The Economic Committee of the National Constituent Assembly (ANC ) is now supposedly developing “strategies to combat high levels of inflation in Venezuela,” including a proposal for what they cryptically describe as a “functional price control system.”

The specifics haven’t been made public yet, possibly because the phrase itself is a raging contradiction: calling for a “functional price control system” is like calling for dry wetness.

Price controls have a 4,000 year-old track record of failure. As a means of fighting inflation, they’ve been tried around the world by governments of the left, right and center and they’ve failed Every. Single. Time.

In Venezuela, they’ve been failing since 1939.

However, the government believes that the problem is not price controls per se, but the way they are being implemented.

Calling for a “functional price control system” is like calling for dry wetness.

Before the ANC was convened, Maduro said the constituyente would develop new distribution and pricing schemes that include severe punishments for “those who violate the people’s access to products at fair prices”. Maduro even promised that the first of many economic laws to be approved by the ANC would be a law against speculation, adding that he would draft it himself.

Instead of promoting an adequate business environment, Maduro thinks the way out of shortages transits through yet more controls, threats and punishments. Apparently, controlling the distribution of basic goods and the allocation of foreign currency, and executing over 85 thousand inspections and close to 15.500 fines between 2012 and 2016, is simply not enough.

And let’s not forget that a fixed FX rate is also a price control over foreign currency.

Maduro even promised that the first of many economic laws to be approved by the ANC would be a law against speculation, adding that he would draft it himself.

Some elected constituent assembly members believe that it’s imperative to review the foreign exchange system first. However, no Constituyente or government spokesperson has mentioned the possibility of dismantling foreign exchange controls, or even of unifying the multiple exchange rates: measures virtually every economist you talk to, up to, and including Mark Weisbrot, see as vital.

“Fair prices” —a cute and misleading term for controlled prices— is the seed from which black markets and bachaqueo germinate. These are, in some way, the original economic sins of the 21st Century Socialist System.

If anyone in the government can remotely aspire to seriously want to steer the Venezuelan economy towards recovery, their crucial first step must be admitting that excessive controls are, first and foremost, dysfunctional. Instead, from the bottom of a deep, dark hole, Maduro announced we’d be prying that shovel out of his cold dead hands.

So much for hope.

44 COMMENTS

  1. I’m worried about making this comment, because I strongly agree with you about what’s going to happen in Venezuela. I do not want to be seen as supporting the Maduro regime or its policies!

    With that in mind, it isn’t correct that price controls have failed every time. There are multiple cases where they accomplished what policymakers wanted to do with little permanent damage to the economy. Panama is a recent case; the U.S. in WW2 is probably the canonical one.

    • It would probably have been more precise to say that Price Controls *as the central plank of an inflation fighting policy* (implicitly, in the context of inflationary fiscal and monetary policy) can only ever fail, and does…

      • I’d agree with that!

        But I think you can make it even more precise.

        “Price controls have always failed when facing down indiscriminate increases in base money.” Or, in English, “If the central bank is literally printing money without limit, then no price control can hold back inflation.”

        My quibble is that if the central bank is in fact trying to lower inflation , then price controls can (in theory) make the adjustment faster. The Venezuelan central bank is not trying to lower inflation!

        • The authors of the above research have defended their study ad nauseum. Many of the skeptics have insisted that the research is “faulty”, despite the fact that their methods and statistical analysis were above reproach. None of the skeptics have taken it upon themselves to show their own research in peer reviewed scientific journals, proving the UCLA study wrong. (Though Paul Krugman loved to howl about it in the NY Times)

          The complaints about the UCLA study are typically political in nature. (ie, “How dare you question the sainthood of FDR and how He got us out of The Great Depression!”

          • I’m just saying it’s kind of a stretch to blame this policy or that policy on either extending or shortening the Depression. It’s not the kind of stuff you quantify with deep certainty.

            And I do believe economists often get it wrong.

          • Guapo, you’re off-base about that study. I note you didn’t link to the paper. It’s not accepted by economic historians. The main issue is simple: they assume that margins were competitive during the worst years of the Depression and that markets were monopolistic. Neither assumption is correct. They also oddly assume that the recovery could have been much faster.

            May I ask how intensively you’ve studied the economic history of the Depression? The literature is quite deep.

    • With that in mind, it isn’t correct that price controls have failed every time.
      When have price controls worked in Venezuela?

