Mary Anastasia O’Grady has written an interesting analysis of the Venezuelan mess in the WSJ today, and she quotes Mises on prices:
Here’s how Chávez economics “works.” As petro-dollars pour into state coffers, the government takes them to the central bank to get new bolivars printed, which are then pumped into the economy through government spending. Mr. Chávez has also been regularly increasing wages. The result is a consumption boom. Under free prices, too many bolivars chasing too few goods would produce inflation that would show up at the supermarket checkout counter. But price controls make that impossible. Instead, serious shortages are emerging.
Free prices are to an economy what microchips are to a computer. They carry information. As Austrian economist Ludwig von Mises explained in his legendary treatise 60 years ago, it is free prices that ensure that supply will meet demand. When Mr. Chávez imposed price controls, he destroyed the price mechanism.
And so it is that the Venezuelan egg is now a delicacy, the chicken an endangered species, toilet paper a luxury and meat an extravagance. White cheese, milk, tuna, sardines, sugar, corn oil, sunflower oil, carbonated drinks, beans, flour and rice are also in short supply.
The reason is simple: Producers have no incentive to bring goods to market if they are forced to sell them at unprofitable prices. Ranchers hold back their animals from slaughter, fisherman don’t cast their nets, food processors don’t invest in equipment and farmers don’t plant. Those who do produce find it makes more sense to take their goods across the border to Colombia or to seek out unregulated (black) markets.
I do wonder about the use of the term “incentive.” The makes it sound as if no one should do anything unless he can make money. It is more precise to state that market signals are instructing producers that it would be economically irrational to bring products to the market.
