Venezuela’s “Fair Prices” Are Anything but Fair

By: Willians Ruiz - Nov 24, 2015, 9:57 am
Price controls aren't new, but the results are always the same. (Source: Twitter)
Price controls aren’t new, but the results are always the same. (Banco Agrícola Venezuela)

EspañolPrices are an economic mechanism that transfer information from consumers to producers and vice-versa. They are the essential component for decision-making, financial planning, savings, investment, innovation, and consumption.

When state intervention obstructs the price system’s vital role in the economy, it creates distortions that muddle the transfer of information. Individuals’ and entrepreneurs’ decisions can no longer be taken under the natural process of the free market.

The unfettered price system allows consumers to make choices based on a great number of factors. If the market provides similar products, the consumer will choose the one that best satisfies his needs.

This decision might be based exclusively on the product’s price, but it might also be based on a combination of price and quality. Or the consumer might choose what he regards as the best product regardless of the price.

In the free market, the consumer is, as Milton Friedman put it, free to choose.

On the other hand, if there is no demand for an entrepreneur’s products due to their high prices compared to those of his competitors, he will have to make some changes. Usually, he will have to adjust his production costs so as to offer better prices. It’s not the other way around, as the economic mainstream and much of public opinion believe.

If the entrepreneur notices that there is demand for a more expensive product with greater quality that perhaps incorporates recent technological advances, he’ll be able to afford greater production costs.

It’s clear, therefore, that the voluntary interaction between consumers and producers in the free market leads to very efficient economic coordination, with prices as the natural coordination mechanism.

Prices not only permit the necessary adjustments in decisions related to both consumption and production, they also promote innovation and development. They also provide information that is crucial for investment and production in terms of future demand.

When prices are allowed to act freely, they give signals to economic agents so that they can make important choices about savings, investment, production, and consumption.

When laws or coercive measures interfere with the price mechanism, prices cease to fulfill their essential economic function as a coordination device. When the price system is distorted, the entire economy begins to deteriorate.

In particular, socialist regimes seek to clamp down on the behavior of prices in a free market. Their leaders consider that only the centralized government apparatus should determine prices.

This, however, is a labor worthy of titans, and only the inimitable free market can carry it out efficiently. Socialist leaders must therefore resort to all sorts of controls as they seek, like alchemists, to find the “fair price” for any given product.

The free market price system is a threat to all types of centralized control, but especially to a centralized control of the economy such as that practiced by totalitarian, socialist, or communist regimes. Those who implement those systems think that prices arise from speculation, and they do not take into account a product’s subjective value. This is why they rush to control prices.

Marxists believe that that the amount of work which a product requires must determine its price, and that the most expensive goods must be those completed with the greatest amount of work.

[adrotate group=”8″]

This theory completely ignores the fact that economic value is determined by the economic agents’ subjective appreciations and decisions. Such subjective decisions have to do with the utility that each individual person assigns to a particular good.

Commerce takes place because one individual values a good that someone else offers him more than whatever he gives in exchange for that good. The same holds true vice-versa, as the Austrian economist Carl Menger demonstrated with his subjective theory of value.

An individual decides to exchange wheat for money because he values the money he will receive more than the wheat he has already produced. The corresponding amount of money will allow him, for example, to buy the fur which he needs to keep warm in winter. And the buyer values wheat more than money because he needs it to bake bread and feed himself. This exchange would be impossible without subjective valuations on both sides.

When the state interrupts this mechanism by imposing price limits and maximum profit margins, it undermines the productive process. Producers can’t easily adapt to the new conditions without endangering their companies’ stability.

There’s no such thing as a fair price determined arbitrarily by the state. Fairness in prices is only brought about when the market is allowed to function freely.

Today, those who try to establish an absolute control over the means of production — from distribution to sales to profit margins — overlook the fact that these measures have been tried before: in the Soviet Union, East Germany, and Cuba, among other places.

Today, Venezuela is making the same mistakes and suffering the same consequences.

Translated by Daniel Raisbeck.