      • Every time that “price controls” have been utilized (without fail) they have led to unintended consequences. You cannot have a government body mandate an arbitrary price on any commodity without it adversely affecting someone. Look no further than “rent control” in both New York City and San Francisco. Prices increased dramatically for non controlled rentals, and supply plummeted. Portland, Oregon is considering rent control (because the bureaucrats in City Hall feel that prices are “too high” for their voters), and prices are shooting up dramatically on the mere speculation.

        Cui bono, with price controls? It certainly isn’t the end consumer.

        “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand” –Milton Friedman (and please see his other quote below)

        • IOW, the quibbling that certain price controls in other countries in other times may have worked- is irrelevant- obfuscation even. They never have in Venezuela.

          • I’m at a loss to know when price controls have worked as intended any where, any time? Even “price control’s” poor cousin, “subsidies” results in higher consumer prices (ie timber, milk, grapes, honey in the United States)

        • Panama, in the last few years. The United States in WW2 and the Korean War. The recent precios cuidados program in Argentina, although that’s not a price control per se. This is just off the top of my head.

          The world can be complicated. The Chavistas are insane. These are both true statements. Why Chavista madness is often taken to have lessons for only vaguely related problems is beyond me. It’s like saying that fire is useless because you’re watching an arsonist burn down a building.

  2. Noel – I hear you. And I too do not wish to come across in any way as a defender or supporter of the klepto-narco militarized regime. However, perhaps in certain sectors of the (sane) economy price controls do work. Here’s a paragraph about the Canadian dairy industry web site:

    “The Canadian dairy sector operates under a supply management system based on planned domestic production, administered pricing and dairy product import controls. The dairy industry ranks second (based on farm cash receipts) in the Canadian agriculture sector ranking just behind red meats.”

    The ‘price controls never work’ line also caught my attention.

    BTW the graphic for this piece is brilliant!

  3. Milton Friedman 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. It’s the same with oil or gas”

    Austeridad, cueste lo que cueste!

  4. I’m no economist, but it seems to me that what “price control” constitutes is not always so straight forward, and whether they always fail is I think seriously debatable given that, as some others have pointed out, many of us whether we know it or not are the beneficiaries of goods and services that are in some way, price controlled (i.e. regulated, subsidized, taxed, price capped, etc).

    My phone service is price controlled. I still get it- it has not disappeared. My booze is price controlled- the government sells it (not everyone’s cut of tea, but that’s the way its been for as long as I can remember). Gas is taxed to an extent that it constitutes a kind of price control. Those are just obvious examples.

    Price controls on food clearly are failing in Venezuela and are leading to shortages. But advocating against price controls in Venezuela right now would be political suicide. Reforms of many stripes may be political suicide.

    So it looks like the regime is sticking with its plan, which may indeed be its grave. How to fix that hole that clearly needs fixing, in a politically viable way, is another matter.

    • You are confusing what the Canadian government does with what price controls mean in this case.

      Price controls in Venezuela are best understood by example. See this old one, for example

      http://www.eluniversal.com/noticias/economia/nuevo-precio-del-kilo-cafe-69421-bolivares_193815

      Summarized, the government announced that overnight the “fair” price of 200 gr. of coffee would be jumping from 9 Bs and a bit to 144 Bs.

      Now think about this. How in hell can it be that if the “fair” price of something is 144 today, it was good and possible and a rational economic strategy to sell it for 9 Bs 24h ago? The answer is, of course, that it cant be. The government may decide to actualize this price once every year or two, but you selling it on your supermarket? Your costs are going up every day. Same for everybody on the chain up to the coffee plantation. Only thing the government has done with that illusion of “keeping the fair price” so out of wack with reality for so long is to ensure you dont get coffee because it either goes to the black market or nobody is interested in producing or importing it for months.

      Then rise and repeat till next year they raise it another 1500, 2000%

      • The typos aside, how you explained it is how I would have explained it.

        The concept at its very core, “fair,” makes no sense. Who’s to judge what’s fair? How can you MONITOR the fucking thing, so many items?

        Plus, life isn’t fair:

        A beetle infestation destroys Colombia’s coffee crop one year, driving up prices.

        Does anyone think that VZ bureaucratics are anywhere near capable of making these price adjustments as market conditions change? Or even more impossible for them to swallow, allowing producers high, free market profits to insulate themselves against FUTURE disruptions?

