By Tim Worstall 

This isn’t perhaps the sort of thing that we normally congratulate people on, managing to so entirely screw up a national economy so as to generate 200% annual inflation.

But we really should give credit where such credit is due. It is an achievement to manage to follow economic policies that blockheaded so, in the spirit of being entirely fair, congratulations to Venezuela’s Bolivarian socialism. It’s worth noting further that the reason for this stunning success of theirs is not because they’re a bit left wing, nor because they’ve tried to make the lives of the poor a bit better.

It’s because they’ve ignored the most important rule of trying to run an economy, they’ve failed to understand that markets really do work. Something that we all need to recall in our own countries as various people tell us that we’ve got to excise market forces from one or another part of our own economies.

There’s ways to deal with the effects that we don’t want from market forces: but ignoring or trying to abolish them leads to, well, to success like that that Venezualan Bolivarian socialism is currently experiencing.

Here’s the news of that inflation rate:

Venezuela, which already has the world’s fastest inflation rate at a reported 69 percent in December, could see that rate more than double this year as it struggles to respond to falling oil prices.

“We may end up this year with inflation at close to 200 percent,” Alberto Ades, co-head of global economics research at Bank of America BAC +0.06%, said in an interview on Bloomberg Surveillance Friday. He forecast the economy would shrink 4 percent. “Venezuela is in a dire crisis.”

We need to understand why it is that the Venezuelan economy is in such a pickle. And no, it’s not because the oil price is falling. It’s also not because the government there is lefty, nor that they were trying to take a bit of the money off the rich and make sure the poor thus had better lives. It’s because the methods by which they tried to achieve these things were simply pig ignorant. And I’m afraid this speaks to many more lefties than just those Bolivarian socialists.

A potential Prime Minister, Ed Miliband, in my native UK is marching around shouting about “predistribution” and how he’s going to fix the prices of energy. Which is the mistake that Venezuela under Chavez and Maduro made. And the mistake that the equally lefty Nordics haven’t made.

The point being that markets, and the prices in them, are far from being just some random numbers that the plutocrats assign to things in order to strip the poor of their incomes. They’re actually signals: signals of who is prepared to produce what, for what remuneration, and who actually wants stuff at what cost? It’s actually how we coordinate production and consumption in fact. It’s long been proven that we don’t have any other effective method of such coordination (Hayek’s Nobel was in large part for this, there have been other proofs since) so, markets and prices are what we’re left with.

Yet there’s a terribly sad hangover from early socialism which insists that planning will do better than markets. This has its roots in Karl Marx’s misunderstandings of markets and prices but it’s still a pernicious influence out there.

Because prices perform that coordination service for us we can’t go around setting them at random. If we set them above market prices, as the EU did with food, then we end up with massive oversupply and mountains of butter and lakes of wine. As the EU did when they did this.

If we set prices below market ones then people just won’t produce what people want. We thus end up with empty shelves and shortages, as Venezuela famously does today of just about everything. And think how badly you’ve got to screw up to get a shortage of something as simple as toilet paper, which is something they’ve managed.

If you actually want to do that redistribution bit then you’ve actually got to go off and do some redistribution. Take money from one group of people (we might politely call this taking “tax”) and then give it to some other group of people (call it “welfare”).

This is what the Nordics do, they reduce inequality significantly by doing so and they manage to do so without generating near hyperinflation nor shortages of anything. Because, other than tax and redistribution they don’t do anything to screw up markets nor prices.

And that, of course, is what Venezuela should have done. Take, perhaps, some of that oil revenue and just give it to the poor. Would have worked far better in reducing poverty than what they did do and it wouldn’t have created that 200% inflation either.

As to our own countries I’m looking at Miliband’s plans for the UK with some foreboding. Because he’s expressly realised that he won’t be able to increase taxes very much, if at all, and thus won’t be able to do the sensible form of redistribution. So, he’s looking at those other policies, the predistribution ones, the price fixing ones. You know, the ones we know don’t work? Election time is such joy, isn’t it?

Bron: Forbes