The Problem with Price Controls

And why they do not work

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On May 16th, 2013, the UK Daily Mail reported a shortage of toilet paper was occurring in Venezuela, the home of  the late “Revolutionary” Hugo Chavez. Although many Venezuelans and people around the world do not understand how this is, we will explain here. From the article:

“First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities – toilet paper.
Blaming political opponents for the shortfall, as it does for other shortages, the government says it will import 50m rolls to boost supplies.

Economists say Venezuela’s shortages stem from price controls meant to make basic goods available to the poorest parts of society and the government’s controls on foreign currency.

“State-controlled prices – prices that are set below market-clearing price – always result in shortages. The shortage problem will only get worse, as it did over the years in the Soviet Union,” said Steve Hanke, professor of economics at Johns Hopkins University.

Prices of goods and services is THE basic determinant of value of a particular good or service. How do we know what value is? Some items will be valued more by some than others. For example, some people will not pay $60 for a brand new video game, but others will. Some would pay $90 for a brand new video game. Thus stores will set their prices based on what people are willing to pay, not on what the government tells them. If stores overcharge on an item, they will sell fewer units, and thus will be compelled to lower their prices in order to sell their items and stay in business. If even one enterprise charges a little less than its competitors for the same item and consumers react accordingly, then other enterprises will be compelled to follow suit. This rule does not hold true for cartels, monopolies, duopolies, or oligarchies-nearly all of which are either sanctioned by the government or actually run by it. From the article:
“President Nicolás Maduro, who was selected by the dying Hugo Chávez to carry on his “Bolivarian revolution”, claims that anti-government forces, including the private sector, are causing the shortages in an effort to destabilize the country.”

This is a classic socialist tactic. Most socialists, Keynesians, and Statists do not understand that people will act according to their best interests. They think they can run an economy from one location and everything will work well because they said so. Hugo Chavez, whose nation only made money due to oil reserves in Venezuela, “gave” people food, work, education, healthcare, affordable housing, but his people still became poorer and more dependent. The reason is obvious: The “free” goods were paid for by those who produced, and taxes went up and up until the producers either fled the country or bargained with Chavez so they could benefit from Cronyism.

Back to the accusation: as is usual for people who do not understand the problems, or who are deliberately trying to manipulate people, blame some boogeyman for the regime’s failures, so those who are less educated and informed will actually believe the government’s lies. From the article:

“The government this week announced it also would import 760,000 tonnes of food in addition to the 50m rolls of toilet paper.

Many factories operate at half capacity because the currency controls make it hard for them to pay for imported parts and materials. Business leaders say some companies verge on bankruptcy because they cannot extend lines of credit with foreign suppliers.

Merentes said the government had met the US dollar requests of some 1,500 small- and medium-sized companies facing supply problems, and was reviewing requests from a similar number of larger companies.

Chávez imposed currency controls a decade ago trying to stem capital flight as his government expropriated large land parcels and dozens of businesses.”

Instead of businesses paying for the parts and materials they needed based on a free flow of pricing, the government simply told people what they could pay for things. The problem is that if the price is unacceptable to those trying to sell, they will just walk away. They will not take a value they feel is less than they were looking for  unless forced to by government. This is EXACTLY what happens to nations with single-payer healthcare: the government dictates the prices to the providers, and they either accept it or else decide the prices paid is not equal to or greater than the services they provide. The result is fewer providers, many of whom will retire or change professions. Why do all the hard work of medical school or in this case trying to buy and sell goods or services if your value is dictated to you by people, most of whom have no experience in your field and whose goals and motivations differ significantly from yours?

This is the lesson we learn from big government supporters:Government cannot run industries because their objectives differ from those who seek profit or other compensation as reward. Free-market and free-enterprise economics supporters do not take into account the temperment of people or the intent. Rather, we acknowledge reality: that most people are incentivized to provide goods and services for an incentive, be it money, stocks, items, or whatever else that individual values, and each person’s exact values differ. There is no “one size fits all”, and forcing people to go along with that idea does not work. There is no delusion paradise which often exists in the minds of “progressives” that rich people will just pay more taxes, doctors will happily provide their services for whatever price the government thinks is “fair”, and people will all get paid high wages with full benefits.

In this case price controls did not make goods cheaper: they made goods scarce and now Madura, who most likely rigged the election over Capriles, will now have to choose between doing the right thing and eliminating price controls and government control of the economy, or doing the Chavez and blaming everyone and everything for his party’s failures.

Read the original article:http://www.guardian.co.uk/world/2013/may/16/venezuela-toilet-paper-shortage-50m

 

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