Is the Venezuelan economy suffering from a deficiency of demand?

The Venezuelan economy is in a mess. Everyone knows it; no one denies it. There has been a catastrophic fall in real incomes and wealth. Why?

Is it because everyone has decided to save rather than spend? Is it because there has been a fall in aggregate demand? Is there not enough public spending?

Here’s the real question. Is there anything in modern mainstream macro that will explain what has gone wrong in the Venezuelan economy? If so, how does modern theory explain what has happened?

In my view there is hardly a thing in the way we teach economics that will explain the problems of the Venezuelan economy. Nor would a modern text tell you what to do or to change if the problems are to be fixed.

I do think economists do understand why it has gone so badly wrong. I just don’t think we teach any of it any more. We certainly don’t spell it out.

AND I’VE JUST COME ACROSS THIS: I’ve been reading through John McVickar’s illuminating 1825 Outlines of Political Economy, and a wonderful book it is too. And there I found this sentence.

The capitals of England and of France have not increased, because of the vast expenditure of their governments, but in despite of it. [p 33]

The language is a bit archaic but then so too is the economics. Perfectly clear, however, both the syntax and the conclusion.

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15 Responses to Is the Venezuelan economy suffering from a deficiency of demand?

  1. sfw

    Is there anyone in the mainstream media (and our gov) who understands, how an economy gets distorted? If so do they see that if distorted enough it falls apart? Does this sort of thing even get discussed at Uni’s? I have no idea of how Venezuela can recover without even more damage and how long it will take, it may not happen for 100 years or more.

  2. Mother Lode

    Actually, mainstream economics does have answers.

    They just happen to be absurd.

    American de facto (even if not de jure) sanctions, the rich looting the country and sending the wealth outside Venezuela. Probably something about OPEC too.

    At bottom, though, it is all Trump.

  3. Buccaneer

    The rich (socialists) have looted the country

  4. Pyrmonter

    Uncomprehended by modern economics? I’d suggest not.

    https://www.mercatus.org/publications/monetary-policy/hyperinflation-and-seignorage-venezuela

    For a similar exploration of the political economy of hyperinflations, the most recent Macro Musings explores the currency reforms undertaken by the CSA in a good, orthodox fashion – good work in a field normally populated by apologists for the Lost Cause.

    http://macromusings.libsyn.com/bryan-cutsinger-on-seigniorage-and-the-monetary-economics-of-the-civil-war

    It may be obscure, but (as noted in the Cutsinger piece) the analysis of this stuff goes back decades to the work of Cagan 50 years ago – something I’d have assumed S Kates to be familiar with. It was good stuff.

  5. Bruce of Newcastle

    Producers can produce as much as they like.
    But if their produce is stolen then they won’t be paid for it.
    So they stop producing.
    The customers won’t get what they need, because there’s nothing to buy and anyway they themselves can’t acquire sufficient value to pay for goods without that value also being stolen.
    So everything stops.

    Neither Says nor Keynes applies when justice and the rule of law no longer exists.

  6. Dr Fred Lenin

    Is it a bad dose of incompetent interfering communist fascist socialism ,a disease which is virulent and common these days ? . Like measles we thought it was nearly eradicated when the soviet onion collapsed under its own stupidity , but the virus hid in academia and trade unions and is now becoming endemic again . The cure may be a very severe dose of reality starvation ,death gulags before immunity is developed . Career politicans are the most prone to carry the disease , perhaps abolishing career politics and political gangs (parties ) will help ,and a good dose of deprivation of taxpayers money to all of them , that usually brings reality to bear on leftists .

  7. Fisky

    The overwhelming majority of economists believe demand deficiency fully explains Venezuela. Never socialism!

  8. Petros

    Aren’t there sanctions on the country? Did they not contribute.

  9. The big question is whether anyone has yet blamed it on climate change?

  10. Fisky
    #2977560, posted on April 2, 2019 at 12:21 pm

    The overwhelming majority of economists believe demand deficiency fully explains Venezuela. Never socialism!

    They should quit and hand back their diplomas.

  11. MPH

    Demand is effectively infinite, but various other factors mean it is never satisfied. Far more people want a Ferrari than have one, only those who have something of equal or similar value to exchange will get the Ferrari. That’s how I think of Says Law anyway…

  12. Zatara

    Aren’t there sanctions on the country? Did they not contribute.

    Venezuela’s electrical power generating plants run on oil derivatives.

    Venezuela sits on the largest known oil deposits in the world.

    Venezuela’s power grid has been dead for weeks.

    No sanction turned off the lights there.

  13. Overburdened

    We have all been advised in the past that Venezuela is a roadmap for the path to our destiny by eminent people of the Left.

    I think I agree with them, unless they have changed their minds.

    Solid question to ask.

    I think the answer is that in the time of subsistence living, consumer demand is low.

  14. John A

    From the Wikipedia entry (well down the page):

    Say’s Law should therefore be formulated as: Supply of X creates demand for Y, subject to people being interested in buying X. The producer of X is able to buy Y, if his products are demanded.

    Human behaviour demonstrates that a person who sees a demand not being supplied, then moves to produce and thus meet that demand for a reasonable price in the market, is the prime mover of economic activity, and all such activity is micro-economics.

    If a government abolishes the market as BoN points out by confiscating or controlling the product, then Say’s Law of markets still hangs like a Sword of Damocles but it is not seen to operate.

    Socialism and Keynesianism (it’s economic “omega-point”) is about macro-control, not economics.

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