Everything you ever wanted to know about price controls but were afraid to ask

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    The best romances come naturally. Set dinner dates will never compare to finding that thing you don’t have to schedule to share and enjoy an intimate moment. That thing that binds you together effortlessly. Some of us find that while sharing a pizza and buffalo wings over Law and Order SVU. For Caracas Chronicles contributors Anabella Abadi and Carlos García-Soto, nerding out and writing is their thing.

    “El Control de precios en Venezuela (1939-2015): De la Segunda Guerra Mundial a la Guerra Económica,” is their first book together. I say first because I’m sure (and hope) there’s so much more where that came from.

    The book covers all you need to know about price controls, including their history, regulation within the Venezuelan legal system and, of course, their economic consequences. Some graphs ought to be included in high school history books, or simply tattooed (literally speaking) onto the foreheads of Venezuelan eighth graders so they can read them everyday while washing their teeth, and understand why they are not using toothpaste but a menjurje granny made instead:

    The first years of price controls in Venezuela clearly revealed a pattern that would repeat itself once and again throughout history: all controls applied isolated will not keep inflation at bay, since prices will rise whenever bank bill issuing is higher to the increase of goods and services offered.

    They start with Eleazar López Contreras in 1939, and with the framing of the first legal instrument to regulate a system of price controls in 1941, under Medina Angarita. It’s an interesting yet disturbing trip through (almost) 80 years of price controls which end, well, at the very End of Times, with 21st Century Socialism.

    Anabella and Carlos’s work spares no detail, and the book is packed with joyful little nuggets of terror such as this paper clipping from Panorama in 1973:

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    Starting next Monday the housewives of Maracaibo will be appointed as ad-honorem deputies and will be empowered to apply fines to immoral merchant who speculate with food products. (Panorama, 1973)

    As you can see, the madness started early on.

    El control de precios en Venezuela is an important and useful document for lawyers, economists, and historians alike. It’s the kind of work we need from our academics in times such as these. It’s a reflection upon the mistakes we’ve been making (and consistently repeating) in the last eight decades as well as a guide to what’s wrong with current economic policy.

    A guide to what not to do.

    You can find the book at CEDICE (Edif. de la Cámara de Comercio), and soon at your local bookstore. Si los controles lo permiten.

    On a lighter note: If writing is a passion that Anabella and Carlos share, it was the price control what actually brought them together. Last week was the second anniversary of the first time Carlos, a Lawyer, wrote Anabella to ask her economic insight on the subject. A question turned into a book. A book turned into a life together. One of many funny ways in which la Patria brings people together.

    Unlike most Venezuelans, Carlos got more than what he bargained for.

    25 COMMENTS

    1. A great story! Even a bit of romance! 🙂

      The part about appointing housewives to enforce price controls … that is the same thing the Shah of Iran did. Like the chavistas, he also wanted to control the distribution of food, so set up supermarkets to get local food vendors and small stores out of the loop and control prices himself. (See Nikki Keddi, “Modern Iran: Roots and Results of Revolution.”)
      Which raises a question you don’t explicitly address: it seems price controls are neither characteristic of the ‘right’ nor the ‘left’, but of many Venezuelan governments since the 40’s ? Yes?

    2. This is as stupid as it gets.. in any normal economy, if a manufacturer is over-charging for their products, they will not be competitive and lose market share. So they are forced to either reduce costs, or produce a better product. That’s how any healthy economy works: competition.

      Same as wholesalers or retailers, if they don’t lower their prices and compete with other retailers and wholesalers, they go out of business. Unless they offer unique products and variety. People go to Wallgreens and Wallmarts or Sears or elsewhere, because they have variety and good prices. Those who supply their products must be aligned with very low prices and certain quality. Otherwise they loose in sales, and someone else steps in. Business is business.

      If you force businesses to a ‘controlled price” the whole competitive and effective system goes to hell. No one tries to get better, and produce better and cheaper products. No incentives. In the end, it becomes a monopoly, enchufados with special favors, corruption. That’s the real idea of “controlled prices” . They run honest businesses out, and keep their favorite, subsidized business, to get a cut of the sales. Just another way to steal.

      It’s also the Cuban model. Lower availability of products, impoverish people, force them out of the country, and those who remain are subdued, and slowly get used to the misery.

