02 Oct 2013

SHOCKER: Price Controls Lead to Shortages in Venezuela

Economics 59 Comments

The news is rife with stories of the awful shortages of basic essentials in Venezuela. For example, the BBC World Service did an extended report, and the following comes from a Guardian article:

It’s the rainy season in Venezuela and Pedro Rodríguez has had to battle upturned manhole lids, flooded avenues and infernal traffic jams in his quest for sugar, oil and milk in Caracas.

In Avenida Victoria, a low-income sector of Caracas, Zeneida Caballero complains about waiting in endless queues for a sack of low-quality rice. “It fills me with rage to have to spend the one free day I have wasting my time for a bag of rice,” she says. “I end up paying more at the re-sellers. In the end, all these price controls proved useless.”

In 2008, when there was another serious wave of food scarcity, most people blamed shop owners for hoarding food as a mechanism to exert pressure on the government’s price controls, a measure that former president Hugo Chávez adopted as part of his self-styled socialist revolution.

This time, however, food shortages have gone on for almost a year and certain items long gone from the shelves are hitting a particular nerve with Venezuelans. Toilet paper, rice, coffee, and cornflour, used to make arepas, Venezuela’s national dish, have become emblematic of more than just an economic crisis.

Although people often use the phrase merely for rhetorical points, this episode really is Econ 101. The price controls instituted under former president Chavez are the ultimate source of the shortages. Naturally, Chavez’s successor, Nicolás Maduro, blames everything on a “wider plan concocted by the CIA to destabilise his government,” according to the Guardian piece.

As any intro economics textbook explains, when the government sets the price of a good below the market-clearing level, you get a shortage. That is, buyers want more units of the good than sellers want to provide. This is playing out in literally textbook fashion in Venezuela.

As a final note, this isn’t Monday morning quarterbacking on my part. Back when Chavez devalued the currency and ramped up price controls, I said it would lead to shortages. Here’s an excerpt from an article I wrote back in February 2010:

“The bourgeois are already talking about how all prices are going to double and they’re closing their businesses to raise price,” Chavez said on state-controlled television. “People, don’t let them rob you, denounce it, and I’m capable of taking over that business.”

True to his word, Chavez sent troops into retail shops to inspect prices. Economists know the effect this will have. Chavez will find that no amount of populist rhetoric or military might can overturn the laws of economics.

By definition, the market-clearing or equilibrium price is the one that equates supply and demand. By using soldiers to intimidate businesses into keeping their prices below the (new) market-clearing level, Chavez will cause demand to exceed supply, creating a shortage. Venezuelans will find that the items in question will simply disappear from the shelves, and will be available only in the black market.

Political rulers can violate the laws of morality, but they can’t overturn the laws of economics. If Venezuelans want to once again readily obtain toilet paper and food, they should demand that their government allow the market to function.

59 Responses to “SHOCKER: Price Controls Lead to Shortages in Venezuela”

  1. Jonathan Finegold says:

    If you want to see some “sound” economic logic in an article title: “Hyperinflation is Forcing Venezuela to Print Hundreds of Millions of Extra Banknotes.” If it weren’t for those darned prices, Venezuela wouldn’t have to print so much money!

    • Dan says:

      Wow

    • Innocent says:

      I think it is a liquidity trap…

    • Cosmo Kramer says:

      oh my lord. Good find.

    • Tel says:

      We so totally dodged a bullet on that one. I mean, with credit cards and electronic banking we will be able to handle massive inflation without a hitch!

      Mind you, educating the population in the details of scientific notation could be a problem… and the SI system of units only goes up to Yotta-dollars after that, hmmm, could get hairy.

    • GeePonder says:

      Wow! And who is the Tom Hickey genius? I need to start lurking on Norman’s site more, just for the laughs, except it is kind of sad, too.

      • Bob Roddis says:

        It’s sad.

      • Bob Roddis says:

        Actually, Tom Hickey claims to be a retired philosophy professor. That makes sense, I guess.

  2. EHeassler_USN Ret. says:

    Gee, ain’t communism great? Somebody should tell obama that is what we have to look forward to in the United States if he continues his all out war on our economy. As the dollar weakens thanks to obama, we can see prices increase every day in the supermarkets and at the gas pumps. Gee, thanks obama!

  3. William Anderson says:

    I’m waiting for LK to check in and inform everyone that the real problem is the plethora of cut-throat capitalists that dominate the government and society there. Everyone knows that a government order always eliminates the Law of Scarcity and that scarcity itself is contrived by corporations that set price and output at monopoly levels. (An economist from Calvin College actually made that claim.)

