September 19, 2017

Venezuelan Price Controls Lead to Predictable Shortages

By Marian L. Tupy
Yesterday, Bloomberg had an interesting article about food shortages in Venezuela. Contrary to popular perception, the Venezuelan shops are not empty. Bakeries, for example, offer "a wide variety of freshly-made breads," including, "a fat, dense loaf called the gallego, or a soft sobado." Conversely, "the canilla, a soft, buttery take on the baguette that's been the beloved bread of choice in this South American country for decades," is missing from the shelves. Why?

The canilla has disappeared because its price is set by the state. The price of the bread is "set at such a low level—1,500 bolivars versus the 4,500 to 7,500 a gallego commands—that bakers complain it doesn't come close to covering their costs. So they use new-found supplies of wheat in the country to bake every other kind of bread imaginable."

Say what you will about socialism, it always follows a predictable pattern. In an attempt to make something available to everyone, the socialists ensure that it is not available to anyone (except for the politically well-connected). As a child growing up behind the Iron Curtain, I recall constant shortages of basic foodstuffs. The price of meat, for instance, was kept artificially low due to political considerations. Low prices created an impression of affordability. On their trips abroad, communists would often boast that workers in the Soviet empire could buy and produce more meat than their Western counterparts. In reality, shops were often empty.

The deleterious consequences of price controls should not come as a surprise to anyone with a basic understanding of economics, including supply and demand, and the role that free markets play in allowing the price mechanism to function properly. Back in 1979, Robert Schuettinger of Oxford University and Eamonn Butler of the Adam Smith Institute wrote a brilliant series of essays entitled Forty Centuries of Wage and Price Controls: How Not to Fight Inflation.

The authors noted that price and wage controls go back, at the very least, 4,000 years to ancient Egypt. "For centuries the Egyptian government strived to maintain control of the grain crop, knowing that control of food is control of lives. Using the pretext of preventing famine, the government gradually regulated more and more of the granaries; regulation led to direction and finally to outright ownership; land became the property of the monarch and was rented from him by the agricultural class."

According to the French historian, Jean-Philippe Levy, "There was a whole army of inspectors [in Egypt]. There was nothing but inventories, censuses of men and animals … estimations of harvests to come... In villages, when farmers who were disgusted with all these vexations ran away, those who remained were responsible for absentees' production... [one of the first effects of harsh price controls on farm goods is the abandonment of farms and the consequent fall in the supplies of food]. The pressure [the inspectors] applied extended, in case of need, to cruelty and torture."

As Venezuelans can attest, the basic laws of economics have not changed since the time of Hammurabi. And, as they can also attest, neither have the means—cruelty and torture—by which governments attempt to make price controls work in real world.

This first appeared in Reason.