Venezuela Continues to Pursue its Socialism Fail

Reuters has a report about the shortages of food in Venezuela. The people that run soup kitchens and food banks are having trouble getting the food they need to feed the hungry.

Note that the problem isn't that they do not have enough money to buy the food. They just can't find it for sale at the government mandated prices. People are having to queue up for food everyday as the items are in short supply and shoppers can only get one thing one day and another thing on another.

As mentioned in the article, this is very reminiscent of the old Soviet Union where people had plenty of money but stores were constantly short of goods. In his book, The Russians, Hedrick Smith noted that Moscovites in the 1970s typically went about their day with a mesh shopping bag and up to a month's wages in their pocket. Whenever they saw people lining up to buy something, they would join the queue, often without any idea what they were lining up for. They then bought the maximum amount of the product allowed, whether they needed it or not, since they could always trade the items with someone who did need them. Part of this confidence was driven by the fact that almost everyone they knew was doing the same thing and usually had something to trade.

I had a friend in college who emigrated from Russia at about that time and he described his first experience in a western supermarket in Vienna. He and his mother walked the aisles bewildered by all the merchandise on the shelves where you could just reach out and touch it. They had never seen anything like it.

Of course, it's simple economics 101. In a market system, consumers pay for the cost of producing and distributing everything they buy. This is known as the scarcity value of the good. In a commercial for Doritos, Jay Leno used to quip, "Crunch all you like, we'll make more." That pretty much sums up the dynamic, if one keeps in mind that to crunch the Doritos, one must pay the cost of making them plus a little extra to give people an incentive to do so. Because the price covers the cost of putting the products on the shelf, producers and retailers put as much of the stuff on the shelf as they think consumers will buy. An empty shelf is a lost opportunity to make a profit.

One of the big problems with Socialism (the real kind, not what right wingers accuse Obama of being) is that it denies that prices work this way. Socialists argue that the profits producers make inflate the price above its true scarcity value. They frequently, as in the case of Venezuela, place limits on the prices producers can charge in the belief that this will force producers to accept a lower "fair" rate of profit.

The result is entirely predictable given the economic laws of supply and demand. The law of supply says that at lower prices, producers will offer less of a good for sale and the law of demand says that consumers will demand more of a good at a lower price. Less supplied plus more demanded equals shortage.

When you have consumers demanding more of a good than producers are willing to supply, the problem becomes one of determining which particular consumers will be allowed to buy the available goods. Waiting in line to purchase the limited supply of goods becomes a way to bid on the good and people who are willing to stand in line longer are essentially outbidding other consumers. Thus, the price of the good becomes the cash paid for it plus the time spent waiting in line.

Unfortunately, the time waiting in line is a complete loss to the economy. The people standing in line are neither producing anything (resulting in a tangible loss of productivity) nor enjoying themselves (resulting in an intangible loss of well being). More importantly, the producer derives no benefit from people bidding on the product with time spent standing in line.

In contrast, when consumers bid on products with money, the higher cost to the consumer is balanced by the higher profit to the producer. This provides two benefits. The producer can spend that money and stimulate demand in the economy. More importantly, the higher profit will encourage more production of the good. If profits are particularly high, they will encourage other would-be producers to enter the market, which will drive prices down while supplying more of the good.

Sadly, Socialists deny that this is how things work. Profit is bad and profit seeking is a behavior that must be engineered out of producers (or, alternatively, is an artificial motivation produced by the Capitalist system). While Neo-Socialists have largely come to the conclusion that market pricing is in fact the only efficient way to distribute goods (and have directed their attention to the ownership of capital as the problem to be fixed), Venezuela (and to a lesser extent Argentina) haven't gotten the word.