Venezuela’s inflation will hit 1 million percent. Thanks, socialism

By Megan McArdle. Excerpt:

"Why did Venezuela embark on the road to destruction? And why does the government stay on it while the citizenry slowly starves?

In a word, socialism. After his election as president in 1998, Hugo Chávez pursued an increasingly aggressive socialist agenda, one that continued under his 2013 successor, Nicolás Maduro. Chávez nationalized foreign oil fields, along with other significant portions of the economy, and diverted investment funds from PDVSA, the state-owned oil company, into vastly expanded social spending.

Unfortunately, Venezuela’s heavy, sour crude oil was unusually hard to get out of the ground. Continual investment was needed to keep it flowing. So was the expertise of the banished foreign owners and the PDVSA engineers Chávez had purged for opposing this scheme. Production plunged; the only thing that kept Venezuela from disaster was a decade-long oil boom that offset falling production with rising prices.

Then came the 2008 financial crisis that crushed global demand for oil, followed by the onrush of U.S. shale oil, driving prices down further. And no one would loan money to Venezuela that couldn’t be repaid in oil. Meanwhile, unwilling to admit that socialism had failed, Venezuela made a fateful turn to the central bank.

Now, one could say that this is not an indictment of socialism so much as the particular Venezuelan implementation of it. But it’s striking how the precarious economics of socialism, including hyperinflations, are tied to petroleum. Many of the notable hyperinflations in history were tied to the collapse of the Soviet Union. And the story of the Soviet collapse is also a story about oil.

Central planning had wrecked the Soviets’ grain production by the 1960s, and collectivized industry didn’t produce anything that the rest of the world wanted to buy, leaving the Soviets unable to obtain hard currency to import grain. Oil sales propped up the Soviets until the mid-1980s , when prices crashed as new sources of oil came online (sound familiar?). The Soviet leadership was forced to liberalize to rescue the economy. The U.S.S.R.’s collapse soon followed.

Socialism, in other words, often seems to end up curiously synonymous with “petrostate.” The new breed of socialists cites Norway as a model, but saying “we should be like Norway” is equivalent to saying “we should be a very small country on top of a very large oil field.”

Without brute commodity extraction, you need capitalist markets to generate a surplus to distribute, which is why Denmark’s and Sweden’s economies have more in common with the U.S. system than with the platform of the Democratic Socialists of America. And as both Venezuela and the Soviet Union show, even oil may not be enough to save socialism from itself."