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Dan Liljenquist: Ignoring basic economics in Venezuela

People line up outside a school set up as a validation center to certify the authenticity of their signatures in Caracas, Venezuela, Monday, June 20, 2016. Venezuela starts a crucial stage in the possible recall referendum against President Nicolas Maduro
People line up outside a school set up as a validation center to certify the authenticity of their signatures in Caracas, Venezuela, Monday, June 20, 2016. Venezuela starts a crucial stage in the possible recall referendum against President Nicolas Maduro with the validation of 1.3 million signatures supporting the referendum. (AP Photo/Ariana Cubillos)
Ariana Cubillos, AP

I have been fascinated by neoclassical economics since 1992 when, as a freshman at BYU, I serendipitously enrolled in Economics 110. Microeconomics frameworks, which help explain complex human interactions, hooked me. I made economics my major, and then spent five semesters as an economics teaching assistant, trying to help confused and frustrated students see the beauty in demand and supply curves, price elasticity, market externalities and other microeconomic concepts. I found something valuable in economics — a lens through which to analyze and understand both economic conditions and the policy choices that produced them.

This week, the New York Times reported on the tragic humanitarian crisis in Venezuela. The Venezuelan people are starving; 87 percent of Venezuelans don’t have enough money to buy food, and that percentage will only go up as 2016 inflation is soaring by over 400 percent. Unemployment has reached 17 percent, and government safety net programs are folding. The Venezuelan government has instituted food, water and electricity rationing, trying to stretch too few resources over too many desperate people. Food riots, protests and mass looting are breaking out all over the country. Crime is rampant, and the murder rate is the second highest in the world. We are witnessing — and Venezuelans are living through — one of the worst economic and societal collapses in modern history.

It wasn’t supposed to be this way. On paper, Venezuela should be a prosperous country. It has huge oil reserves, rich agricultural land, vast mineral wealth and a literate population. So what happened?

Venezuela’s societal collapse can be traced directly to the policies enacted by populist demagogue and neo-socialist Hugo Chavez and his successor. Nearly a decade ago, Chavez adopted as his official economic policy “socialism of the 21st century,” which involved aggressive “wealth redistribution,” “land reform,” “fair prices” and “foreign currency control.” Each of these policies was touted with persuasive rhetoric, and most Venezuelans seemed to welcome the new approach.

To redistribute wealth, Chavez seized and nationalized private businesses. To enact land reform, Chavez confiscated 5 million acres of farmland from large industrial farms, broke up the parcels, and gave the land to the poor. To enact fair prices, Chavez set and enforced aggressive price controls on food, stimulating consumer demand by keeping prices artificially low while at the same time constraining supply by making it impossible for farmers to make money farming. To enact foreign currency controls, Chavez prohibited ownership of foreign currencies, denying Venezuelans the ability to protect their personal savings from runaway inflation by hedging against other currencies.

Each one of these disastrous policies contributed to Venezuela’s collapse. Production plummeted, inflation soared, and black markets proliferated. For a time, Chavez and his successor were able to delay the inevitable collapse thanks to high oil prices. As the Venezuelan general economic conditions worsened, the government-owned oil company pumped more and more oil until 96 percent of Venezuela’s government revenues — the revenues that supported the social programs that replaced the market economy — came from oil. Then the price of oil collapsed, and Chavez’ 21st century socialist utopia with it.

The famed economist Friedrich Hayek postulated, “the curious task of economics is to demonstrate to men how little they know about what they imagine they can design.” I learned back in my Economics 110 days that economic principles are as immutable as the laws of physics. Economies are self-organizing, responding to the constraints imposed on them by exogenous forces, especially government policies. Chavez imagined that he could design a socialist utopia while ignoring basic economic principles, and his people are now suffering for it. We must be careful not to make similar mistakes.

Dan Liljenquist is a former Republican state senator from Utah and former U.S. Senate candidate. He is nationally recognized for work on entitlement reform.