Economics

In the News

Exodus from Venezuela and the economics of revealed preference

Jim Riley

29th August 2018

How many people in the history of the world have fled from a capitalist country to a socialist one?

There was much amusement at the height of the long miners’ strike of 1984/85. A National Union of Mineworkers official from Yorkshire, a crony of Arthur Scargill, sought sanctuary in the Stasi-controlled state of East Germany. He felt unsafe under the jackboot of the Thatcher regime in the UK.

In the 1930s, some tens of thousands moved to Stalin’s Soviet Union, including the father of General Jaruzelski, the leader of the last Communist government of Poland in the 1980s. According to the euphemism used by the late Robert Maxwell in his biography of Jaruzelski, the father then “took a job in the north-east of the Soviet Union”. In other words, he was sent to the Siberian labour camps. He was lucky. Most of the other Poles who moved to the Soviet Union were subsequently shot.

These incidents stick in the mind precisely because they are so rare.

In contrast, when given the chance, millions flee from socialism. Venezuela is but the latest example. According to the United Nations, well over 2 million people have already escaped – the equivalent of some 4 million leaving the UK, carrying just whatever they can with them.

The Berlin Wall was constructed in 1981 to prevent people moving from socialist East Germany to capitalist West Germany. As post-war reconstruction got under way in the 1950s, around 3.5 million left for a better life in the West – more than 10 million translated into UK terms. The Wall was built to keep them in.

The problem which the Western countries have is not in keeping their own populations in. It is keeping others out, whether it is by Trump’s wall or Salvini’s refusal to allow refugees to land in Italy.

The reason is simple. Economies based on market-oriented principles work much better than centrally planned ones. Capitalism, for all its faults, offers a much better lifestyle than socialism.

In the 1950s, South Korean living standards were not much better than those of sub-Saharan countries in Africa. Now, South Korea is rich, and the North remains trapped in poverty. High levels of security are imposed by the latter to keep people in place. If they were removed, the country would rapidly become de-populated.

A fundamental concept in economic theory is that of revealed preference. People reveal what they really want not through answers to survey questions, but by their actions. If I say I prefer Pepsi to Coke but always buy Coke, I reveal that I actually prefer Coke.

Given the chance, over the years many millions of people have left socialist countries for capitalist ones. People were even willing to risk death to try and escape the old Soviet bloc countries. By their actions, people reveal their preferences.

The financial crisis, scandals like Carillion, homelessness – all these are sticks for “useful idiots”, in Lenin’s phrase, to beat capitalism. But the point cannot be made often enough. Whenever people are given the choice, they prefer capitalism to socialism.

Jim Riley

Jim co-founded tutor2u alongside his twin brother Geoff! Jim is a well-known Business writer and presenter as well as being one of the UK's leading educational technology entrepreneurs.

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