Carlos Faría: A Man for Our Times

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First things first: Nicolás Maduro is never going to oversee even minimal economic reforms aimed at letting markets clear. His training, his outlook, his understanding of his role and his track record all come together to make that entirely obvious now.

He’s been beseeched to move in that direction by more or less everyone, from Pedro Palma to Mark Weisbrot. He’s appointed not one but two Vice-presidents for the Economy who’ve pledged to do just that. But when the time comes to sign the relevant decrees, the guy freezes. Es más grande que él. 

He can’t do it. He won’t do it.

And this creates a serious problem of economic coordination. 

This is one of those points that’s really obvious to economists but really obscure to everyone else, so let’s take a moment to unpack it.

Markets —and more specifically market prices— play a number of roles, but the most important is coordination. When you let the free interplay of buyers and sellers set prices, those prices communicate to people what the economy needs more of and what the economy needs less of.

The classic statement of this view is Hayek’s:

In a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people in the same way as subjective values help the individual to coördinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes.

Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce.

All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes.

The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction.

That freely set prices are the best way to achieve this kind of coordination isn’t really under serious dispute anymore. (Bueno, at least not anywhere more than 100 meters from esquina de Carmelitas.)

 
Central Planning is a much worse solution to the problem of economic coordination than the price mechanism. But it is a solution.

Prices are a uniquely powerful and efficient way of conveying relevant, constantly updated information about what you should and what you shouldn’t produce and what you should and shouldn’t consume.

As that information disperses seamlessly through an economy, it becomes an amazingly efficient tool for coordinating production and consumption decisions between millions of people who don’t know each other and don’t talk to each other.

But are prices the only way to coordinate economic activity?

No!

It’s, as Hayek hints, just about imaginable for a single mind to centralize all that information and dole it out as orders to all the different economic agents out there and replicate, más o menos, the outcome of a market mechanism.

 
Here’s what’s not a solution, though: nothing.  Kneecapping the price mechanism without replacing it with a proper central plan.

Brutal and bloody and creaky and inefficient and corruptogenic though it might be, Central Planning is a solution to the problem of economic coordination. It’s not a good solution, but it is a solution.

Here’s what’s not a solution, though: nothing. 

Kneecapping the price mechanism without replacing it with a proper central plan. What’s not a solution is leaving thousands of “private” firms out there to try to survive in an environment where they have no reasonable signal to follow about what they ought to do: prices don’t carry that information, but neither does the government, which has no overall plan, and instead is left to try to parapetear la vaina with a bunch of soldiers with guns ad-libbing orders with no worked-out idea of who should produce what when and for whom.

Central planning is miserable, yes, but this ni chicha ni limonada bullshit the government’s subjecting Venezuela to is, somehow, worse: it leaves capital allocation, production and consumption decisions to be made on the basis of literally nothing. That chaos ensues is only natural.

Which is why I silently salute the appointment of Carlos Faría as head of economic policy. Now, look, there’s no real reason to think Faría is some kind of Caribbean Kantorovich —it can’t be a good sign when the most complete statement of views you find for a guy is a four-year-old interview from VTV— but at least he’s a proper communist.

His dad founded the communist party, his education was in the Soviet Union, he’s been coordinating centrally owned factories for years. Central Planning is in this guy’s blood.

I guess what I’m saying is sometimes there’s a man who —I won’t say a hero, cause what’s a hero? —but sometimes there’s a man. And I’m talking about Carlos Faría here —sometimes there’s a man well, he’s the man for his time and place, he fits right in there— and that’s Carlos Faría, in Carmelitas.

 

37 COMMENTS

  1. Well, ok! You do have a point. (I recall Francisco Rodriguez, speaking at As/COA in NYC a few years back, pointing out that at least one fellow won a Nobel prize in econ. for his work in the USSR on central planning … while making a point that the chavista government is certainly not one that takes the details of ‘planning’ seriously in any sort of way.)

    Meanwhile, just FYI, the fellow who constantly visits Caracas to see Del Pino et al, to look after his company, Rosneft’s, investments and Russian oil and gas interests generally, Igor Sechin, is known in Russia for having been an ‘amazing’ efficient bureaucrat who has studied the history of the USSR’s statist economy and is known for some positive results in his various roles in large state or semi-state enterprises

    (Venezuela is probably the only major South American country where the Kremlin can impress people with their engineers’ competence and work focus and, hence, buy Mr. Putin a modicum of longer-term geopolitical leverage within Latin America).

