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Drucker Perspective

Drucker as an Economist: Venezuela's Slide into Crisis & Its Lesson for America

MMN
Contributor: Management Matters
Posted: 07/22/2016

In a series of articles over the next several months, we hope to provide readers with Peter F. Drucker's spot-on-analysis of today's "crisis in economics."

Drucker was no fan the so-called "Keynesian Welfare State." In a series of time-spaced articles, he thoughtfully and thoroughly explained why Neo-Keynesian economic theories (the theories upon which many of our economic policies are based) have been totally discredited.

Thankfully, Drucker also clarified the types of economic policies/prescriptions required to produce real economic growth.

Every country (with a functioning civil society) that followed these prescriptions, has experienced a major economic turnaround.

We can only conclude that slow/low growth economies practicing Neo-Keynesian economics suffer from the law of slow learning.

Introduction

Said Peter F. Drucker: “If there’s one thing economists and I agree on, I’m NOT an economist.”

In this rare instance, Drucker was wrong. He had a profound understanding of economics, an understanding that still eludes most economists today.

His writings, we believe, could shape the thinking and inform the questions on economic theory and economic policy for the rest of the century – if government leaders worldwide would take the time to read, study, underline, discuss, and conduct in-house workshops on how to put his ideas into practice.

Newt Gingrich, for example, back in the 90s, when he was U.S. Speaker of House Representatives (1995 – 1999), was (and still is) deeply influenced by Drucker's writings.

Indeed, it was reported he gave copies of several Drucker books to members of both the House and Senate in the hope they would begin to understand – in a clear, concise way – what needs to be done for America to regain control of domestic, economic and fiscal policies, all lost as a result of being wedded to a deeply flawed theory of economics.

Said Gingrich: "Drucker, like Adam Smith, was essentially a philosopher of reality. He looked at what was really happening in the [the world] in economic, historical, and political terms, and then he made sense of it all...

…Many of his ideas are timeless and will likely be as useful a hundred years from now as Adam Smith's The Wealth of Nations is today…"

Drucker wrote extensively about "the poverty economic theory."

He was very critical of the so-called Neo--Keynesian economic model that has led to today's misguided economic & social policies that now threaten to destroy democracy and capitalism. (In part II, we will explain Drucker's point-by-point analysis of the discredited assumptions underlying Keynesian economics).

Again and again, Drucker warned if we continue to bury our head in the sand with respect to the destructive societal tendencies of the Neo-Keynesian Welfare State model, we will suffer the inevitable consequences of our indifference.

The Real Consequences Of Indifference: Venezuela's Economic Collapse

The stunning social, political and economic collapse of Venezuela should be a wake-up call.

This country of 30 million people is facing dire food and medicine shortages, frequent power outages, serious political unrest, the world's highest inflation rate, violent crime, and is now in a declared state of emergency.

This wasn't supposed to happen. But it did. And it was predicted to happen. But nobody listened.

Not long ago, Venezuela's President Nicholas Maduro, declared a state of emergency. Put bluntly, Venezuela has become the world's most visibly failing state. Many more countries will follow unless the right economic prescriptions are soon formulated and implemented.

If this doesn't happen, and quickly, America's future will be characterized by what F. Scott Fitzgerald's Nick Carraway said (in the Great Gatsby) when asked how a given individual went bankrupt: "Slowly, then suddenly…"

We believe Venezuela's underreported economic catastrophe should serve as a major warning signal to indifferent and apathetic Americans.

Indeed, it should be a warning signal to all Democracies clinging to Keynesian propositions completely discredited by Nobel Peace Prize winning economists. (We will provide details about these economists in Part II).

A truthful joke once told by Harvard's Ted Levitt: “It appears the biggest problem we have in America today is ignorance and apathy, don't you agree Burns? Burns answered, 'I don't know and I don't care.'  We had better start knowing and caring.”

Today's decisions bring tomorrow's results. There is always a time lag between decisions made today and their inevitable results on tomorrow.

Capitalism Has Proven Itself Far Superior To Socialism In All Forms

The great British leader Winston Churchill said: "The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."

Venezuela's greater income equality solution was fueled by idealists in search of Utopian bliss. In brief, 30 years ago Venezuela was a relatively wealthy, very sophisticated country.

Then, the populace made terrible choices with respect to electing governmental leaders pedaling an alternative to capitalism.

To slightly paraphrase Churchill, "I accept the possibility that capitalism may be a poor way to run an economy, except for all the other forms that have been tried and failed."

As is usually the case, aggressive left-wing populism was sold to the people. Initiated by the late Hugo Chavez and extended to this day by his handpicked successor, Nicholas Maduro, Venezuela's business elite and the United States were blamed for Venezuela's problems. Sound familiar?

So, to bring dignity and inclusion to Venezuela's impoverished, Chavez aggressively set out to destroy what he called "the U.S – bourgeois alliance” by regulating every aspect of economic life and centralizing all decisions under his strict control.

The result? The economy toppled under the "government controlling the means of production."

But the visible economic consequences were delayed. It was held together when oil prices were exceedingly high. As soon as oil prices plummeted, the consequences of a government controlled economy reared its ugly head.

Vin Scully, Los Angeles Dodgers broadcaster extraordinaire, recently summed up his thoughts about socialism during a team game against the Milwaukee Brewers, saying:

"Socialism failing to work — as it always does — this time in Venezuela. You talk about giving everybody something free and all of a sudden there’s no food to eat. And who do you think is the richest person in Venezuela? The daughter of Hugo Chavez. Hello!”

Lessons Learned From Venezuela's Horrific Crisis

We have many generalizable messages. But probably the most important one is: when government runs the economy, as in communist and socialist societies, the economy underperforms.

Says Jay Prag, Professor of Economics at the Peter F. Drucker and Masatoshi Ito Graduate School of Management:

“…Government-run enterprises have no competitive pressure that keeps them efficient. Government-run enterprises are more or less led by politicians – and they worry about another group of people, voters...

...But a large government sector implies a large block of voters who work for the government. In an incredible humanist irony, government employees have become a major voting bloc in countries around the world...

…Those people, acting in a completely consistent, humanist way, vote for politicians who will keep them employed no matter what…. Big government is thus consistent with inefficiency, not economic growth…"

…Eventually, everyone loses hope and things become unbearable… Indeed, the very people that kept the politicians in power for all the goodies, suffer the most… As has often been said: 'There's no free lunch'…"

Postscript: August, 2017

"Venezuela claims to have more oil than Saudi Arabia, yet its citizens are hungry," reads the opening sentence of an excellent article in the Economist Magazine (July 29, 2017).

The article notes that an astonishing 93% of the Venezuelan people say they cannot afford the food they need and three-quarters have lost weight in the past year.

Further, the Maduro regime that "caused this preventable tragedy professes great love for the poor; yet its officials have embezzled billions, making that Venezuela the most corrupt country in Latin America, as well as the most ineptly governed."

Without a doubt, Venezuela is sliding from economic catastrophe to dictatorship. As reported in many media reports, an increasing number of millennials favor socialism to capitalism.

Venezuela is a textbook case of why democracy matters. But it is also a textbook case of why any tampering with the Free Market soon leads to the destruction of political freedom and tyranny.

Drucker, more than 25 years ago, asserted the major thesis of Friedrich von Hayek's 1944 book the Road to Serfdom was "an economy based on the Free Market and unencumbered by government controls, regulations and interventions, creates, by itself, an optimally free, just, and equal society."

MMN
Contributor: Management Matters
Posted: 07/22/2016