Over on Distortioland, @Econ_Vzla has an enlightening little essay on the way wage hikes can make people worse off in an economy like ours.

The first problem is that, in a shortage economy, free time is what people have left over after having stood in long and numerous queues. Add to that the fact that, on the other hand, the size of the queues depend upon the size of excess demand. That is to say, its size depends the imbalance between what the population is willing to spend, on the one hand, and the diminished availability of goods to be purchased. A notation for this might look as follows:

Welfare=Consumption + Free Time
Free Time = Time not working minus hours spent in queues
Time Spent in queues=f(Excess Demand)
Excess Demand = Real Income minus Total Goods offered

What characterizes the Venezuelan shortage economy is that the supply of consumer goods is completely restricted, that is, it does not respond to shifts in demand. It is thus easy to demonstrate that, at a certain point, any increase in income will necessarily translate to a increase in demand, given that no additional goods exist that might be consumed. Therefore, necessarily, an increase in real income can only result in an increase in the size of the queues, with no effect upon the level of consumption.

Therefore, it can only reduce the welfare of the population.

That’s a bit abstract – bueno, it’s Distortioland! – but I think the way to wrap your mind around it is to think back to Carlos Hernández’s post about going out to stand in line in Ciudad Guayana. The thing he found out right away is that, when you’re trying to find scarce goods, money is useless. 

Seriously, when it comes to really scarce products, money is useless. That day in the Mercal they were “sacando” (newspeak for “selling”) two bottles of cooking oil per person and one Kg. of powdered milk, but I wasn’t interested in the cooking oil. Once inside, one of the Mercal workers advises me to buy it anyway so I can trade it for something else – gosh I was such a newbie.

I end up buying the two bottles and selling one to the old lady in front of me who gives me Bs.50. Later I forget to give her the change (30 bs), and apparently she forgets about it too. It doesn’t matter, because the money I keep will only be enough to pay for a bus ride, or a plastic bag.

Money is useless, and back in the real market that cooking oil is way more useful that the Bs.50.

That’s the main distinguishing characteristic of a scarcity-plagued, price-controlled economy: how much you consume comes to depend much more on how much time you have (to stand around) than on how much money is in your pocket. In that kind of situation, putting more money in people’s pockets doesn’t really help them access the products they need, because the thing that scarce isn’t money, it’s products.

Which is just another way of saying that even by the standards of breathless, turbocharged South American populism, Julio Borges’s call for salaries to be multiplied by 10…just isn’t helping.
[HT: JH!]

23 COMMENTS

    • Actually, is time to remove all price controls and privatize all the expropiated factories that are idle, doing nothing.

      • It will take a long time before anyone risks capital to invest in a factory or plant or farm in Venezuela…

        • Actually, most of the trust in Venezuela’ll be recovered just kicking the communist lunatics out of power, no one’ll invest in Venezuela as long as any chavista remains in an important position of power. Chavismo is literally stopping Venezuela’s de velopment just by EXISTING.

  1. what I find missing from your analysis Quico, is your take on what the motivations and intentions of the policies might be.

    We all know by now that taken at face value most of the regime’s actions do not seem to make sense.
    My only explication, given the high consistency of all actions, is that the real purpose is to steal as much as possible from the treasury and to create such dire conditions that people flee, align or perish to the new masters.

    I fail to believe in chance to explain such a high correlation between policy and my hypothesis.
    What do you think?

    (ts time to discuss motivations and not just policy!)

      • No offense, man, but, considering the chavista nomenklature as a bunch of moronic and incompetent idiots is part of the reason they’ve stayed for so long in power, because they’ve been grossly underestimated time and again.

        • They ARE moronic and incompetent idiots in regards of how to manage the economy. This is not is a master plan with a conspiracy that works perfectly for some hidden agenda.

          Mainly because they dont need any of those to just keep stealing right and left.

          • Reducing the population to a pile of useless, pauper, brainwashed zombies is a common strategy of communism to keep power as it’s happened on Cuba with the Castros.

            Chavismo’s stranglehold on Venezuela is a version on steroids of the most viciously populist and leftist of the adecopeyano methods for keeping power, which included the complete monopolization of all the important economic resources by the government in order to guarantee impunity to keep stealing without any accountability.

  2. Thanks Quico, for the quote.

    2 years ago, I used to look at Peru, Brasil or even Argentina’s stabilization process of the 90s in search for proper answers to our policy challenges. That time passed. Now I am convinced that we have to look more and more those of the Eastern European Economies and other Soviet Satellites after the the fall of the wall.

    There is a very extensive work produced by the time, and it is almost creepy the similarities and resemblances of say Poland. Hungary or Bulgary, with our current mess.

    • But none of those countries had the near total break down in law and order, with insane murder rates and near total impunity, or a public resorting to mob justice in response to individual crimes. Nor did they have heavily armed criminal gangs intent on controlling large areas of cities and elsewhere.

      • The whole empowerment criminals got in chavismo responds to a policy that aimed to turn them into instruments to dominate society by chavismo, an army at the service of the regime that would keep people busy afraid for their own lives instead of thinking into how their money gets spent by the government.

    • I’ve cited Poland before here. I think we hit that for Venezuela six months to a year ago. And that is an optimistic assessment.

      We may be seeing uncharted territory before long given the unwillingness of the government to even attempt the most remote of reforms.

      Everytime I think we may be starting to see the curve to a bottom, our friendly neighborhood gobierno seem determined to drive it further down a black hole.

      If only they were half this efficient at drilling wells…

    • That’s a relief, I’m just glad the conversation is going in that direction at least in this page, reading actual economists discuss about venezuelan economy is refreshing, I’ve had enough of those analistas económicos de licorería

  3. Quico,

    How you consume is a function of how much time you have insofar as your income is not protected from the devaluation of the currency. In the current economic scenario, those that have real access to dollars (real in this case meaning a constant and considerable stream), either because they 1literally earn in dollars or 2adjust their prices to the inflation rate and rapidly buy dollars in the black market, do not have to wait in line to buy products. This second group can afford the bachaquero premium, make considerably shorter lines in more expensive supermarkets, or bring products from el exterior.

    I think it is very important to always bear in mind how these situations affect different people differently, and how examples like this one illustrate the deep inequalities exacerbated by chavismo.

    • There are real parallelisms with the Bolivian case too. A commodity-rich country, an external shock, a fiscal crisis, monetization and hyperinflation. BUT, I’m more worried about the capabilities of recovery of an economy that has lost almost all productive capacity and any sense of discipline of the market economy. In that sense we are Eastern Europe, not Bolivia.

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