The Real Economic Emergency is Having This Guy in Charge

There’s a little riff in Economics Vice-president Luis Salas’s maiden interview with teleSUR that’s really worth revisiting. In just over one minute, Luis Salas fleshes out in as much detail as he’s able, his implicit mental model for how speculation and usury causes a general rise in the price level that’s unrelated to monetary expansion. It’s worth taking the time to watch it before you go on, so go and do that now.

Did you catch that? Good.

For Salas, prices rise because merchants as a group make a grab for windfall profits by raising their prices. But as they do that, they find that of course they strain consumers’ capacity to pay for products. So their sales tend to fall. So, in fact, they’re all made worse off by the decision in the medium term, and many wind up having to close up shop.

There it is. That’s it. That’s the implicit microeconomic model behind the governing elite’s economic strategy.

It’s – I don’t want to overstate this, but realistically that’s not a real danger – like having NASA try to build a spaceship on the basis of pre-Newtonian physics. It won’t work because it can’t work. It really is that bad.

It’s shocking because in his little rant, Salas comes ever so close to having the realization that would lay bare for him – and for everyone else – how downright silly his entire theory is. If he had even a bare bones feel for economic reasoning, he’d see it at once. It takes a peculiar form of willed ignorance not to see it, actually. But, clearly, he doesn’t.

Put yourself in the place of any one of the merchants running the elaborate economic conspiracy Salas mistakes for economic life. Since you’re a heartless speculator, you put up your prices…just like all the other merchants in your area are doing. But because you’re doing that without any interest in underlying demand, you eventually start to notice that fewer buyers are buying. In fact, you’re losing money.

For Salas, at this point the only thing left for you to do is close up shop. You’re out of business. Congratulation: you speculated yourself out of a living.

But for any marginally rational businessperson, that’s insane. When you see that your prices are so high demand has started to flag what you do is so friggin’ obvious it barely warrants mention: you lower your prices! You defect from the price cartel.

The temptation to do this is overwhelming. If all your competitors are selling toilet paper at Bs.100 and you drop your price to Bs.95, you quickly find you have the whole market to yourself. Nobody’s going to pay Bs.100 for toilet paper when you can just as easily buy it for Bs.95.

So unless the rest of the cartel is willing to use force to prevent defection – unless it’s a horse’s-head-in-your-bed style cartel – somebody will defect. And the moment one merchant defects, all the other merchants in the area have basically no choice but to match his price.

It’s called competition, Luis. It’s the reason prices don’t rise inexorable in the world’s 191 other economies.

That Luis Salas is able to get through the little rant at the top of this post without actually grasping this is the real economic emergency facing Venezuela today.

The National Assembly cannot, must not, give any additional economic powers to a government lead by a minister unable to master the basics of economic reasoning. It would be as crazy as approving a multibillion dollar budget for pre-Newtonian NASA to try to build a spaceship. And that’s all there really is to say about it.

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