Last year I wrote about cheap food in Venezuela. Price controls imposed by the government to help the poor were hurting them instead, by, among other things, putting farmers out of business and reducing the availability of goods. Simply put, farmers were refusing to sell at a loss – and who would blame them?
The solution in Venezuela, however, has been not to listen to the country’s producers – instead, the government chose to impose more price controls and greater penalties for violation. Reports the New York Times:
Faced with an accelerating inflation rate and shortages of basic foods like beef, chicken and milk, President Hugo Chávez has threatened to jail grocery store owners and nationalize their businesses if they violate the country’s expanding price controls.
Further,
Shortages of basic foods have been sporadic since the government strengthened price controls in 2003 after a debilitating strike by oil workers. But in recent weeks, the scarcity of items like meat and chicken has led to a panicked reaction by federal authorities as they try to understand how such shortages could develop in a seemingly flourishing economy.
I remember my own experience with price controls growing up in the Soviet Union. You had two choices – purchase nothing at government mandated prices, or buy what you needed to buy for the ‘market price’…in the black market (informal sector for legal goods).
If Russia’s experience in the 1990s is of any indication, abolishing price controls is also challenging, especially when combined with high inflation. If prices are controlled for significant periods of time, when eventually released – they can reach market levels (those that exist in the informal sector while controls are in place) very rapidly, hurting the poor the most in the process. So, if history is of any indication, the longer the government sticks with price controls (and the higher inflation gets) – the tougher the recovery process will be.
There are many explanations for why price controls do not work. One has to do with the fact that it is impossible for a central planner to possess full information about supply of goods and demand for them. Producers and consumers are in a much better position to make pricing decisions. F.A. Hayek has captured the idea more than 60 years ago. He argued that the central problem in economics is not a particular allocation of goods:
The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.
As Hayek posits, how people use information should be of central concern. In such a system, prices are simply a mechanism of “communicating information.” This means that people, not governments, are best at determining prices:
It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.
Critics would be quick to point out that F.A. Hayek assumes that market institutions are in place. There is competition among producers, contracts are enforced, etc. They would be correct! But the solution is not to control prices — the solution is to develop market institutions that allow prices to function as a mechanism of matching up producers and consumers, putting food on the table of people, and keeping producers in business. This means that there is indeed a role for the government to play in taking care of the poor, but it is not the one of controlling distribution and taking away people’s business.
Published Date: February 19, 2007