    I might also add that the best way to “solve” this problem, other than to use the armed forces to kill and intimidate (that always rids the economy of scarcity) is for the monetary authorities there to create a liquidity trap, since such conditions eliminate scarcity and allow people connected with the government to spend as though they were richer than they really are.

    And shame on you, Bob, for claiming that price controls create shortages and chaos. LK no doubt will be happy to post the reasons why you should be ashamed of yourself.

    • Mule Rider says:

      You beat me to the punch, Dr. Anderson. I was going to say basically the same thing (though not as elegant as you).

      • Mule Rider says:

        LK, much like Krugman, has mastered the art of sophistry and deflection.

    • Lord Keynes says:

      Fascinating that you think that a nation moving toward a command economy is the same thing as a market economy run with Keynesian macro management, and that a Keynesian would automatically rush to defend Venezuelan socialists.

      But, then, “thinking” was never really your strong suit, was it, old chap.

      • valueprax says:

        Different types of laissez-faire, and all that.

        The “degree of command economy” present in “market economies run with Keynesian macro management” (so they’re not free markets then? If they’re being managed) are irrelevant for consideration here.

        LK, what could any of us feeble-minded sellouts ever do if we aspired to achieve your level of objective, passionate truth-seeking? Do we have a chance or should we just shoot ourselves besides a mass grave and spare you the trouble?

      • Bob Roddis says:

        That’s right. Lord “Fixprice” Keynes’ analysis is much more nuanced and sophisticated than that. For example, he denies the existence of Cantillon Effects. He also insists that if firms tend to shut down production but continue selling old inventory over time without price cutting during bad times that the Austrian School has been refuted.

        His analysis is so nuanced and sophisticated that it blinds him to the similarities between a lack of prices under Soviet style socialism and distorted and misleading prices under Keynesianism. And he denies that observation of the latter phenomenon is even part of Austrian analysis.

        • Lord Keynes says:

          “he denies the existence of Cantillon Effects. “

          Only in instances when administered prices (an empirically well established fact) do not move in response to demand changes — an observation that would logically follow, moreover.

          That does not deny that when prices do change, Cantillon Effects do happen.

          Nice to see your dishonesty and plain lying is as robust as ever.

          • Bob Roddis says:

            Not so logical, LK. The first guy that got the money first still got an unearned gift from others regardless of the time lag.

            Did I forget to mention that LK still does not understand economic calculation (which I first realized when he denied that Keynesian price distortions are similar in impact to the absence of prices under socialism).

            • Lord Keynes says:

              “The first guy that got the money first still got an unearned gift from others regardless of the time lag.”

              lol.. The direct implication of this is that every subsequent user of a private sector negotiable cheque, negotiable bill of exchange, or negotiable promissory note also “got an unearned gift from others regardless of the time lag”.

              Therefore all those private sector debt instruments that add to money supply must be criminally immoral…

              Better use coercion against the private sector to stop this evil practice, you thuggish socialist, you!

              • Bob Roddis says:

                Lord “Obfuscation” Keynes:

                I also mentioned purchasing a commercial loan. Did you miss that.

              • Major_Freedom says:

                “The direct implication of this is that every subsequent user of a private sector negotiable cheque, negotiable bill of exchange, or negotiable promissory note also “got an unearned gift from others regardless of the time lag”.”

                No, because by the time the last receivers receive the money, others would have already acquired goods and assets at the lower prices.

                If I sell my garbage to the state for $100 million for example, then the way YOU will experience an increased income is if I spend that money on goods that are a function of existing spending, which of course does not include my $100 million at this time yet.

                But me spending that money makes YOUR money less valuable. We are competing for the same supply of goods.

                LK, you’re confused as usual.

                I realize that you have a psychological incentive NOT to understand this, because if you accept the obvious, your whole inflationary advocacy is revealed to be nothing but a transfer from one group to another group, and doesn’t help “society.”

                The reason why the state used coercion to monopolize money is precisely because it benefits them and their friends in the market as a group, at the expense of everyone else, and the expense is greater the later the receiver of the new money is in the chain.

                It’s funny how you have a compulsion to try and paint Roddis and other anti-coercion, pro free market advocates to be as morally corrupt as you.

                The difference of course is that whereas Roddis’ talk is more or less consistent with his actions, your actions, which are anarcho-capitalist actions, are contrary to your talk.

