Venezuela Doubles Down on its Econ Fail

Venezuela is in a hole and its president seems determined to keep digging. AP reports that President Maduro is deploying teams of inspectors to enforce the governments price controls to a guarantee "a happy Christmas for the people."

Of course, anyone who has taken Econ101 should be able to predict that all this will do is guarantee more shortages and black market activity. The laws of supply and demand tell us that if you lower prices below the market equilibrium, than consumers will demand more and producers will produce less, creating a shortage. (I discussed this at some length in a post back in May and another back in February).

The government sees it differently. The shortages are blamed on black market vendors who buy goods at the government mandated price and then resell them at a higher price on the black market. It also claims that "bourgeoisie criminals" are waging an economic war on the government's policies. Among these criminals are smugglers who are bringing goods into the country to sell on the black market.

From the point of view of economic theory, this can only be described as nonsense. The black market only exists because of the price controls. Black marketeers can only make a profit because the government has set prices far too low (indeed the lower the government sets the prices the greater the shortage and larger the profit margin for black market sales). Furthermore, if the shortages were simply the result of hoarding and reselling the goods being produced, there would be plenty of domestic goods to meet demand and their would be no need for (or profit in) smuggling.

The thing is that the laws of supply and demand are not abstract concepts. The head of the Caracas Chamber of Commerce demonstrates this in the quote that closes out the article:

"There is a huge crisis of confidence in Venezuela," he said. The commercial sector "doesn't trust the government's economic policies or its ability to resolve problems. Experience tells us that with measures like these, you're left with empty shelves, little to no supplies, and closed businesses."

This is undoubtedly what will happen and is unlikely to produce a happy Christmas for anyone except those employed to enforce the laws.

What I find so infuriating about Venezuela's policy is that it flies in the face of China's experience. China has generally made policy reforms that allow businesses to make a profit when producing and allowing the market to set prices. What they have been slow to do is to fully privatize property ownership. Therefore, the Chinese brand of socialism has embraced market distribution of goods and services while going slow on privatizing capital. In Venezuela, they have left most capital outside of the oil sector in private hands but have focused on intervening in (read distorting)  the market system. In other words they have more fully embraced the parts of socialism that most socialists have come to reject.

Meanwhile, back at West Texas and Brent (as mentioned in a previous post), the price of oil has dropped precipitously and might continue to remain low into the second quarter of next year. This is going to slash Venezuela's already dwindling oil revenues. This suggests to me that things are about to get even worse for the country's economy and this should stoke political unrest.