Economics 101

The Latest News from Venezuela Proves You Can’t Create Flourishing by Controlling the Economy

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Yesterday brought more news from the heartbreaking situation in Venezuela. CNN reports that president Nicolas Maduro increased the country’s minimum wage by 40 percent – and that hike still only amounts to $67 a month.

Maduro has already raised the minimum wage three times this year. Even with this hike, his efforts at controlling wages and prices aren’t helping Venezuelans keep food on the table. Reporters Patrick Gillespie and Flora Charner write,

Thursday’s wage increase likely won’t help ordinary Venezuelans put more food in the fridge. Venezuelans have struggled with extreme food shortages this year, and only recently have the shortages eased as the government has stopped enforcing its strict price controls.

Did you catch that last part? Food shortages in Venezuela have only started lessening because the government stopped enforcing price controls. This is a great illustration of why prices are so essential for societal flourishing. You can’t eliminate prices and expect things to turn out well. One of the biggest lessons to be learned from the tragedy in Venezuela is that making things “free” is no substitute for the human creativity that would otherwise be allowed to reach its full potential in a free society. As I wrote in February,

If we want to help the poor, we shouldn’t bite the hand that feeds them. This is what socialist, centrally-planned policies do. Despite the best of intentions, people are left without food, security, or freedom. The assumption behind such policies is that we can wave a magic policy wand and make things free and eliminate prices – and, somehow, this is a good thing! It’s counter-intuitive, but prices are the best tool for rationing scarce resources…. Eliminating prices and making things free or nearly free is the fastest road to poverty and ruin.

If we want to effectively help those in need, we need prices. In her paper The Economics of the Minimum Wage and the Christian Response, Joy Buchanan describes the situation in Venezuela:

Venezuela’s government is trying to control incomes and prices so that everyone can afford some basic products…. The economy of Venezuela is now collapsing because wages and prices cannot adjust.

Wages and prices cannot adjust, even with a specific government position devoted to make sure prices do just that. Buchanan continues:

It is an indication of their problem that they have a government position called the “Cost and Price” regulator. The person in this position recently denied that the country is facing a serious toilet paper shortage, when in fact many store shelves are empty. Consumers cannot buy basic food staples.

Controlling prices for certain goods doesn’t make those goods less scarce. It doesn’t solve the problem of how to make those staples more abundant, and nature abhors a vacuum. Someone will step in to provide what’s needed. Buchanan shares:

An article titled “This is Why There is No Toilet Paper in Venezuela” offers the following explanation: “The Venezuelan economic model of excessive meddling is creating a mess. By keeping prices artificially low and imposing price controls on everything, they’re completely undermining the domestic economy to gain short lived political payoffs. Black markets occur when the formal economy isn’t functioning — and it hasn’t been for a while.” Keeping prices artificially low has the same result as keeping wages high: the market does not connect all the possible buyers and sellers and so less-connected people get left out.

Not only are people left out, but they also aren’t able to get the things they need – like food and toilet paper. Prices provide essential information that needs to be communicated freely for people to flourish. Buchanan explains that in order to keep price controls in place, the Venezuelan government is cracking down on sources of information:

Because market prices communicate powerful information, the government of Venezuela is trying to prevent citizens from even knowing actual market prices. A website, DolarToday.com, gives accurate information on the exchange rate and inflation rate of the Venezuelan currency. The Venezuelan government does not allow its own citizens to access this website. The government raises the minimum wage frequently, which raises the cost of labor and therefore the price of products. This price inflation erodes the value of citizen’s savings, driving some to open secret saving accounts in US dollars. In this type of situation, raising the minimum wage helps no one.

Well, it does help people – people in power. Again, Buchanan explains:

The more government gets involved in”helping” the poor, the more room there is for government officials to help themselves. In the case of Venezuela, the stated mission of the Chavez regime was to help the poor using every power the government could wield. Not only is life now worse for the poor people, but government officials and corrupt cronies have become richer because they assigned themselves so much power.

If we truly care about helping the poor and ending the kind of poverty we’re seeing in Venezuela, we need to realize that centrally-planned economic schemes can never bring true flourishing.

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