Almost three years ago, I was writing about Nicolás Maduro and the mess that he was making of Venezuela. He’s still making it. I’m going to update that post here.
Three years ago, President Nicolás Maduro of Venezuela was signing decrees to control the prices of new and secondhand cars. He was accusing criminal gangs and those pesky Western-imperialist economic saboteurs of creating artificially high prices for automobiles. According to Nicky, anyone caught breaking the decree/law would face jail sentences of between 6 and 12 years.
This was but one of many price controls, most of which have led to long queues, empty supermarkets, a nation that only produces sugar-free Coke, and a flourishing black market. But admittedly, there are pyrrhic opportunities to be found as well. Here’s an extract from a Guardian article:
On the country’s border with Colombia at San Antonio, engineer Jesús Arias, 33, has given up on his profession and smuggles petrol across the border. One of the country’s most costly price controls means that filling an entire tank costs just a couple of cents, converted at black market rates. Over the border, petrol sells for hundreds of times more. “Here petrol is practically a free gift,” Arias said. “A litre of mineral water costs more than a litre of gas.”
Arias fills his 50-litre tank for just a few pence; a few hundred metres across the bridge in Cúcuta, Colombia, he can sell that for around £15. “Doctors, lawyers, architects, engineers we’re all doing it,” he said. “Here on the border, I can earn in three or four days what I earn as a professional in a month.” Children walk across the bridge with Coca-Cola bottles filled with petrol.
As a practical observation, these kinds of economic policies mean one of two things:
- Nicolás Maduro is clinically insane; or
- Nicolás Maduro is evil.
But I think we have an answer to that question. An extract from the Financial Times:
Ever since he became Venezuelan president, Nicolás Maduro has gone to ridiculous lengths to eulogise the memory of Hugo Chávez. The burly 53-year-old has claimed to speak with his predecessor’s spirit manifested as a “little bird”. At cabinet meetings he waves a book of his mentor’s sayings as if they are holy script. He has even argued that Chávez should be sanctified: a rare trespass into Christianity by the gaffe-prone Mr Maduro, who once compared Venezuelan socialism to “when Christ multiplied the penises” — a confusion of peces, the Spanish for fish, and penes that must rank as one of the worst malapropisms in history.
But let’s focus on the economic insanity.
On Price Controls
The theory goes something like this:
- Ignore economics
- Impose price
- Punish anyone that disagrees
I’m not saying that the occasional government intervention isn’t warranted. I think it can be, especially when the market needs a little encouragement (as in the case of public goods). But in practice, price controls are rarely a response to market inefficiencies. Instead, price controls are a response to a market that is being altogether too efficient in its response to an economically useless government/governor.
It looks like this in the textbooks:
As Milton Friedman has said:
“We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly, you’ll have a tomato shortage.”
And before you know it, you have instances like motorcyclists being killed for spare parts, because the spare parts were subject to price controls, and no one would import them at that kind of price (because why would you go to all that trouble to make a loss?).
Prison sentences? Please.
I realise that some people might be thinking that a prison sentence would be a good deterrent to stop the black market from happening, and to force people to abide by the price controls.
I have two responses to that:
- Has the threat of imprisonment stopped the black market for drugs? And
- Let’s take a walk through history.
Venezuela is not the first to try it…
Price controls have been the conceit of many a megalomaniac. Some examples:
In his infamous Edict of 301 AD, Diocletian blamed the rapid rise in prices in the Roman empire on the “avarice” of merchants. Obviously, the inflation had nothing to do with his debasement of the currency to pay for all the new troops he was hiring.
A line from that edict which could have been written by the Venezuelan bus driver:
“To be sure, if any spirit of self-restraint were holding in check those practices by which the raging and boundless avarice is inflamed…perhaps then there would be room left for shutting our eyes and holding our peace…[but since it is unlikely that this greed will restrain itself]…it suits us, who are the watchful parents of the whole human race, that justice step in as an arbiter in the case”
He then imposed the death penalty on anyone that tried to sell at higher prices than the price controls that he’d set on beef, grain, eggs, clothing, and everything else.
The death penalty was also in place for anyone that tried to hoard goods, as well as for anyone that even tried to buy something at a higher price.
So many people died under that law that it was eventually set aside. And Diocletian abdicated with it.
The key point: people would rather die than comply.
In the aftermath of the French Revolution, the new assembly passed the “Law of the Maximum”: price controls to try and slow the inflation in the new french currency, the assignat.
The penalty for violation was also death.
The French public largely ignored it. And as Robespierre was dragged to the guillotine, the historical record is that the mob jeered “There goes the dirty Maximum!”
The Soviet price controls are perhaps the most famous of all. And despite the threat of heavy penalties, black markets flourished.
You can go back through history and look at price controls enforced in every era in almost every place (megalomania happens across the board), and you’ll find a story of overreach followed by a lesson in humility.
Maybe the Venezuelans will also build a guillotine.
It’d be loco.
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.