    • Stuff like, for example, minimum prices for telephony services are normally accompanied in many countries with actual subsidies to the companies providing that service at those prices. If the idea is to, for example, get phones in remote locations, etc, there would be a series of evaluations to say ok, look, we are going to pay you the difference for putting that cell tower so Endoftheworldville gets signal and the not-affluent people there can actually get phones.

      In Venezuela is more half magical brutality thinking (“This is the fair price because I make it so, and whoever disagrees goes to jail”), half deliberate to starve and destroy private industry (because the government is the only one selling at those price, basically dumping on every Venezuelan producer or importer).

  5. I sometimes read the posts on Aporrea using the Google translator (which adds some entertainment value). Lots of rambling rants and screeds. Lots of indignant folks not happy with the shortages, and yet in total denial of the law of supply and demand. Either true believers, or very cynical propaganda writers.

  6. Just finished reading ‘Phishing for Phools´ a book by two economists that while supportive of market economies does go into quite a bit of detail into how it can sometimes founder and lead to all sort of imbalances and manipulations. The basic message is that human beings have a propinquity for falling into excesses that its best to keep somekind of safeguard when they do to protect the ínnocent´.

    • Where markets are manipulated by gubmint, the market reacts to the benefit of the path with least resistance or greatest return.

      Phishing misses the point about market transparency that was missing in the first place. Price controls are not a sign of good government, but very poor planning and short sightedness.

      Price controls do not benefit the consumer.

      • The US government subsidizes farmers to point of paying them not to farm sometimes. Price control can work as long as someone (ie the government) pays the profit. You gonna pay for it one way or the other!

          • Don’t have time to read the link right now, but is your payment’s purpose more for conservation reasons than ag supply/prices?

            There might be a distinction here.

          • Great noise is made about CRP being about “the environment”, when in reality, it is just another do-nothing government program to appease a subset of voters. (If a government can do anything well, it is throw other peoples money at a non-problem to make their whingeing constituents happy!)

            The guy I bought this land from in 1995 had it in CRP for about 5 years. It was formerly farmland that was of dubious quality. (sandy soil in a county that has plenty of excellent soil) The crops he grew on it previously didn’t grow well, as he didn’t put much money/effort into it. When Uncle Sam offered to pay him to not work it, he jumped at the chance. They paid him rent on land that he was losing money on anyway. A win for him, a lose for the taxpayer. It wasn’t land that endangered anything more sinister than a pheasants nest.

            Before he got the land in CRP, it was assessed at about $2000/acre. Two years after it was in CRP, it was assessed at $3500/acre, which is a little more than what I paid. Not a bad way to double your money.

            I do nothing with it, other than hunt turkey, pheasant and deer. I pay taxes each year that are about 1/4 the rent I collect. Only government can rob the taxpayer like that and spin it as being “good land stewardship”.

    • The absolute-free-markets-for-everything approach doesnt work.

      The absolutely-price-controls-for-everything doesnt work.

      As in everything in life, you take tools and you implement them to solve problems, and most of the time you face constrains. Free market pricing is very good in getting producers actually produce and avoid shortages. Then you put some government controls and subsidies for some stuff and some edges and adjust for some other desired properties, like ensuring access to the goods and services for the less wealthy.

      You know, empirical government. Not just beat the square peg into the round hole because ideologically there arent any round holes ever.

