Library of Economics and Liberty masthead logo 
Ibsen Martinez

On Price Controls and Populist "DoubleThink"

Ibsen Martinez*

I live in a Latin American neo-populist petrocracy.

For the last decade, my government's economic officials have pledged themselves to the "comprehensive, humanist, endogenous and socialist development of the nation", whatever that means.

Perhaps that gobbledygook just means that in Venezuela it is much easier to fetch a bottle of premium Scotch whisky at any low-income neighborhood's supermarket than a bottle of milk, a pound of sugar or a dozen of eggs. Paradoxically, the local branch of Audi set an all-time Latin American sales record during 2007 by catching a 22% share of the region's luxury cars market.

To the average Venezuelan citizen, "petropolitics" is not just another catchy word. Despite the hard fact that our main customer is the U.S., my oil-rich country's notoriously outspoken leader is the perfect embodiment of anti-Americanism in our continent. To say that American motorists end up paying for Venezuela's Russian Sukhoi US 28 Soviet-era jet fighters and hundreds of thousands of Kalashnikovs assault rifles is not an overstatement.

The hard fact is that, no matter how "humanist" and "endogenous" a petrostate's welfare and social policies are conceived, oil just does not create jobs. On the contrary, it destroys most other sectors of the economy. Its most distorting effect is pushing up the real exchange rate, lessening incentives for almost any other industrial activity. Why produce your own food, for example, if you can import it? How can any other kind of export industry be developed if the inflow of petrodollars hampers manufacturing?

With all that oil wealth concentrated in the state, you can only witness how "clientele politics", voracious bureaucracy and crony capitalism pervade every corner of our society.

As Tina Rosenberg wrote in "The Perils of Petrocracy" (The New York Times, 11-04-2007), "those in power distribute oil money to stay in power. Thus oil states tend to be highly corrupt". "Comprehensive, humanist and socialist" stance notwithstanding, I would add.

Populism and petropolitics have lately drawn the interest of many scholars and commentators who have indisputably attained a keener understanding of both subjects than mine, hence I will not delve into all the consequences of those terms when they concur in a Latin American country with 27.7 million inhabitants, a GDP of $140 mm and, according to government sources, a 13.2% level of unemployment.

I will rather follow Yogi Berra's word of advice, "you can observe a lot by watching" how daily life goes by in a populist petrocracy such as the one I live in. In consequence , allow me to contribute to a better knowledge of Venezuela's current economic plight by pointing at an "Orwellian" innovation that I have designated "populist newspeak."

When Mr. George Orwell coined the word "newspeak" he was obviously thinking of full-blown totalitarian regimes, not erratic Latin American populism. To everyone's surprise, Mr. Chávez has plundered "newspeak" usages and twisted them into illiberal democracy's conventional rhetoric. A remarkable achievement, let us be fair. That said, I think it's high time for a digression directed at taking a better hold of my contention.

Consider breakfast. My breakfast, to be exact. It's been months since I have had an oatmeal breakfast or a nice cup of espresso with a drop of milk because coffee and milk has literally vanished from supermarkets' shelves since last November. And that includes "Mercal", the government's supermarket network where the poor are supposed to buy food at subsidized low prices

The reason? Stiff price controls, of course, and fixed currency rates that have been going on for 5 years, too.

 

Read more about the effects of Price Controls in an article by Hugh Rockoff in the Concise Encyclopedia of Economics. See also the discussion of how fixed exchange rates work in the CEE article on the Gold Standard by Michael Bordo.

I must confess that the very mention of price controls makes me drool at the thought of black beans and precooked corn flour, two staples absolutely essential in our spicy and usually inexpensive cocina criolla (Creole cuisine) that, according to señora Luz, the Dominican immigrant lady married to my office building's Colombian janitor, I am not the only one to miss.

Early on February, an outburst of looting broke in Sabaneta, Mr. Chávez's small hometown in southwestern Venezuela. Two hundred regular army troops had to be sent in to avoid further looting of the local "Mercal's" facilities. The enraged looters accused corrupt supermarket officials of hoarding subsidized basic foods and then trying to sell them above controlled prices. As isolated as it was, the whole episode was reminiscent of the bloody riots that erupted in Caracas in 1989 with a death toll of some 700 people.

