Saturday, January 16, 2010

The Laws Of Economics Can't Be Repealed

That Venezuela's socialist ruler Hugo Chavez is a nutcase is hardly news. The latest example is quite instructive though. First he devalued Venezuela's currency by 17% for "priority imports" and by as much as 50% for imports that are not considered essential. Presumably, the lower rate will apply to exports as well.

Having two exchange rates for the same currency is of course loony enough as it will encourage arbitrage and create various distortions (it is not clear why he simply didn't instead slap [higher] tariffs on these "non-essential" imports) , despite Chavez' tirades and violent actions against "speculators".

Now he denounces any businessman who raises prices in response to the higher cost of imports as a "bourgeois speculator" and threatens to use military force against these "bourgeois speculators".

Price controls of that kind have been tried many times before in history, and to the extent they were enforced they meant either shortages or that the government were forced to subsidize it. If Chavez thinks that he can in some cases double the cost of goods and expect them to have the same retail price, then few or no retailers will want to sell them. If Chavez' thugs are sent to seize these businesses in response, then it will be the Venezuelan government who will have to sell the goods at a loss-something which will be very costly for the government.

Either way Chavez can't repeal the laws of economics in the same way that he can repeal man made laws. Higher costs of imports will ultimately mean either higher costs for Venezuelans-whether be for the consumers in the form of higher prices or for the government in the form of subsidies- or that shortages will appear. The laws of economics are just like the laws of physics something which politicians or anyone else can't change or escape.