    I’d be curious if your fellow, Carlos Faria, knows or meets with Sechin.

  2. Groan.

    Central planning is a solution? So is Stockholm syndrome. Or suicide. That’s like saying the terrorist Islamic State isn’t the best form of Islam, but it IS a form of Islam.

    To quote John McEnroe: YOU CANNOT BE SERIOUS!!

  3. Interesting statement about the role of central planning as an option to market-prices coordination. But I’m not agree with the idea that government has let economy to its luck in a “ni chicha ni limonada” field. Chavismo has introduced thousands of distortions into market, substracting value from prices as information carriers by imposing controls and setting them ad hoc. But still – and here following Hayek’s idea this process is spontaneous – market keeps asigning resources (probably misleading) in the economy, as we can see in bachaquero’s armys outside stores and the huge amounts of capital was destinated to overbilling during cadivi’s boom.

    I think, Central Planning may be a kind of distortion to market which its output exceeds current chavista measures (or whatever) but markets, always will be there and cannot be subsituted by any other production way.

  4. The problem Quico is that nobody is going to follow Faria, Maduro or anyone’s plan. No matter if they are pro market or communist or whatever, these guys lost their followers and have no execution capacity whatsoever.

    I understand your point but… Venezuela will keep on being raped by everyone as long as Chavistas/Cubans are running the show.

      • That s the issue. And in order for that to hapen a cultural revolution ( which we are at portas) is gonna happen. Sorry but the democracy is dead with that. Regrets for Lorenzo and his bet

  5. So Chavismo’s failure leaves intact the great achievements and intellectual legacy of economic planning of such economies as Bulgaria and Poland!

  6. On the issue of Kantorovich, you should check the “novel” (is a novel, but is also almost a series of essays) “Red Plenty”, by Francis Spufford. It deals with the history of Kantorovich idea and the attempts of making it the basis for a “cybernetic” Soviet economy, side by side with the reality of the Soviet economy and society.

    There is a part that is delightful in which the theoricians have to see ways to convince the politicians that what they are doing, while it looks like a market and has “prices”, it is not and the “prices” are “virtual” or something like that, because of course the whole mention of the idea of some mechanism that would determine prices without political control was heresy.

  7. I’m sorry to say that I disagree on the premise of your post Quico.

    Miguel Pérez Abad oversaw arguably a reasonable central-planning effort in terms of lining up prices of most ‘un-regulated’ goods to market fundamentals, through the implementation of new ‘PV-Justos’ that often implied inflation rates over the 300% mark. Another example in that direction was the managed float in SIMADI and the eventual implementation of a free, unified FX market. Say what you want about the character, but he seemed to take his central planner role to heart and was minimally competent at it.

    This guy Faria? I don’t care about his credentials. He’s obviously there because of nepotism and for family business purposes. Time will tell about his central planning skills, but I’m pretty sure he’ll dissapoint your expectations.

  8. Writing as an ordinary consumer and regular participant in food buying queues there may be something to what Daniel is saying regarding the gist of Perez Abads efforts., my wife and I have discovered that in the last two months some food items which had totally disappeared fromt the market have now begun reappearing at prices that are much higher than their previous regulated price and are constantly rising…..but at least they are there……talking about grains, poultry , sometimes milk . coffee…Other items remain almost impossible to find (rice and sugar specially) …. , definitely prices are rising much faster than they did two months ago…case in point a 2lt bottle of beberage was costing 850 bs until a few days ago when its price rose to 1.200 Bs ………maybe close to what it would cost in US$ using a 1000 Bs per $ exchange rate…..!!

    • Yes, bingo Bill. That’s exactly what I meant. The system of broad-based price regulations that Perez Abad was leading had ‘Central Planning’ written all over.. And it started to ‘work’

      • No come on this is a misunderstanding of what Central Planning is all about.

