Economics is the study of the use of scarce resources which have alternative uses. This definition comes from the text Basic Economics written by Thomas Sowell. Hugo Chavez – president of Venezuela – should read at least the first couple chapters of this book.
Venezuelan President Hugo Chavez sought to tighten his grip on South America’s third- largest economy as he ordered National Guard troops to seize rice-processing mills for allegedly failing to observe government price controls.
“Some companies are refusing to follow the government’s rules,” Chavez said yesterday on state television. “I’ve ordered the intervention in those industries to protect the people, not the bourgeoisie.”
Two questions come to mind. First, why did the government feel the need to implement government price controls and second, why did the rice-processing mills ignore imposed rules?
In response to rising inflation, Chavez ordered price controls – specifically implementing price ceilings on staples like rice and milk – to keep prices low for the people. The problem is that market forces quite easily move to cause more issues for those producing and consuming these products.
Pricing is a very important factor when it comes to product availability. Quite simply, prices rise when demand exceeds supply at the current price, and prices fall when demand is lower than supply at the current price. These facts are what the Soviet Union and now Chavez in Venezuela are totally missing.
Chavez has instituted price controls to keep prices lower than they would be if left to market forces. Because of this move, two things happen. First, the demand of rice increases since the price is low. People in certain areas of Venezuela are stockpiling rice at the low price even though they do not need it. Second, companies look for alternative uses for the rice they produce since they can not make a profit – and indeed loose money – at the set price.
Alternative uses for rice? You bet. As it turns out, flavored rice was not included in the Chavez price controls.
The government will seek to establish norms to determine what percentage of processed rice products can be sold as flavored rice, which isn’t subject to price controls.
So what caused inflation in Venezuela? Chavez increased the roll of the federal government when it comes to social programs, welfare and other support for the poor. This huge increase in government spending has caused staggering inflation, more than 30 percent last year alone.
That first colossal mistake has led to Chavez’s second mistake. Watch out… snowball coming down the hill.
Chavez may be beginning to realize it is impossible for the government bureaucracy to determine how resources should be allocated. Even a blue ribbon panel would not be able to efficiently figure out where they next ton of rice should be shipped or what the price should be.
We’ve got a perfect opportunity to watch what Chavez has done and will do in the future in his self-proclaimed move towards a “perfect” socialist society. Maybe those who did not learn from the Soviet Union’s experiment will learn from Chavez.
Gateway Pundit has more.