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Venezuela Forces Supermarkets To Slash Prices, and Supply Falls Short

       1/9/18

Man With A Child In Venezuela

Hordes of hungry Venezuelans swarmed supermarkets in Caracas on Saturday after the socialist government ordered prices to be cut, creating pandemonium as the population jumped at the chance to buy less expensive food as the country’s deteriorating economy has resulted in extreme shortages.

The nation’s National Superintendency for the Defense of Socioeconomic Rights (Sundde) ordered the price adjustment on 1/6/18, citing article 46 of the “Organic Law of Fair Prices”.

Venezuela’s leadership accused 214 establishments from 26 supermarket chains nationwide of increasing prices on goods like flour and milk. "These acts can not be considered as mere speculation, they are criminal acts against the people. There is no reason why they are making these price changes and that is why we are applying the corrective measures, “ stated William Contreras, the superintendent in charge of the Sundde.

The news spread like wildfire around the city and soon the stores were surrounded by people beating on their doors and waiting in line to buy basic goods. Critics say Maduro is playing with fire in the oil-rich nation, where millions are unable to eat three square meals a day and malnutrition is on the rise, saying his policy will dissuade supermarkets from stocking their shelves and could trigger looting.

Several Venezuelans interviewed in line outside of a supermarket in eastern Caracas said they thought Maduro’s policies were a disaster. But they still planned to take advantage of lower prices because they were not able to properly feed their families otherwise.

Venezuela has fallen into this quagmire due to internal conflict between government parties and a lack of confidence in Nicolas Maduro, the leader of the party formed by the late Hugo Chavez. The nation was once Latin America’s most economically and politically stable country. After a coup attempt in 2002, an optimistic Chavez implemented a series of interventionist measures with the aim of preventing capital flight. These measures included expropriation of key industries, exchange controls, and price controls. However, once oil prices started to plummet, which accounted for 95% of the country’s export revenue, the harsh economic realities of these controls began to reveal themselves. Soon scarcity would be the norm due to a price control scheme that prevents the price system from functioning in the economy. Despite this, the socialist government would resolve to strengthen their price controls through the passage of the Fair Prices Act, in 2014, which banned profit margins over 30% and tightened the economic ceilings on basic goods.

The measures fly in the face of basic economic principles. In a free market, prices are a means indicating how much of a product is being demanded or supplied. For producers, prices are an indicator of when to enter or leave a market. Falling prices are an indication to leave the market. Raising prices, on the other hand, are an incentive for producers to enter a market so that they may earn a profit. On the consumer end, lower prices signal to consumers that it is a good time to buy said good or service. Higher prices generally discourage consumers from buying a certain product or incentivize them to look for cheaper substitutes. This dynamic ultimately leads to an equilibrium price that is the product of market forces, not government decrees.

Artificially lowering prices, and preventing the market from functioning naturally, will lead to consumers demanding more of a product then producers are willing and/or able to supply. When demand outstrips supply, shortages emerge. These arbitrary ceilings disrupt the productive structure of businesses and do not allow them to bring goods to the market in a cost-effective manner. Unsurprisingly, many businesses are forced to incur losses, especially if the legislated price falls below the natural market price that is needed to meet operational costs. Less fortunate enterprises will find themselves compelled to shut down their operations as they can no longer afford to supply goods to the market given the artificially low prices.

History is riddled with stories just like this one. A somewhat recent example was in the US during the 1970s, when Richard Nixon issued an executive order to control the cost of oil in the US after a production cut in OPEC nations. Despite being passed under the premise of fighting inflation, these price controls not only proved to be ineffective in curbing inflation, but they also created a new problem — shortages.

The laws of economics are universal, and no government, no matter how well-intentioned, can violate these principles without consequence. And Venezuela, a country where people are being forced to eat their pets, is no exception.

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