              • Anonymous says:

                So you’re admitting the Keynesian inflationary fiat model causes distortions, aren’t you?

                Argument conceded.

                And your new argument is that under free markets this problem of distortion will be as bad but your evidence is lacking, so I’m afraid you lose both arguments, LK.

                Like I’ve said before, you truly are the Wyl E. Coyote of this board.

                And for the record, you’ve never once criticized your hero for his advocacy of eugenics. Judging by the ethics you profess — might makes right — I can’t see why you’d object to the practice either. Your fellow Keynesian DK advocated the murder of innocents who objected to being in a contract with the state that they did not take part in creating. Maybe it’s just a Keynes thing, this desire for the state to kill “unworthy’ humans.

            • Bob Roddis says:

              Therefore all those private sector debt instruments that add to money supply must be criminally immoral

              This is why it is pointless to “debate” Lord “Fixprice” Keynes. A check is just a promise that a certain amount of specie is presently in the payor’s bank and is now assigned to the payee. Someone who purchases a commercial loan is now entitled to the proceeds instead of someone else.

              A funny money loan created out of nothing or a payment by the government with new funny money is not anything like those two examples.

              Actually, LK’s middle name should be “obfuscation”.

              • Dan says:

                “This is why it is pointless to “debate” Lord “Fixprice” Keynes.”

                I agree, which leads me to question why you two keep having the same arguments for years on this blog? Same goes for people who get sucked in by Ken B’s constant trolling of this site.

              • Lord Keynes says:

                :”A check is just a promise that a certain amount of specie is presently in the payor’s bank and is now assigned to the payee.

                That is precisely what negotiable debt instruments are NOT, bob.

                You are ignorant of basic facts about credit money.

                Debt instruments are IOUs, not certificates of bailment.

                You need not have the money “in the bank” or credited to your account at the time you write the cheque, only when it is redeemed.

                If what you say above were true, then NO CHEQUE WOUD EVER BOUNCE.

              • Rick Hull says:

                LK > If what you say above were true, then NO CHEQUE WOUD EVER BOUNCE.

                This is ridiculous. Roddis says the cheque is a promise to pay. Sometimes people are unable or unwilling to keep their promise. THAT’S WHEN THE CHEQUE BOUNCES.

              • Rick Hull says:

                Sorry, I forgot we’re being pedantic. Implicit in the promise to pay, when one writes a cheque for an amount payable on demand, is a promise that the account contains said amount. When the implicit promise is not kept, the cheque bounces.

              • Tel says:

                When the implicit promise is not kept, the cheque bounces.

                Actually, there’s a statutory grace period of three days (I believe) where the cheque can wait for clearance… also some banks will spontaneously create an overdraft, and then charge a fee for it later. How this plays out in practice might well vary.

                The direct implication of this is that every subsequent user of a private sector negotiable cheque, negotiable bill of exchange, or negotiable promissory note also “got an unearned gift from others regardless of the time lag”.

                Not such a strange implication. If I write a cheque and the recipient doesn’t bank it for a year I’m indeed significantly better off. Very few businesses will allow cheques to sit in the cash register longer than a day or two for this exact reason.

                That said, the fact that elasticity automatically exists in any private transaction seems to me would also be an argument against any currency elasticity offered by government, since it is both unnecessary and unhelpful.

          • Matt Tanous says:

            “Only in instances when administered prices (an empirically well established fact) do not move in response to demand changes”

            Presumably, given a fixed number of goods, if I buy it first, you can’t. Which would be (wait for it)… a Cantillon Effect! What do you know? Cantillon Effects without price changes. Who would’ve thunk it?

      • Mule Rider says:

        Command economy, Keynesian macro-management….

        Po-ta(y)-to, po-ta(h)-to…

      • Mule Rider says:

        “Fascinating that you think that…a Keynesian would automatically rush to defend Venezuelan socialists.”

        The accusation wasn’t that you’d automatically rush to defend Venezuelan socialists but rather find a way to scapegoat (cut-throat) capitalism and deny basic economic truths in the process.

        Nice bit of sophistry/deflection, however.

        • valueprax says:

          Red socialism is not blue socialism, sir, and your inability to distinguish the difference represents artifacts of your simplistic, naive mind.

          If you look at the color spectrum, clearly red is a much different color from blue!

          • Lord Keynes says:

            Your use of the word “socialism” is an abuse of language typical of Austrian ideologues.