  7. Everyone of us human being operates on so many delusions. Too many us don’t know how universe really works. We keep on saying that “we are charge” of all sorts of things. In the longs physics keeps on rearing ugly head. In the long run (or short run, as Venezuela is on). The University of Chicago (the other colleges) make their economics students take course based no laws thermodynamics. (I don’t want glorify the man – but Pinochet employed economists from University of Chicago of redesign of the economy). Strange thing – their economy works, to most part.
    The three laws thermodynamics are universal (Stephan Hawkins is sure Black Holes). The first two laws applicable to economical; (I’m am sorry, if it understand me – I’m trying to condense some things that taken several hundred years do develop)
    The first law
    This states that energy can be neither created nor destroyed. However, energy can change forms, and energy can flow from one place to another. A particular consequence of the law of conservation of energy is that the total energy of an isolated system does not change.
    The second law (I’m modifying – because it would book to adequately described this law)
    Indicates of natural processes are all irreversible , and, in many cases, the tendency of natural processes to lead towards spatial homogeneity of matter and energy, of natural processes, and, in many cases, the tendency of natural processes to lead towards spatial homogeneity of matter and energy, It implies the existence of a quantity called the entropy of a thermodynamic system. Second law only permits that Entropy of Natural Processes are getting larger with time (there are thousand books and papers related this
    Some of us are too stupid. To some us let jealously get in way. To some us “the gods” get in the way. To some of us we choose to ignore the laws (but no matter how try – the laws always kick you the ass). To some “we are above laws” (like dictators). “It’s boring”. And on and on.
    There been many attempt ignore to the laws physics (particularly thermodynamics – they are complex). And when some “Economists” get hold of them, they sometime (most of time?) lead (via the marx bros, Statin, Castro. Mao, Et. Al) you to Venezuela today.
    By the price controls or any control doesn’t work in the run. But we really dealing with human beings. you have some protections against greed and you have some incentives to somebody to produce something.
    As side note: we have people today that only increasing the entropy of our planet (politicians, etc)

    • The fact that the Chilean economy ‘works’ isn’t due to the Chicago Boys’ monetarist reforms, which have been widely regarded as a failure since Chile’s 1982 crisis (which caused a 14% decline in GDP).

      In response, the Chilean government was forced to nationalise the two largest Chilean banks in 1982, and then several more smaller financial institutions in 1983. Much of the foreign debt incurred by the private sector during the Chicago Boys’ tenure was transferred to the Central Bank’s balance sheet, and public expenditure as a percentage of GDP rose to about 34%, higher than during Allende’s presidency. Hence, the situation being mocked as the so-called “Chicago way to socialism”.

      In truth, there is some degree of similarity between the Chicago Boys’ who were given the opportunity to test their radical monetarist theories on Chile, and the doctrinaire Marxists (Serrano) currently visiting their mad ideas upon Venezuela. In both cases their beautiful economic and political theories – a belief that the omniscient wisdom of the free market would solve all ills, or of prosperity for all delivered by a publicly owned and administered means of production – could never survive contact with reality. To paraphrase John K. Galbraith, in both cases their great misfortune is that their theories have been tried.

        • Well, yeah, but here is one of the reasons why the Venezuelan opposition runs into trouble. You can be very far to the left and believe that Allende and Maduro are wrecking the economy. The problem is keeping people far to the left in the opposition tent when much of the opposition insists on using Chavista insanity to discredit leftist ideas in general. That doesn’t make sense to most leftist (or indeed some rightists, who oppose leftist ideas for other reasons) and so makes it a bit hard to unite the opposition.

          I’m looking at you, Handsome! Although seeing as we both live in the U.S., we’re not good examples.

  8. It’s going to get worse. Maduro really believes in price controls. If it doesn’t work he believes that that it’s because his controls are not tight enough and so he increases the controls. Of course the so-called economic war is a convenient way to assign blame and escape responsibility.

    Venezuela hasn’t reached rock bottom yet.

  9. “And I do believe economists often get it wrong.”

    I’ve always heard that if you lined economists up end-to-end, they make a complete circle.

  10. “multiple exchange rates: measures virtually every economist you talk to… see as vital.”

    Every pro-Chavismo economist, maybe, but not any other economist with even a moderate understanding of market forces. Even conventional liberals like Paul Krugman know better than that.

    • As I read it says that it is the dismantling of FX controls, and the unifying of multiple exchange rátesszük which they see as vital, not the multiple rates themselves

  11. Do agree that price controls in Venezuela have almost always led to very undesirable results , in other places maybe they have sometimes helped the market system avoid excessess and manipulations , specially because in real life markets dont always operate as they ought to , but generally if there are reasons to apply them , they must be applied sparingly and with great caution .

    Sometimes I suspect that part of the problem is that the rules whereby those prices are established are misunderstood or ineptly applied , once compared the profits which the operation of the Ley de Precios Justos purportedly allowed with the actual profits average companies in different industries in the US got and to my great surprise…they matched !!

    The thing is that price controls should only be applied when what makes markets competitive and fair is absent leading to distortions , problem is correcting those distortion is very very difficult and it often happens that the correction overshoots its mark causing more damage than what its meant to avoid….!!

    • Agree completely! Price controls are risky and almost always a second-best policy. And as Quico said, when inflation is out of control due to money-printing, they will always make things worse.

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