further value, even with the natural resources we have. It is a combination of externalities and lack of internal capabilities.

              Coronil’s book is way more that an dependentista explanation. It portrays how our rent-managing institutions have shaped state, society and mind sets.

            • Starting your analysis of Venezuelan underdevelopment with the discovery of natural resources is extremely short-sighted. Venezuela was MUCH poorer before oil. What was the cause back then? Coffee? The neighboring countries around Venezuela do not have oil suffer from the same level of underdevelopment, many of them much worse. Even the most basic observation should tell you that oil is not the causal mechanism here.

              Saying that it is “a combination of externalities and lack of internal capabilities” is extremely vague, and doesn’t actually explain anything. It sounds like you are leaning toward a culturalist, racist explanation like Francisco Toro and others around here. Not only is that complete garbage, but it is intellectually lazy.

              Coronil’s book is great. Don’t get me wrong. But it doesn’t explain Venezuelan underdevelopment. When you really analyze his argument at its core, the explanation for underdevelopment is dependentista nonsense about integration into the “global division of labor and nature” (Check out pages 29-32). In the end he is unable to explain why Venezuela came to depend on oil, nor can he explain why market imperatives do not function the same in third world countries. He says “rent capture conditions the organization of economic activities” but he can’t explain why this is the case in Venezuela and not in resource abundant countries in the North.

            • Like you said… it is all very complex… and not in 1000 words I could elaborate, thus I recommended the book. Your comments are just as vague. In fact, it is so complex that I really don’t know but I am looking to learn. Your comments only offered a empty criticism but not a real meaningful contribution.

              I differ with you that you can reduce coronil’s analysis to that. But I guess each person takes what it wants a leave everything else behind.

              I think, and I would like to be proved wrong, that no one really understands the length of the institutional/cultural/economic clusterfuck Venezuela is today and what the true blockades for modernity are.

            • Uh, I never said “its all very complex”… But at least you admit that you don’t understand the very thing that you pretended to know something about.

      • I think of market as a very primitive notion, there is no discipline, that’s why some talk about the “market invisible hand”.

        That’s what infuriate Marxists.

        • Haha!! Uh… the invisible hand IS market discipline. And Marx explained how market discipline works better than anyone. Ever heard of a book he wrote called Capital? What do you think that book is about?

          • Yes i’ve heard about Marx’s “The Capital” but i have not read it i don’t think i will, i understand it’s a very dense book, it’s such that our “socialists” leaders haven’t read it eather.

            Sorry, i didn’t know that you meant as “market discipline” was a definition for the “market’s invisible hand”

          • “And Marx explained how market discipline works better than anyone. ”

            Absolutely. He understood them as well as anyone in his time. It was just his proposed solutions to the ills of the free market that ended up being wrong.

            • Uh, he understood them better than anyone in his time, which is why his book about the laws of capital made him so famous.

              As for his proposed solutions, Marx never said much about what the solution should look like. This is a common misconception from people who have never read anything by Marx. He spent most of his time analyzing capitalism, and said almost nothing about what socialism should look like. He believed that it was up to the workers to build socialism according to the concrete conditions around them. The fact that a lot of people claimed to be building societies based on his theories has nothing to do with what Marx himself actually believed.

            • Betty is absolutely correct , Marx spent little time trying to sort out how a communist society might function , his main concern was attacking the contradictions of the capitalism of his day . He said ‘who I am to tell the cooks of tomorrow how they should cook their meals’ , thats a common misconception that he gave any recipe of how communism was to be built , Thus there are dozens of ways in which communism can be built , the russian soviet model being just one among many . All we know is that all historical attempts at buidling a communist society have failed , and that meantime capitalism has developed and ramified into dozen of different versions some of which have been extraordinarily succesful at bringing forth a state of general welfare and development for those living under it . His notion of human nature ( which he said didnt exist because men could be made into anything by their social circumstances) has definitely proven false according to the studies of modern day pyschologists. He was one very deep thinker but perhaps temperamentally too visceral and contrarian to make a really good scientist.!!

    9. Competition is what makes markets a machine for creating wealth and welfare ( with some selective nudging by Govts ) absent competition then you need some kind of regulation to avoid abuses . There are all kinds of situations where there can be no competition , where the market will naturally give rise to monopolies , for example if you build a power line from point A to point B , the needs of B may not economically justify two power lies to be built so your are stuck with a monopoly , What do they do in the Us when that happens , the power line is designated a common carrier ,, cant refuse to carry anyones electricity but then the fare for carrying it is regulated so that it allows an efficient operation to cover its costs and recieve a discreet but steady profit . Any additional profit must come from being more efficient at operating the line . This is not unreasonable .

