The Myth of Rational Economic Design

Bolivia’s Slide into Hydrocarbon and Dollar Crisis

Throughout history, policymakers have repeatedly fallen prey to what Friedrich Hayek termed the fatal conceit—the belief that social and economic orders can be consciously designed and imposed from above.

As of March 2025, former Bolivian Vice President and enduring neo-Marxist intellectual Álvaro García Linera has weighed in on Bolivia’s deepening hydrocarbons and dollar crisis.

Chronic shortages of diesel and petrol, accompanied by days-long queues, are the cumulative consequences of two decades of state-centric economic mismanagement initiated during Evo Morale’s presidency following his 2005 rise to power. These outcomes have been exacerbated by constitutional overreach and persistent regulatory interventions that have distorted market signals and undermined energy sector efficiency.

Bolivia’s fixed exchange rate—set at 6.91 Bolivian pesos per U.S. dollar since 2011—aimed to anchor inflation and ensure stability. However, persistent institutional constraints followed by fiscal deficits monetised by the central bank since 2014 have depleted reserves, undermining the peg’s credibility and fuelling a parallel market where the dollar exceeds 15.50 Bolivian pesos. The result is a balance of payments crisis: falling hydrocarbon exports, once the main source of hard currency, have clashed with high import demand and public spending, triggering capital flight and currency substitution. Instead of enabling fiscal adjustment, the government has increased spending and money issuance, worsening stability, and inflation expectations.

Linera instead proposes a Leninist solution: “grabbing private exporters’ necks to squeeze foreign currency reserves,” sparing enterprises only through enforced compliance. This strategy only imposes a violent, rationalised economic order, further extending the state's reach within Bolivia’s neo-extractive economy.

Bolivia’s state-led interventions distort market signals, suppress entrepreneurial discovery, and entrench rent-seeking. Enforced “rational orders” inevitably trigger crises, fuelling informality as markets spontaneously reallocate resources to sustain economic coordination amid systemic distortion and institutional breakdown.

The Knowledge Problem and State Intervention

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Jesús Huerta de Soto, drawing on Friedrich Hayek's critique of central planning, argues that "socialism"—or more broadly, "statism"—is an intellectual error. No authority, however well-intentioned, can access the decentralised knowledge required to rationally allocate resources or reconcile individual preferences in an economic system.

Bolivia’s economic dis-coordination exemplifies the failures of interventionist policy. By clinging to the illusion of state control over the hydrocarbon sector—an area that inherently demands decentralised entrepreneurial discovery—the government entrenched inefficiencies that transformed Bolivia from a net exporter to a net importer. This shift marked the collapse of its redistributive  "economic model”.

The crisis is rooted in overreliance on volatile gas exports. Declining demand from Brazil and Argentina, coupled with falling global prices, sharply reduced dollar inflows. Meanwhile, rising domestic consumption and unsustainable fuel subsidies (gasoline fixed at $0.54/litre) intensified fiscal strain. Rather than pursuing structural adjustment of relative prices, authorities resorted to deficit financing and monetary expansion, eroding fiscal discipline, fuelling inflation, and driving Bolivian peso devaluation.

The emergence and surge of a parallel exchange rate in Bolivia—an unmistakable indicator of real devaluation amid a deepening balance of payments crisis. Bolivia’s policies have distorted price signals, deterring long-term entrepreneurial investment. The apparent stability during the commodity boom years concealed these structural weaknesses, resulting in a progressive depletion of dollar reserves since 2014.

Bolivia exemplifies the broader dysfunction across the Global South, where state-led redistribution and rent extraction, divorced from market coordination, produce chronic instability. Consequentially, as dollar scarcity intensified, informal exchange markets flourished. In response, the government imposed rigid price and currency controls, echoing the policy failures of Venezuela and pre-Milei Argentina. These interventions, grounded in the fallacy of top-down economic planning, have clashed with Bolivia’s economic reality—where 84% of Bolivia’s workforce operates informally—thereby worsening institutional fragility and systemic disorder.

The Myth of the Rational Economic Order

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Friedrich Hayek warned against constructivist rationalism—the illusion that economies can be engineered from the top down, rather than emerging through decentralised, evolutionary processes. He argued that a “rational economic order” is a myth, as no central planner can replicate the dynamic coordination of dispersed individual decisions.

García Linera’s Leninist call to “grab private exporters by the neck” to seize dollar reserves epitomises this fallacy: it erodes trust, violates property rights, and cripples entrepreneurial calculation. As Shuettinger and Butler in Forty Centuries of Wage and Price Controls, demonstrate, such interventions have historically led to shortages, black markets, and collapse.

Jesús Huerta de Soto, echoing these lessons, recently warned against coercively imposed economic orders in Latin America and Europe, which lack the capacity for economic calculation and consistently fail to anticipate the consequences of their policies. In Bolivia, for example, policymakers began selling dollars to the public through the central bank and the state-owned Banco Unión—a politically motivated strategy ahead of elections, intended to create the illusion of currency availability despite rapidly dwindling reserves. This policy undermined market confidence, threatened private exporters, fuelled informality, and drove productive activity underground by artificially strengthening the exchange rate in favour of the dollar. Compounding this, hyper-regulation and price controls forced many entrepreneurs to remain in the informal sector, as formal participation exposed them to excessive regulation and the risk of expropriation.

