Inflation Is Among The Costs Of Venezuela's War On The Private Sector

Authored by Steve H. Hanke of the Johns Hopkins University. Follow him on Twitter @Steve_Hanke.


Venezuela is engaged in a multifaceted “war.” The Bolivarian Republic of Venezuela’s main enemy is the private sector of the economy (read: those who hold title to private property) and anyone else (internal or external) who opposes Chavismo (read: socialism).


Wars always wreak havoc; life, property, and dreams are destroyed. In the process, wars – like Venezuela’s – progressively consume a country’s accumulated capital stock, too. In other words, as wars rage on, the destructive war economy gradually eats away at productive assets like land, factory capacity, and raw materials. Just where this process leads was well illustrated by the great Austrian economist, Prof. Fritz Machlup, in a 1935 article about Austria’s World War I inflation:


A dealer bought a thousand tons of copper. He sold them, as prices rose, with considerable profit. He consumed only half of the profit and saved the other half. He invested again in copper and got several hundred tons. Prices rose and rose. The dealer’s profit was enormous; he could afford to travel and to buy cars, country houses and what not. He also saved and invested again in copper. His money capital was now a high multiple of his initial one. After repeated transactions — he always could afford to live a luxurious life — he invested his whole capital, grown to an astronomical amount, in a few pounds of copper. While he and the public considered him a profiteer of the highest income, he had in reality eaten up his capital.


In Machlup’s parable, “copper” represents the capital in an economy. Over time, war consumption and inflation eat up the economy’s physical capital. And, without capital, peoples of war-torn lands face a bleak future. Alas, when the dust finally settles, new questions will have to be addressed. Indeed, citizens of war-torn lands are always left asking, “Where’s our capital?” Yes, the “seed corn” will be nowhere to be found.


But, some of the costs of war are hidden under a shroud of inflation. Inflation, too, is a problem — one that always accompanies wars. But, why?


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