December 12, 2018 Reading Time: 4 minutes

Several days ago, a Havana building collapsed and killed four people. Although many structures in Cuba have been damaged by the succession of hurricanes that have struck during the last decade, full and partial structural collapses have been increasing in frequency there. Thousands of buildings are unsound and on the verge of falling down, with many lives at risk.

A common refrain among defenders of the Cuban state and its economic management is that the U.S. embargo is to blame for preventing critical resources from reaching the island for decades. But Cuba has maintained trading relationships with over 190 nations while the U.S. embargo has endured. Also blamed are the collapse in subsidies from the Soviet Union and a fall in world sugar prices (both in the early 1990s), which had a major impact on Cuba’s economy.

But the increasing frequency of building collapses, with the concomitant loss of life and mounting housing shortage, is a direct result of Cuba’s political managers’ being unwilling to liberalize its economy fully. It is the basis of allocation, and not the type or number of goods available, that accounts for the disrepair of buildings and the mortal risk they pose to thousands.

The Road to Ruin

After the 1959 revolution, opulent buildings in major Cuban cities were confiscated from their owners — individuals and corporations — and given variously to party officials for their own use or to indigent citizens for housing. As was the case with Venezuela, the Soviet Union, and all other centrally planned states, in early stages of economic collectivization all seemed well, indeed idyllic: supplies plentiful, employment substantial, mass transit operating on time, and social-welfare agencies operating smoothly, all sometimes better than previously.

Yet inevitably, the ruinous nature of centrally planned economies is laid bare; the initial prosperity is revealed as the drawing off of capitalism’s surplus rather than the result of any economic superiority of bureaucratic planning.

Prices Are Priceless

The general scheme underlying collectivist economies contemplates a massive bureaucracy that gathers data to plan the allocation of resources and make production decisions for capital goods: resources, heavy equipment, and the like. Rather than employing prices drawn from individuals and firms dispersed throughout the economy, legions of bureaucrats compile estimates of demand and submit those to a czar — the head of the Ministry of Construction, in Cuba’s case — who in turn makes the ultimate decisions regarding the use of capital goods. Following a handful of meetings, state-owned equipment and materials (and where applicable, labor) are dispatched to one or a number of sites deemed the most important.

The result, inevitably (and at this point thoroughly documented), is misuse, waste, shortages, and idleness on a massive scale. The Communist Party of Cuba’s account differs greatly from those of citizens and foreign correspondents.

Without prices, the best way (in terms of materials and production methods) to produce outputs cannot be determined from among scores, perhaps an incalculable number, of choices — nor, for that matter, can the specific outputs that should be produced.

Prices provide a means of evaluating opportunity costs in a market system through which all prices and decision-makers are connected; they allow decision-makers to consolidate capital goods, consumption goods, and methods. Individuals and firms operating within a market economy have the means to determine the lowest-cost, or relatively lowest-cost, means to achieve their ends; top-down planners operating through statistical agencies and bureaucratic offices focusing on estimating needs may get lucky once in a while, but on the whole, they cannot make rational economic choices.

Meritorious but Insufficient Liberalization

After assuming power in 2008, Raúl Castro opted to allow limited markets and simple entrepreneurial enterprises to develop: in-home restaurants, barbershops, bicycle-repair shops, and tailors. These are low-capital-intensity businesses for which simple consumption goods and individual labor are the major inputs. The Cuban government has, with a handful of small exceptions, maintained control of the allocation of capital goods, resulting in a monolithic decision-making process. Land development, large-scale agriculture, mining, refining, and large-scale construction projects are still conducted at the whim of Cuban economic ministers.

To save lives by ensuring that the types of large-scale, sophisticated repairs that dilapidated buildings need can be done, the Cuban government must free the capital-goods markets as well.

Only the expeditious sale of construction equipment and building materials to private firms, a free market for skilled labor, the sale of government-mismanaged buildings to private bidders, and capital markets for dealing in certified titles to masses of capital (stocks) will ensure as quick an addressing of both the collapse of thousands of buildings and the shortage of housing as possible.

A Step Backward

Closing in on the 10th anniversary of embryonic entrepreneurialism in Cuba, the Cuban government is poised to introduce a spate of new regulations in early 2019 that, many citizens fear, will quash the growth of the small but vibrant private sector. Among these are new licenses that restrict individuals to operating one business at a time (e.g., a bed-and-breakfast owner can’t also run an in-house restaurant) and the requirement that anyone operating a private business have an official bank account. Needless to say, the government’s reversal doesn’t bode well for the future of private enterprise in Cuba.

While a genuine stock market would provide a profoundly impactful step toward economic liberalization, the Cuban government could at the very least free up the market for capital goods, permitting prices and local decisions to inform and coordinate economic choices, which would in turn save lives.

Peter C. Earle

Peter C. Earle

Peter C. Earle is an economist who joined AIER in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area. His research focuses on financial markets, monetary policy, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

Selected Publications

“General Institutional Considerations of Blockchain and Emerging Applications” Co-Authored with David M. Waugh in The Emerald Handbook on Cryptoassets: Investment Opportunities and Challenges (forthcoming), edited by Baker, Benedetti, Nikbakht, and Smith (2022)

“Operation Warp Speed” Co-authored with Edwar Escalante in Pandemics and Liberty, edited by Raymond J. March and Ryan M. Yonk (2022)

“A Virtual Weimar: Hyperinflation in Diablo III” in The Invisible Hand in Virtual Worlds: The Economic Order of Video Games, edited by Matthew McCaffrey (2021)

“The Fickle Science of Lockdowns” Co-authored with Phillip W. Magness, Wall Street Journal (December 2021)

“How Does a Well-Functioning Gold Standard Function?” Co-authored with William J. Luther, SSRN (November 2021)

“Populist Prophets, Public Prophets: Pied Pipers of Lucre, Then and Now” in Financial History (Summer 2021)

“Boston’s Forgotten Lockdowns” in The American Conservative (November 2020)

“Private Governance and Rules for a Flat World” in Creighton Journal of Interdisciplinary Leadership (June 2019)

“’Federal Jobs Guarantee’ Idea Is Costly, Misguided, And Increasingly Popular With Democrats” in Investor’s Business Daily (December 2018)

Books by Peter C. Earle

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