In this way, the state's coercive interventions perpetuated economic uncertainty—a destabilising effect consistent with historical patterns of systemic collapse, from Diocletian’s Rome in the third century, marked by the debasement of the denarius, to contemporary Bolivia and the ongoing erosion of the peso-boliviano.

Spontaneous Order in Action (Despite the Crisis)

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Spontaneous order offers an alternative to rational order (socialism). It is a natural process whereby complex social and economic coordination arises from voluntary individual actions, not centralised control. Guided by price signals, decentralised decisions generate outcomes that no authority could design.

For Austrian economists, this dynamic is observable in daily life. As Mises noted, production is inherently "anarchic." When supermarket employees restock shelves in response to fluctuating demand, they exhibit decentralised coordination driven by market signals determined by subjective preferences, not government orders.

However, these mechanisms break down in the Global South, where interventionism forcefully distorts long-term market signals. For instance, extensive hydrocarbon subsidies create artificially low prices, discouraging entrepreneurial initiatives by masking scarcity. When prices fail to reflect real conditions, entrepreneurs no longer perceive the need to invest or innovate, undermining local supply capacity and disrupting market coordination.

In Bolivia, persistent fuel shortages and dollar scarcity have led to widespread diesel smuggling. However, these acts should not be viewed as criminal offences under Bolivia’s legal code, but rather as decentralised, entrepreneurial responses to state failure. The rationality behind these responses is clear: subsidised fuel prices create powerful arbitrage incentives. Individuals purchase fuel cheaply and sell it across borders at market rates, a logical response to distorted relative price signals and inflation driven by interventionist policies. It functions as a mechanism of economic survival. Informal markets reveal an adaptive process of coordination grounded in spontaneous order, often dismissed by mainstream economists obsessed with equilibrium and formal structures—what Hayek (1988) warned against as the “fatal conceit”: the illusion that economic systems can be centrally designed.

Bolivia’s case is illustrative: as state intervention deepened, informality surged from 60% to 85%, exposing the collapse of formal institutions and the rise of entrepreneurial adaptation to imposed regulations through informality. This shift, far from indicating criminality, underscores the vital role of individual initiative and adaptation within economic systems. It signals how markets reallocate resources when formal mechanisms impose deceitful-induced incentives and strategies—crafted in the minds of planners like García Linera—that fail to reflect real economic conditions and worsen social discoordination.

Interventionism as a Crisis Multiplier

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In Interventionism: An Economic Analysis (1929), Ludwig von Mises unequivocally demonstrates that partial state controls—such as price ceilings, currency restrictions, and forced dollar repatriation—inevitably lead to failure. They create shortages, misallocate resources, and fuel black markets.

Governments then escalate intervention, deepening distortions in a vicious spiral that inexorably pushes economies toward collapse or socialism.

This analysis is highly relevant to Bolivia, now trapped in a spiral: currency controls and price mandates have triggered shortages, repression, and widespread informality.

Echoing Diocletian’s interventions during Rome’s Third-Century debasement crisis, the Bolivian government has responded to rising inflation by increasing the minimum wage from 2,500 to 2,750 bolivianos—a policy likely to exacerbate inflationary pressures and destabilise the Foreign Exchange Market.

Mises' Economic Calculation Problem explains why incentive-compatible allocation of scarce resources becomes impossible without private ownership and real market prices. Officials, blinded to true scarcities by distorted prices, are effectively 'flying blind', meaning they are making decisions without a clear understanding of the actual economic conditions.

As investment collapses and hydrocarbon and dollar reserves dwindle, Bolivia's interventionist spiral intensifies, providing a stark and clear illustration of the validity of Mises' warnings against socialism.

Conclusion

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Governments across the Global South persist in imposing coercive economic orders to pursue an expanded welfare state of redistribution, systematically undermining entrepreneurship, capital formation, and voluntary exchange—the true engines of sustainable growth.

Bolivia’s hydrocarbon crisis is not a market failure but the predictable outcome of sustained intervention and the enduring illusion that an economic order can be engineered by force. Such interventions inevitably generate informality as parallel markets emerge as a response to distortions framed by interventionism, to allocate resources, foster entrepreneurship, and sustain goods and services amid systemic dis-coordination and crisis.

We must undergo a fundamental rethinking of the state’s role, learning from the rhetoric of neo-Marxist figures like García Linera, who, once in power, sought to dismantle the spontaneous structures that underpin market coordination. Even figures like Donald Trump, though ideologically distinct, reveal how interventionist impulses destabilise market processes and erode economic trust.

Rather than acting as planners, states must safeguard voluntary exchange, protect property rights, and preserve the institutional foundations that allow spontaneous order to flourish. Only decentralised, market-driven processes can offer sustainable solutions to crises such as Bolivia’s ongoing hydrocarbon and dollar shortages—not coercive, state-engineered systems.