        Central Planning is about a state bureaucrat ORDERING YOU to buy such and such inputs from Company A, turn them into finished product, and pass them on to Company B. Central planning is about all production decisions made — uh — CENTRALLY. (And Central Planning is also about marching you off to the gulag if you don’t follow your order.)

        Price setting for decentralized, privately owned producers isn’t central planning. It’s just bad policy.

        • Agree they are quite different. Good point.

          But, price fixing and production limits (a sort of null quota), even payments not to produce (say for farmers) or government-set limits on production, and regulating markets, transport routes, etc. have played important positive roles in, for example, the USA,, during wars, to get out of a depression, etc.

          But, of course, they have strong downsides, esp. if continued long beyond the period of emergency (such as corruption opportunities and also manipulation of benefits via access of some market players to corruptible government officials, etc.) that legitimized them initially.

  9. I would like to point out that there could be a political aspect of pricing. Price subsidies, for example, support producers that are otherwise unable to complete, and failing to support those producers may have political consequences that are unacceptable to the regime!

    • Unfortunately, yes!

      And, in these instances, it is politics (‘special interests’) that win out, not the market players with the best widget or most productive business, etc. Such is the story of Venezuela … long before Chavez. Access to government officials, and/or to intermediaries was what ‘competition’ was all about for much of the business class.

  10. “Claro, el día que Carlos Faría fije una directriz y Marco Torres le pare bola, nieva en Maracaibo…”

    Y en en los medanos de Coro tambien..

    “Central Planning is a much worse solution to the problem of economic coordination than the price mechanism. But it is a solution.”

    Both “solutions” are terrible. The only real solution is to have Laws, send crooks to jail, and a free market.

    Create the conditions for companies to compete in a fair environment. That’s how they keep each other sharp, and the prices are controlled by the competition, oferta y demanda. When you allow 10 companies to produce rice, corn, or meats, freely, they start competing with each other, prices are low, quality gets better, and the final consumers decide.

    But you have to control massive corruption in the first place for any “plan” to work.

  11. The only advantage that central planning has over a market economy is that it allows those charged with such planning to steal… a lot! While you may argue that central planning by someone who is more competent is better than by someone who is less so, neither can come close to the efficiency produced by the market. Furthermore, even the most competent of planners will be subjected to the data input of a thoroughly corrupted bureaucracy. Carlos Faría will utterly fail to meet your expectations, because if he actually tries to do what is needed, he will be eliminated by the people who want to continue stealing.

  12. Have been told that in Venezuela whenever there is a quasitechnical effort inside a ministry to create a plan or policy , even where it is adopted , ultimately the plan is set aside by the upper ups who don’t understand it or who in the end follow a gut impulse to handle things from a purely political or partisan perspective …….´, its not just that their planning is flawed but that they incapable of following any plan because it becames superceded by the ad hoc decisions of the know it all , all powerful chiefs at the top.

    As told to me by people whove participated in such plan making inside the Whale …..’none of our plans or policies have been applied because in the end the top bosses do whatever they like or prefer to do given their on the spot gut reactions to different situations ….’

    For plans to work you need to have people who are disciplined , competent , well organized and focused …., (vide Japan , Germany ) doesn’t mean that the market gets short shrift but that some regulations are applied to ensure they function optimally and are not subject to induced distortions to reduce the beneficial effects of a healthy competition …..!!

    • Hi Bill –

      I think you are making an important point, with which I agree. Most of my comments to this and one or two recent posts by Quico have been along the same lines.

      The organizational and managerial incapacity/incompetence of Chavez and Chavismo has been a crucial aspect of their tenure. I could list many examples from the oil sector and politics and economics. As I have written above and on previous posts. is consistent with your comment about how the top leaders override whatever comes up from experts (such as they are) below them in the bureaucracy is notable.

      In the oil sector, the stories about the style of management shows that the system reverted to a form of “personal authority” leadership, as opposed to modern forms of bureaucratic/collective responsibility and decision making.

      Whatever is finally sorted out by some PDVSA committee or team responsible for a negotiation in the oil or gas sector with, say, a JV partner, after weeks of talks is then initialed and passed upstairs. But, the boss (who might have changed recently to boot) has not participated and mistrusts and/or does not understand or is scared of approving the negotiated agreement, and instructs the underlings to go back and insist on such-and-such … and nothing is resolved for months and months. (Meanwhile, the negotiating team has little capacity in the first place).