      Finally, if prices normally go up, well people make more money and spend it somewhere. If a dozen tomatoes are a bit more expensive, the buyer needs to earn more money or eat less tomatoes, which regulates the price. But if the economy is healthy and the tomato prices go up, people still buy them and the tomato industry gets stronger, and the tomato producers and resellers start spending money on other things.

      Alternatively, it motivates new tomato growers to offer a new tomato, cheaper and tastier.

    3. Logistically speaking, romance in Caracas is like building an international space station, but that’s an excellent plug.

    4. First a few question, are there prices that need controlling ?? If so which and why ?? if there are such prices how do you control them in ways that don’t distort the process of producing enough goods to sattisfy public demand and at the same time not deprive the people producing/selling them of the incentive to continue doing so ?? How do you prevent those charged with the job of controlling them from abusing their power to advance a demagogic game of winning popular sympathies on the cheap??

      Normally you should rely on free competition and a symmetrical access to information between buyers and sellers to allow the market to set the prices of products , but economic studies are full of cases where those mecanisms don’t work too well because some market players abuse the system in pursuit of higher gains or there is an asymmetry in the information which is available to buyers and sellers that leads to dysfunctional results.or just because the goods or services on offer are naturally scarce which allows one or more players to manipulate their advantages to the prejudice of their customers or users.

      Problem is there is a mind set which believes that people which produce or trade goods for profit are inherently dishonest and greedy and will always find ways to abuse their customers or counterparts and those who play on those fears to earn peoples political sympathies by imposing prices which deprive the producer marketers from any incentive to produce them leading to situations we know too well of scarcity and penury….!!

      There is also a mind set in people with an authoritarian mentality that has them try and control prices to exhibit themselves as all powerful demigods capable of exercising total control over the economies of the countries they ruled !! Understand that Pinochet ( and Franco) started their regimes by attempting to solve all economic problems by taking control of prices with results that weren’t that good.and that sometimes it took them a long time to understand that they had to give free markets a chance to operate their miracles!!

    5. It’s also the Cuban model. Lower availability of products, impoverish people, force them out of the country, and those who remain are subdued, and slowly get used to the misery.
      ———

      One wonders to what extent this is literally true, at least in the round. Probably a lot. The question is: Why would any government want to rule a miserable state? Again, I wonder if this is the only possible option should you be a control freak, who doesn’t care how the cookie crumbles so long as he or she retains absolute power.

      It is also very narcissistic. For example, even to those who are as fervent socialists as Castro are not allowed to share power. So all the young and hopeful and talented politicos in Cuba will never be given a shot to rule because Castro won’t have it. He will only have himself and his own. And his manner of rule is just like the Chavez approach – a military outfit that gives orders, and takes none.

      So under all the socialist rhetoric, what Chavez, Maduro, God-given, Delcy and all the others are simply and entirely about is power, and never giving it up no matter what. As is, the only real power they wield is through the loyalty of the security forces and the military. Drive a wedge into that and the house of cards falls.

    6. I wonder if there is a major oil producer, besides Norway and Canada, that does not have price controls on common household items. I think even the Russians brought them back, no?

      • There is a price control board for patent medicines. However, in most cases, they simply highlight “unjustified” prices.

        Since most medicines are purchased by large governmental entities, such as Provincial Health Care Plan that run 500-800 hospitals, a red flag from the price control board means that the manufacturer risks losing gigantic sales.

        In my province, Ontario, the buyers for the Health Care Plan are sophisticated, but also know that purchase of red-flagged drugs would be highly controversial.

        http://www.pmprb-cepmb.gc.ca/view.asp?ccid=1273&lang=en#a4

    7. “How come price of medicines in canada is so much smaller than in the US ?? is it that they have more competition??”

      Good question! Canuckhead, are they subsidized?

      • I am not sure medicine is always cheaper here than in the USA. Is it? Canadians have been known to purchase their drugs in Mexico, where you don’t need a prescription, however I’m not convinced prices are that much different across the board there either. Not aware of susidies on the sticker price though depending on your province you may qualify for assistance. Mr. House points out we have a federal tribunal that regulates drug prices on non generic drugs. Another instance of price regulation in Canada is for telecom, and I believe natural gas in some provinces is price regulated. Electricity. Booze in most provinces is sold by state entities, which determine the price. Container shipping rates. Hockey cards? I remember when the Province of Ontario tried to eliminate smoking by driving up cigarette prices so people would quit, through a huge tax, leading to a massive black market ….then there was the 1970s….

