Political rulers can violate the laws of morality, but they can’t overturn the laws of economics

SHOCKER: Price Controls Lead to Shortages in Venezuela

By bob murphy

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.