The news from Venezuela just keeps getting worse: runaway inflation, rolling electricity blackouts, shortages of even the most basic goods, people dying in hospitals waiting for care that just doesn’t ever arrive. The world looks on, appalled at the spreading miseries, and asks: “Why is this happening?” And, “What can be done about it?”

These questions are similar to those Adam Smith asked that led him to write his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations. Why are some places prospering, and others not? And what can we learn by studying the history and institutions of different societies that would enable us to make sound recommendations about how to alleviate poverty?

Why Is Venezuela Poor? These Common Theories Miss the Mark.

Many of the explanations that might initially occur to us are insufficient.

  • The presence or absence of plentiful natural resources? There are wealthy places with few natural resources, like Hong Kong for example; and there are places abundant in natural resources that remain poor—like Venezuela.
  • Perhaps it’s the existence of technological advances, or good education, or health care, or nutrition? But these all seem to depend on wealth: the wealthier a society is, the more resources it can devote to technology, education, health care, nutrition, and many other goods and services.
  • Or perhaps it’s the presence of respect for the rights of women or minorities? These, too, seem to track wealth: the wealthier a place is, the more it tends to respect rights.
  • Perhaps it’s the absence of war and conflict? These too seem related to wealth: the more prosperous is a society, the less likely is it to engage in active war, especially with other societies with which it trades goods.

A final explanation that was more common in the eighteenth and nineteenth centuries is that perhaps poor countries are populated by people who are naturally inferior to others, and that accounts for why they are less prosperous. Thomas Carlyle dubbed economics the “dismal science” precisely because the economists had suggested that all people were capable of improving their conditions, if they had the right institutions. What a “dismal” prospect it was to Carlyle, who fancied himself part of the naturally “superior” caste of humanity whose job it pretended was to oversee the lives of the naturally “inferior,” to be informed that his services as overseer were no longer required.

No, none of these explanations tells the real story.

There Are Two Things That Decide Why Some Societies Work…And Others Don’t.

As Adam Smith correctly saw, the two main obstacles to increasing human prosperity were institutions and culture. Poor places were those that,

  • on the one hand, were beset by bad institutions that prevented individuals from bettering their conditions,
  • and on the other, were hamstringed by a culture that demonized, rather than celebrated, commerce, trade, and honorable business.

What are the right institutions? Smith said “peace, easy taxes, and a tolerable administration of justice.”

Justice, on Smith’s account, was principally three things:

  • The protection of each person from murder, assault, and enslavement.
  • The protection of property.
  • The protection of voluntary contracts, or promises.

It’s a simple formula: the “three Ps”—person, property, and promise. Smith’s review of the historical record led him to make the rather audacious prediction that a country whose government protected these three Ps—and did “little else”—would soon begin to prosper, regardless of what its natural resources were, what language its people spoke or religion they practiced, or where on the globe they found themselves.

By contrast, countries whose governments did not protect the three Ps, or whose governments themselves actively violated the three Ps, would not prosper. It might do well in the short run, in the way that confiscation, theft, imperialism, or slavery can, and historically has, allowed some societies to enrich their leaders. But these “transactions” do not—and cannot—lead to general growth in prosperity. Those who get rich by these extractive means do so only at the expense of others, and extraction is deadly to true prosperity.

That brings us back to Venezuela.

Its troubles are not inexplicable, and should not be surprising, since it fails on both of Smith’s conditions of institutions and culture.

It has, first of all, over the last few decades, nationalized more and more of its economy, canalizing its people into ever narrower ranges of options, and divesting them not only of their personal property but of the freedom to improve their own lives as they judge fit.

In addition, Venezuela—or at least Venezuela’s leaders—have been in the grips of a growing suspicion of honorable business, of honest work, and of faith in individuals to be the authors of their own lives. As the number of “national plans” has increased, so has the assumption of control over individuals’ lives, and the concomitant disrespecting of individual dignity.

Hugo Chavez was a prime example—though, alas, certainly not the only one—of what Smith called the “man of system,” the person who conceived of society as if it were a chessboard, and all the people in it like mere chess pieces, which the man of system could merely arrange into whatever pattern he dubbed right, just, or beautiful. But human beings are not mere chess pieces; they have, as Smith said, “principles of motion all their own.” they are moral agents who make choices, respond to incentives, and behave in the beautifully unpredictable ways free people do—if only they are allowed.

So the man of system is faced with a dilemma. Either he must, in the face of free people’s stubbornly recalcitrant unwillingness to follow his plan, give up on his comprehensive plan altogether; or he must decide to stamp out his people’s freedom, and regiment them like an army.

The former route is what has led to prosperity in the world, indeed more prosperity since Adam Smith’s day than the world has ever known. The latter route, however, is what too many leaders have chosen, and Venezuela’s “Socialism of the 21st Century” is another shining, if ignoble, illustration of the result.

Many other countries have also taken the route of control and repression and “organization,” and found their own men of system only too happy to assume power: think of the former Soviet Union under Stalin, of China under Mao, of North Korea, of Cuba, and on and on. It is thus no accident that the places with the least economic freedom are also the poorest and most wretched.

Ignoring Adam Smith causes real people to suffer.

The 240 years since Smith’s Wealth of Nations was published has provided abundant evidence for the now-open secret of prosperity: Smith’s three Ps and his “peace, easy taxes, and a tolerable administration of justice” are a good place to start. As Smith well understood, and as the miseries in Venezuela today demonstrate yet again, this is not merely a matter of filthy lucre.

It is about the improvement of the lives of actual, real, and precious human beings. Increasing wealth is not the only thing that matters, but it can enable people to turn their attention to things that do matter, to constructing for themselves, for their families, and for their communities lives of dignity, meaning, and purpose.

The costs of economic centralism, even socialism, in places like Venezuela are clear in the declining standards of living, but they appear just as clearly in the loss of freedom, in the loss of the dignity that comes from living the noble life of a free and responsible moral agent.

Economics is sometimes criticized as soulless, as untethered from morality and from what truly matters to human beings and flourishing human societies. Nothing could be further from the truth. It is precisely in places like Venezuela where we can see the immiserating results of an unwillingness to learn the lessons of political economy.

Adam Smith, were he alive today, would rejoice in the prosperity people have generated in those countries that followed his prescription, and he would take only cold and heartbroken comfort in seeing the continuing demonstrations in places like Venezuela that he was right after all.