John Oliver’s “Last Week Tonight” took on the subject of Venezuela and sadly whiffed on identifying its basic problem. It’s not about not saving oil revenue, it’s not about bending the democratic process to political will, it’s an excellent example of what happens when you destroy the market.
More specifically, Venezuela’s failing economy is what you get when you start price fixing. Prices aren’t just random numbers to be assigned at will, they’re crucial pieces of information that make an economy work. No one ever has managed to make an economy above subsistence level work without the price system. Soviet economists used to joke they’d need to leave just the one market economy so they’d know how to set their own prices — not that that would work, of course.
Politically, you can see the attraction. Venezuela did have many poor people and a wealthy few waxing rich off the oil. So, why not set food prices nice and low, by law?
But if you do that to, say, beans, then beans disappear from the legitimate market and get sold on the black market.
The original market price is, by definition, where the produce of those willing to grow beans at that price matches the number of people who wish to consume beans at that price. If we alter the price by law, then one of two things happens. Either the legal price is set above that free-market price, and the country gets swamped in beans, with many people growing them and but no one wanting to pay that much for them (This is what ails U.S. agriculture, overproduction as a result of high guaranteed prices). Or the legal price is set below the free-market price, with fewer people growing them but more people willing to consume, leading to shortages. As P.J. O’Rourke has been known to point out, all the economic activity moves to the black market and there beans cost what beans cost — the market-clearing price.
The important point here isn’t that prices are just what capitalists use to charge poor people — they’re information about how many things to make in the first place.
Now, there was a way that Venezuela could have aided the poor. Take the oil money, or some of it perhaps, and give it to the poor people. Then they can go out and buy the beans at the regular price. If they’re buying more, then the price will rise slightly, people will grow more, and we’ll still have as many beans as people want. That’s what prices do: balance supply and demand at the market-clearing price.
Venezuelan socialists didn’t just do this to beans of course, but to damn near everything: all basic foods, electricity, water, and even gasoline. They all cost nearly nothing, at least legally. That’s why there’s nearly nothing that can be bought legally — except the gasoline that the government buys from the U.S. (no, really!).
There is a lesson for us here too — this isn’t just some crazed caudillo making foreigners poor. All too many American cities insist apartments should be nice and cheap, by law, then gaze in slack-jawed wonder at the entire lack of apartments available to rent. Half the country wants to raise the minimum wage, and doesn’t grasp that it really will mean certain jobs won’t exist.
The lesson is: Don’t mess with markets.
Sure, maybe you or I or we really do want the poor to have more. That means we’ve got to tax ourselves so that we can give them more money. Messing with markets through price fixing just means there’s none for anyone, not more for the poor.
Tim Worstall (@worstall) is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.