      In a system like this, where the bureaucratic and managerial institutions have essentially collapsed, the tendency is to revert to patterns of personal authority (which happen to correspond to the late-colonial and pre-democracy forms of management).

      The ultimate illustration of this form of leadership and lack of institutional functionality is the fact that H. Chavez was on TY for hours on end and the leadership of all the ministries were watching intheir ministries with their ‘team’ for their instructions as to what they should do and what is acceptable and unacceptable. The presence of H. Chavez on TV was precisely ‘personal authority’ form of national organization as well in place of real modern-day organizational forms. (The fact he didn’t even organize a political party till 2008, I was told, was a point his Cuban advisers criticized him for strongly,)

      I am struck by a comment by M. Naim in his book about the ‘neo-liberal’ shock he helped to administer. He wrote about becoming exasperated by the fact that after long debates and much careful thought and framing, cabinet-level decisions would be transmitted to the economic ministry (name?) But, then, the guy in charge there would answer reporters questions on TV saying something completely at odds with the instructions. However, when Naim went to investigate in the ministry, he discovered that no one had even a masters degree in economics and they simply did not understand what the upper level was talking about. So, my point here is, that was the sort of situation that existed WELL BEFORE Chavez came along and began working in a very partisan manner to further degraded these institutions, and began using dual institutions to manage his off-the-books projects, etc., etc.

      Indeed, one can argue for more or less ‘statism’ (which has always been at a high level in Venezuela) or more-or-less free-market emphasis in policy. But, one has to realize the limits of any policy to be implemented. IMHO, it will not be any better when the opposition arrives. They have essentially no party discipline that they could bring to the very weak and dysfunctional (personal-authority driven) institutions. Normally, an opposition builds this up working in opposition in the parliament or as local governors, etc. But, this experience is only beginning, in the AN at least. But so many of the educated young people who would be the lower-level, trained operatives/cadre familiar with the goals of the movement who could be inserted in the ministries to be a nucleus of their re-organization and re-disciplining, are nowadays absent from the country. Even a coherent team at the top will face the difficulties Naim describes, only much more so after Chavismo. (So too in the oil sector … top leadership and capital is only one small step … it will be a long slog to re-build a functioning
      institution.)

  13. “His dad founded the communist party, his education was in the Soviet Union, he’s been coordinating centrally owned factories for years. Central Planning is in this guy’s blood.”

    And there are still people out there that love to say that the Venezuelan disaster can’t be blamed on socialists/communists nor can possibly have anything to do with socialism/communism because, hey, some of them like to wear Nike shoes and Rolex watches.

    As if hypocrisy could null one person’s ideology… hehe.
    “He can’t be a nazy, he’s a Jew.” Yeah, tell that to Dan Burros, candid soul.

    That family should have received the “Veteran of Labour” medal several timed by now! Assuming that they have not have received them yet. What a great people!

  14. “As told to me by people whove participated in such plan making inside the Whale …..’none of our plans or policies have been applied because in the end the top bosses do whatever they like or prefer to do given their on the spot gut reactions to different situations ….’”

    But WHY?

    Why is it so hard to write the word CORRUPTION?

    It’s all about money, briberies, guisos, special interests, bogus bank transfers.. You can elaborate or philosophize all you want, about ‘ideologies” or ‘socialism” or ‘chavismo”.

    It’s all crap. Lies.

    It’s all about money and power, but especially money. To steal it as quickly as possibly. The rest is BS. As simple as that. It’s amazing how people try to invent fancy, convoluted theories. In Vzla the problem has always been quite simple: poor education, lack of Laws and Order and real Police, and Massive Corruption everywhere. Easy to understand, or is it?

    Ok, now you can resume talks about “economic policies” that would work.. Yeah, right. Blame it on “ineptitude”, or “the wrong decisions” all you want. But it’s just the special interests and astronomical corruption, everywhere. Not they don’t know what should be done. But they sure know what is done to STEAL as much as possible.

    • The question you must ask yourself is actually this one: “How did Venezuela go from being the average corrupt and uneducated Latin American country from being the average corrupt and uneducated Latin American country but also bordering on famine”.