            If we explore the implications of your abuse of language, we could easily argue that the Austrian economics movement itself is plagued with socialists too, such as Mises, Hayek, Lachmann, or some GMU Austrians.

            E.g., Mises rejected anarcho-capitalism and defended a state that enforced a “command economy” monopoly on justice, law and order, and defence.

            He also argued that certain government restrictions on private production could be morally justified via utilitarian ethics:

            “Economics neither approves nor disapproves of government measures restricting production and output. It merely considers it its duty to clarify the consequences of such measures. The choice of policies to be adopted devolves upon the people. But in choosing they must not disregard the teachings of economics if they want to attain the ends sought. There are certainly cases in which people may consider definite restrictive measures as justified. Regulations concerning fire prevention are restrictive and raise the cost of production. But the curtailment of total output they bring about is the price to be paid for avoidance of greater disaster. The decision about each restrictive measure is to be made on the ground of a meticulous weighing of the costs to be incurred and the prize to be obtained. No reasonable man could possibly question this rule” (Mises 1998 [1949]: 741)

            • Ken B says:

              Mises, whenever I see an extended quote from him, always seems so much more sensible, careful, and yes moderate, than his acolytes.

              • Bob Murphy says:

                Ken B. you’re writing that as if it’s somehow a slam against his acolytes. When is this ever not the case? Do internet atheists make the case for evolution as well as Richard Dawkins?

              • valueprax says:

                Which objective standard are we using to qualify the following concepts?

                “Sensible”
                “Careful”
                “Moderate”

                Are you the sole judge of that?

              • Ken B says:

                Bob
                1. I’m writing this as praise for Mises, whom I have read very little of.
                2. I agree Dawkins is also plagued by confused followers
                3. As for the rest, just look at valueprax’s response.

              • valueprax says:

                That is HILARIOUS! I call you out on your BS wiggle-worming and you go “See, these people are just insensible, reckless and radical, like vp here.”

                Too funny man! You are completely blind to the way you speak in symbols rather than meaningful analytical concepts, aren’t you?

                “Let’s see, I’ll just put the “sensible” code word on this one right here and that guarantees it involves a logically coherent process, whether I check it out or not.”

                You’re using words with value judgments built in. Someone questions your value judgments and you scoff. How DARE we point out that you bring your values into this when you’re attempting to paint yourself as King Objective.

              • valueprax says:

                Do you have a logical principle that dictates when your logic is beyond reproach by us mundanes? Or do you just wing it?

                (See what I did there?)

            • valueprax says:

              Indeed, Lord Eugenics, to the extent one advocates socialism, one is a socialist. Even Mises, Hayek, The Great Rothbard(tm) and even myself to the degree I unwittingly do so even now (I’ve tried to purge myself of such nonsense thinking but perhaps I still hold on to a superstition here or there that someone could exorcise me of).

              Great example of Mises being an illogical socialist while claiming that “no reasonable man” could oppose his opinion on the matter. Which is how socialists always think about the things they opine about. Poor Mises!

              • Tel says:

                “no reasonable man” could oppose his opinion…

                It is amazingly difficult to put together an accurate description of a reasonable man, or for that matter a rational man.

                This makes it weird that large amounts of the laws we live by are defined in terms of such a vague concept.

            • skylien says:

              LK,

              Right, I knew you would find the “fire regulation” quote again.

              And here is an example of interventionism par excellence of the type, that if you start to engage in it, it will lead to further steps, because it is working directly and totally against the initial reason this measure was setup in the first place. Since those people don’t see the problem with it now, it is very unlikely (but not impossible!) the same people will see it later if its shortcomings become obvious and further measures are ‘necessary’:

              http://www.acting-man.com/?p=26338

              I really don’t think that it should be hard for you therefore to agree that far with Mises that such a kind of interventionism definitely tends to lead to a total Command Economy. And that he distinguishes such interventions from interventions like “fire regulation” in which the curtailment of output is known, and accepted by its promoters, because a different effect is valued more (Of course you can still argue about the effects). However it is absolutely impossible to accept the costs of the intervention Mr Hollande pushes for IF your goal is an increase of employment or stop employment from decreasing and therefore keeping up the living standards of the workers.

              I just think that far we should be able to find common ground here, and that managing monetary matters should be a separate discussion even if from the view of libertarians the same or similar mechanisms are at work there. It obviously is not as obvious as in Mr Holland’s case.

