Venezuela Shows Why Price Controls Fail

In my regular Chavez-watching, I read an article about bickering between the United States, Colombia, and Venezuela over drug trafficking and interdiction efforts. As a libertarian and an opponent of the drug war, that’s little more than political theater. After all, for all the tons of cocaine stopped by the local government, tens or hundreds of times more make it out. After all, the profit in a black market is far too alluring to avoid.

Which is what makes the end of this article such a great lesson. Chavez is destroying his economy, with inflation and the often-following wrong response to inflation: price controls. Suddenly producing goods becomes more expensive than selling those goods at the regulated price. Thus, you see what happens:

The announcement comes after 145 tons of contraband food items headed for Colombia were found in San Cristobal, Tachira last week in an anti-smuggling operation by Venezuelan intelligence services. The items included a number of basic food products that are regulated by the government such as powdered milk, rice, sugar, cooking oil, cereal and canned fish. The government says that speculation and hoarding by private producers has contributed food shortages of basic products.

The regional daily, Panorama, reported that every night 50 to 60 trucks load up with Venezuelan food products such as rice and milk, leave the Las Pulgas market in Maracaibo in the opposition controlled state of Zulia and cross over the Colombian border illegally where they sell the products at up to five times the regulated price in Venezuela.

“No one says anything because the business is very big,” said an anonymous vendor in the Las Pulgas market to Panorama. “In order to not have any problems in transporting it is necessary to pay what they ask [the border guards], but in the end they earn a lot more there than here because of the regulation of prices implemented by the government,” he added.

As part of the measures adopted to combat smuggling and crime in the frontier zone a further 500 tons of food loaded onto 18 semi-trailers that were destined for Colombia were intercepted today and a clandestine landing strip near the border, along with a camp thought to be used for narco-trafficking logistics were uncovered.

Remember, just as in the drug trade, the numbers of tons they actually catch is an indication that the number making it through is much, much higher.

See what happens in a command and control economy? When it becomes a money-losing operation to try to sell at the regulated price, it doesn’t mean commerce disappears, it only disappears from store shelves. The “criminals” profit and the rich eat well, while the average citizen is duped by the government’s claim of “speculation and hoarding”.

Venezuela is like a living lesson of what happens when the government tries to break the law of supply and demand. Sadly, as I’ve said before, far too few people will understand the lesson.

  • David Wilson

    First of all, great article!

    Secondly, it is amazing how many Americans revere Chavez. My political science professor is one of them. However, I also have a philosophy professor who is actually from Venezuela, and teaches philosophy of law. He can’t stand the guy. Probably one of the only conservative/classically liberal professors I’ve had or will ever have. I dare all of Chavez’s supporters to spend time there and I bet they will feel the same.


    @ David Wilson

    they will not do it. it will loose the romantic feeling that they get when they talk about how good ‘La Revolucion Bonita’ is. when they have to deal with hunger, health issues and more death by deliquency than Irak while the goverment dont care about it and dont do squat to fix these problems. I will like to let evryone know that the Republica Bolivariana de Venezuela is giving ‘papers’ (ID) to anyone who ‘needs’ it to stay in the country, so if they want to experience first hand what ‘La Revolucion Bonita’ and ‘El Socialismo del Siglo 20’ is they can go there and live 12 months.

  • Damian

    I came across this post while reading up on food price controls. I want to know why they are bad and what the alternatives are.

    It seems to me that in places in Africa and Asia – and now Russia and Venezuela – food price controls come into being when food prices (currently increasing and likely to do so for many years, according to the World Bank) place staples out of reach of the poor. Politically, elected representatives feel compelled to do something, or be seen as doing something – such is the nature of the democratic process.

    Yet the outcome is, as you and others suggest, temporary relief from inflation and an increased risk of criminal activity (plus the unfair punishment of producers and retailers, as some term it). Long term, the market has its way.

    Commentators such as The Economist suggest that the only policy option is to let the market sort it out. There will be short-term pain, but in the end it will all be okay. Many seem to agree with this – I’m not sure whether you are among them. In a rich country this would be fine – we just go without a few things. But in Caracas slums or villages in east Africa, going without may well mean starvation or family disintegration.

    So anyway, I am interested to know what policy approaches you would sugest in times when food prices are so high that the poor – the real poor – cannot afford staples. Thanks.