      Then you go in your comment.

      “about money and power, but especially money”

      Again, how did it it go from being “about money and power, but especially money” to no toilet paper on the supermarkets’ shelves, many times annoying even the Chavistas themselves? The Venezuelan delegation in Rio, including the delegation’s chief, is stocking toilet paper to take home:

      http://globoesporte.globo.com/olimpiadas/noticia/2016/08/ex-ministra-atleta-discricao-e-compras-no-rio-venezuela-desvia-da-crise.html

      “Corruption!” You will probably babble. And I would give you a list of the most corrupt countries in the world WITH toilet paper on the supermarket shelves. Corruption can’t be the only reason, otherwise all Latin America would be bordering on famine.

      But you will answer one final time:

      “Corruption!”

      • “Juan” is a bit of a one-trick-pony. The central theme is that Venezuelans are somehow culturally and/or genetically corrupt and therefore all is lost forever. Francisco recently exposed him as a troll. I would try not to pay him too much attention.

        • The worst posters are those who send indirect, oblique ad-hominems to a 3rd party. I call them twisted woossies.

          Stick to the topic at hand, and respond directly to me with your own rebuttals, won’t you, woossie?

      • “But you will answer one final time:

        “Corruption!””

        The problem with Juan is that he doesn’t give the full answer, which is “TOO much corruption”

        You see, if you steal just a bit, a fraction of the whole thing, sure, you’ll create some shortage of one or two things, but when you go full chavista and steal about 90%, well, you have the “bordering on famine” situation.

        Yes, there was corruption in the 4th, a lot, but not nearly as much as today with chavismo, mainly because the corrupts of yore had more functional brains than the boli****s who are extremely greedy and gluttonous, with much less brains into it.

        It might sound like stereotyping them, but chavista corrupts have worked hard to demonstrate they’re idiots.

      • So what’s the list of the most corrupt countries – per capita – ? My point is that Venezuela has always been very corrupt, but under Chavismo, it is breaking world-records. You have corruption, mega-corruption, and then you have Kleptozuela. At all levels, not just the government.

        I have also pointed out other reasons, as bad education and massive brain-drain. Not to mention the ‘oil curse’ that I always mention too.

        And the lack of Laws, and punishment. In many other semi-corrupt Latin-American countries there is no total Impunity. Look at Brazil: You just sent some crooks to jail, no? In Vzla no one goes to jail for their crimes. But some of you seem to have short memories.. or a lack of reading comprehension.

  15. Farías: El hombre que cuidará todos los monopolios del chavismo/madurismo/diosdadismo/padridismo/castrismo mientras que el pueblo se muere de mengua, es el hombre justo y necesario para el trabajo.

    *Pose de slogan comunistoide*

  16. This confirms a comment I have made in various places. The collapse of Venezuela is not just the natural result of socialist economics: it’s also substantially due to the utter incompetence of the chavernment. They don’t know how to operate a “planned economy”. Granted, nobody ever did – the Russians, who are a very smart people (look how they dominate chess) tried hard, but couldn’t do it successfully. But at least they tried, and applied their brains.

    The chavernment doesn’t know how, doesn’t even know what they don’t know. They issue orders and decree rules by emotion and vague guessing. Then they blame all failures on “sabotage”.

    As Juan wrote: the one thing worse than central planning is a random jumble of orders.

    • Rich, please see my (too long!) comment above in reply to Bill Bass. You seem to me to be making an important point. … and it has a lot of importance for any future governments.

    • The old argument about “incompetence”. If Chavistas wanted to make things work they could, there are plenty of Economists and Professionals still left to do things right. It’s no rocket science. To run a healthier economy you need have free markets, better police, punishment for crooks, and start producing other things than oil. Stop subsidies and freebies and price controls and exchange controls, and let the oferta/demanda market run its course.

      It’s not that everyone doesn’t know that. Even the Chavistas. It’s not a ‘socialist ideology’. That’s all BS. It’s because with the current failed system they can STEAL the most money.

      “Incompetence”? They are very competent thieves, crooks, narco-dealers.

  17. Hahahaha, awesome.

    One thing though, his father is Mr. Farías. He is “The Stooge,” you know? Everybody calls him the Stooge.

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