      Sometimes what limits competition ( without entirely supressing it ) is the small scale of the market being served , casepoint Venezuela , so it can happen that a few companies share a market applying some mututally ‘understood’ pricing condition and exploit it raking in perhaps more profits than they would obtain in fully competitive market situation . There are two solutions to this , either you create price controls or you open the market to wide open or controlled foreing competition .

      The problem with price controls even when they are convenient is that when a govt is not good at managing a rational system of price controls and instead abuses its power to exercise price controls or regulations as means of ‘buying popularity on the cheap’ , in a demagogic way making the business of suplying that market un economic or incapable of growth then as the saying goes the ‘medicine is worse than the disease’ . This precisely has been the situation in Venezuela where price controls are exercised punitively agains businesses to gain the favour of consumers and users .

      The other issue has to do with having private businesses replaced by govt owned businesses which are very badly run and incurr in a lot of waste whilst generating much corruption . If the alternative is between a dysfunctional govt run operation with cheap prices and an efficient well run private operation which overcharges a bit then maybe most people would prefer the latter .!!

      The problem is not with controls or regulation but with the corrupt political motives and wasteful and inept way in which they are exercised by some govts whose only priority is to make themselves popular to retain their hold on power . !!

      • Competition as a concept considered central to the function of a capitalist society I think gets too much attention, not that it is not important, just that it confuses chicken and egg issues and exposes capitalism to unwarranted criticism due to a comparison of capitalism with Darwinian ideas about natural selection and the like. In fact, if you look at Darwinism you begin to understand that although competition is important, it is not the only or most important element. Another element, VARIATION, is just or more important, and that is where, for instance, government intervention can play a role, by lowering the barrier for innovation and market entry. The most important effect of the competition in my opinion is to keep prices under control, without need for a central authority. If chavistas understood this we would be a long way toward getting out of the current crisis.

        • Thanks Gro for bringing in the Variation factor , of course competition can also spur innovation , as much as lack of it makes economic agents complaisant and non innovative. You are right of course in viewing govt policy as capable of fostering innovation and thus economic growth in certain circumstances and contrariwise in stiffling innovation in others. What is most remarkable is that if we look at innovation it is much more prevalent in competitive market economies than in state run ones .. The State can obviously help innovation by embarking on programs that have no direct economic benefit ( the US space program for instance) but which create new technologies which market agents can then transform into new businesses.

          The interelation between innovation and competition is certainly a complex one, and yet its difficult to see innovation as something which can readily happen absent a competitive market economy . Look at how few important inventions were made in the soviet system during the long period of its existence .

          Im not sure that I understand the Darwinian model as necessarily involving competition among species , Often several living beings unknowingly cooperate with each other for their respective survivals. insects and plants for example . The preyed species need to develop abilities that help them to survive their predators innovations because otherwise they are eaten out of existence , in turn if the prey are too succesful in hunting their prey they kill all of them and then either starve or …become vegetarians.!! There is a lot of food for thought in your comments.

          • My point is rather simple: we labour to draw an income, not to compete. If you are a hermit or a monk or amish you still need to work hard to survive, perhaps even harder than those who live in a “competitive market economy”. The struggle comes from scarcity irrespective of social context. The greatest benefit of living in society is variation in available goods and services. The greatest advantage of living in a competitive market economy is lower costs.

            • Actually Grow new studies of economic behaviour teach that people are often galvanized by a spirit of competition (i.e. in order to proudly prove one self better or superior to others ) to work harder at achieving things . The gratification of our ego is sometimes a greater incentive to work than the sattisfaction of our material needs . Thats why lots of peoples whose needs are already sattified work hard to surround their life with luxuries or other social trophies which underscore how superior they are .!!. Consumerism isnt about sattifying peoples life necessities but about giving your self a richer , more opulent, ostentatiously comfortable life which in turn adds to your social status and to your inner sense of self worth. !! Men are funny creatures . People compete in part because competing is fun , exciting , emotionally uplifting . Look at the popularity of sectarian politics and mass sports !!

    10. In the US engineers complain about their jobs going overseas to Asia where engineers work for less. With some capital, those orphaned engineers could easily work in Venezuela for less money yet increase their quality of life… say working close to the beach on Margarita! It really doesn’t matter where the work gets done! Venezuela is a beautiful place to live and work, and that is spoiled by the political and economic risks that the revolution has made.

    11. It rankles me to read something of this sort. Not because I dissaprove what the author is suggesting, but of what it reflects from our ethos currently. It is almost sacrosanct or conventional wisdom everywhere that markets along with Governments form a powerful cooperation for unleashing development opportunities. I guess this is one of the many symptoms of how far behind we’re lagging.

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