        This is the kind of question they put on the Canadian Citizenship test by the way, that no native born Canadian has a clue about….but that is way off topic…

    8. Lots of old folks in the US buy their medicines by mail ordering them from Canada because their price is much more affordable in Canada than in the US , there is talk of the US authorities making this practice more difficult ( purportedly to prevent some medicines being brought into the US which may not meet US safety standards) ,which is causing lots of these old folks to worry because standard prices in the US make them unaffordable so they must go without which will likely threaten their life and health . Competition is sometimes an imperfect way to ensure prices dont go far beyond the level they need to be to give their manufacturers and marketers the incentive to produce them in the demanded quantities , quite simply these automatically set homogeneous prices and conditions for their goods at the maximum level their customers will stand in order to maximize their profits to the hilt……. in a sort of tacit collusion……!!

      Study after study has shown that natural operating markets are often dysfunctional and need some regulation to prevent abuses ……the recognition of the failure of competition to result in rational market operation is widespread among many economic researchers …….maybe what sometimes needs controlling is regulation so it in turn is not abused to force the manufacturer or marketer to sell their stuff at prices that dont allow then a healthy incentive to keep producing what the market demands as a means of gaining the popular support the pols controlling the govt regulator need to bolster their electoral ambitions…!!

      • “need some regulation”.. well if there are medicines that are only available from 1 or 2 suppliers/manufacturers/distributors – then perhaps some price controls are needed. But it would have to include research: “what is your production cost? your is your margin of profit?

        If the price regulation is arbitrary and blind, it forces manufacturers and distributors out of business, and then the product ceases to be available, much like in Vzla. You don’t operate a business to lose money.

        If people buy medicines from Canada or elsewhere, fine. That would force US companies to be more competitive. That’s if the tax structures are even. For instance, the infamous Donald Trump is correct on one thing: the Chinese cheat to sell their products, manipulating their currency, and with much lower labor force standards. That ain’t fair game, so you you have to regulate them. Otherwise your local manufacturers and distributors go out of business, which has already happened a lot in the USA and elsewhere because of the Chinese, or Mexicans, who barely care about the environment, for instance. Protecting the environment costs money, thus raises the price of your product. So polluting countries should be punished somehow in international trade scenarios. European companies, American or Canadian companies are forced by law to take care of the environment, pay higher wages, give some medical insurance to workers, many vacation days, etc.

        How many vacation days or insurances are imposed by, say, the Chinese government? To pollute the environment is not illegal there.. That’s why cities in China, India or Mexico are among the most polluted and dirty in the world. Getting clean costs money, and raises the price of your product. Paying people decent salaries, and giving them medical insurance does too. So in that sense, yes, it’s unfair trade. Tax them.

    9. European companies are subject to higher taxes , much more generous social and worker friendly labour regulations and the same strict anti pollution rules that exist in the US , should they then erect protective barriers to protect their businesses from the unfair advantages held by their US competitors ?? not an easy call…..!! Competition is necessary but sometimes its not that difficult for unscrupulous companies to circumvent competitive constraints and extract a greater profit from their market than is needed to keep their businesses healthy and profitable !! There is no easy answer, regulations are necessary but if they are administered by govts agencies who subordinate their activities to helping their political masters win elections and popular support then the whole regulating process becomes corrupted by populist considerations and can do a lot of harm to a countrys economy. Maybe the answer is to create a state system of regulators run by independent experts not dependent on politically driven govt authorities and erecting an institutional wall to protect such regulators from the latter , in other words we have to make the State (serving all through a meritocratic system of public services) and the Govt that takes care of maintaining the political order and making the most crucial strategic national decisions but not having anything to do with the day to day professional running of state functions ..!!

    10. As VZ has discovered, price controls only work in an isolated economy. Cuba is an island. It is not easy to smuggle large volumes of goods in to or out of Cuba to exploit their price controls. VZ shares borders with large countries with relatively free markets (Colombia and Brazil). The more VZ tried to control prices, the more incentive there is smuggle goods.

      The leaders are delusional if they think that they can control the economy by fiat.

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