              And it would be nice if all sides would stay away from insults, at least stay passive. (I am not saying you can’t return a favor once in a while).

            • Major_Freedom says:

              LK:

              Mises was a near anarchist.

              “The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts, make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars. … However, the right of self-determination of which we speak is not the right of self-determination of nations, but rather the right of self-determination of the inhabitants of every territory large enough to form an independent administrative unit. If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done.” – Mises, Liberalism, pp. 109-10

              This is an argument for anarchism. Mises didn’t go the whole way because he believed it lacked technical grounds to do it. Every group and, if it can be technically done, every individual, can secede from the government. This is what Mises believed.

              Mises was rather inconsistent on the matter of anarchism versus democracy.

        • Lord Keynes says:

          “The accusation wasn’t that you’d automatically rush to defend Venezuelan socialists but rather find a way to scapegoat (cut-throat) capitalism”

          LOL.. so if I blamed Venezuela’s economic problems on “scapegoat (cut-throat) capitalism” I wouldn’t be defending “Venezuelan socialists”?

          Presumably Andersen’s thinks I would be actually attacking them and blaming “Venezuelan socialists”…

          Nice way to throw logic to the wind.

      • Anthony Lima says:

        Fascinating that you don’t see the similarities.

        • Ken B says:

          Fascinating that you think similar means indistinguishable.

  4. Bob Murphy says:

    Why do you guys call him Lord Eugenics? And for what it’s worth, I think it’s easier for “our side” to claim the high ground if you stopped calling him that.

    • Ken B says:

      Are you kidding Bob? Maynard Keynes endorsed eugenics; the implication is LK is a eugenecist by proxy. That’s why I call him Lord Mustache; Maynard Keynes sported one. You can join the fun and call him Lord Toothbrush as I believe Maynard did use one.

      • valueprax says:

        Ken B, what’d you think of Mises letting the cat out of the bag that he loves fascists like Mussolini? Was that sensible, careful and moderate?

        Or do you agree with all the lovers of The Great Rothbard that maybe LK was a little fast and loose with his interpretation?

        Or are you a liar? (See what I did there?)

        Anyway, glad to have you around Ken B, your unfailing objectivity keeps us all in line. Without you, we might play fast and loose with reality ourselves, being primarily motivated by our irrational love for The Great Rothbard, master ideologue moron.

      • valueprax says:

        I’m going to start calling Rothbard the Libertarian Pervert, are you with me?

    • Lord Keynes says:

      The high ground is already claimed by your impeccably argued, rational and eloquent follower Valueprax:

      “No thanks Lord Trash, I’ve read all your garbage before. Take that dumping ground elsewhere, it stinks.”
      http://consultingbyrpm.com/blog/2013/10/a-tale-of-two-krugmans-2.html#comment-74865

      • Lord Keynes says:

        I’m sure all nonlibertarian readers of your blog will be immediately convinced by the sheer power of his arguments deployed there, Bob Murphy.

      • valueprax says:

        That wasn’t an argument. It was a statement of opinion followed by a request for a specific action.

    • Richie says:

      “Why do you guys call him Lord Eugenics?”

      So we should call him Lord Keynes? Why can we not make up his name like he already had for himself?

      • kickef says:

        I don’t know, Charlie.

        • Richie says:

          Oooooh, you really hit me where it hurts! NOT. Pathetic.

      • Ken B says:

        For the same reason we use the handle “valueprax” rather than “novalueprat”.
        I can see the point of ocassionally distorting a name to make a point humorously. I once referred to Bob’s middle initial as standing for Pangloss when he was arguing some slop about god’s plan, but this insistent invariable replacement of LK’s handle with an insult seems childish. I think both I and Pangloss agree on that :)

        • Bob Roddis says:

          Except LK does not call himself “Mr. Keynesian” or “Dr. Keynesian” to differentiate his ideas from the man.

          THE MAN was a Director 1937-1944 and V.P. 1937 of the British Eugenics Society. Further, THE MAN used to go on vacation in the Mediterranean area and pay poor people to have sex with their young boys. Further, THE MAN’s hobby was attempting to destroy bourgeois morality, including, inter alia, thrift (just a coincidence, I’m sure). I can’t possibly see how pointing that out hurts the Austrian cause. Especially after LK spews his usual venom at Prof. Anderson. Especially after LK repeatedly accuses Mises of celebrating fascism when Mises was quite clear in spelling out the horrors of fascism while noting that the fascists saved Italy from Pol Pot style commies.

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