But, please, don't take it from me, take it from the host of foreign left-leaning correspondents who now appear to be utterly surprised by the onslaught of criticism that Mr. Chávez is facing, even from his own supporters, about a list of "petty" domestic worries such as violent crime and shortages of basic foods.

An economic crisis is rapidly playing out when it should be the best of times for Venezuela, a country endowed with the largest conventional oil reserves outside the Middle East and with oil prices verging on global record highs.

By late 2007—writes Francisco Rodríguez, who is Assistant Professor of Economics and Latin American Studies at Wesleyan University—Chávez's economic model had begun to unravel. [...] Scarcities in basic foodstuff, such as milk, black beans, sardines were chronic, and the difference between the official and the black-market exchange rate reached 215 percent. [...] During the past five years, the Venezuelan government has pursued strongly expansionary fiscal and economic policies, increasing real spending by 137 percent and real liquidity by 218 percent. This splurge has outstripped even the expansion of oil revenues: the Chávez's administration has managed the admirable feat of running a budget deficit in the midst of an oil boom.1

Going back to price controls and "newspeak", here is what Mr. Chávez said in his Sunday TV show back on January 20th:

I know and I'm aware that the price of milk at Bs 1.1 a liter (US $0.50, farm gate price) has fallen short, and I'm willing to raise it a bit to benefit the primary producers, although of course we have to think of the consuming public so the price doesn't keep rising. I'm willing, and I announce it to the milk producers of the country, to raise farm gate milk from Bs.1.1 to Bs.1.5 (US $0.69), and I hope all the producers will respond as we need, instead of just making cheeses or taking it out to Colombia, which I consider treason [emphasis mine], they are betraying their own pueblo. Milk must first of all be for Venezuelans...so we are revising the price of milk... because we know production costs have risen.

In the same breath, Mr. Chávez both accepted that price controls lead to shortages and blamed shortages on producers' treachery. Wry blogger "Quico" Toro, who holds a Political Sciences Master degree, reaching out to a large following among Venezuela's youth, writes that,

Mr. Chávez can both concede the utility maximization model of producer behavior—that cornerstone of mainstream microeconomics with its upward-sloping supply curves and its producers who rationally respond to price hikes by expanding production—and he rejects it in favor of a normative explanation. So when producers respond to high prices by increasing supply they're acting rationally, but when they respond to low prices by decreasing supply they're betraying the people. This makes no sense. And I mean that in the strictly formal sense. If something is true, it cannot simultaneously be not-true. Either the supply curve slopes upward or it doesn't.2

In 1984, George Orwell wrote:

...the labyrinthine world of doublethink. To know and not to know, to be conscious of complete truthfulness while telling carefully-constructed lies, to hold simultaneously two opinions which cancelled out, knowing them to be contradictory and believing in both of them; to use logic against logic, to repudiate morality while laying claim to it, to believe that democracy was impossible and that the Party was the guardian of democracy; to forget whatever it was necessary to forget, then to draw it back at the moment when it was needed, and then promptly to forget it again: and above all, to apply the same process to the process itself. That was the ultimate subtlety: consciously to induce unconsciousness, and then, once again, to become unconscious of the act of hypnosis you had just performed. Even to understand the word 'doublethink' involved using doublethink.

That passage could have come straight out the "Understanding Comprehensive, Humanist, Endogenous and Socialist Development Handbook".

Orwell's prescience is still scary, isn't it?


Footnotes
1.

Francisco Rodríguez, An Empty Revolution: The Unfulfilled Promises of Hugo Chávez, "Foreign Affairs", March/April, 2008.

2.

Empire of Doublethink. Caracas Chronicles, February 18, 2008.


* Ibsen Martinez is a columnist, journalist, and award-winning playwright from Caracas, Venezuela. His writings have appeared in El Nuevo Herald, Miami, Letras Libres, Madrid, and El Pais in Madrid. Since 1995, he has written a weekly column for El Nacional.

For more articles by Ibsen Martinez, see the Archive.
Return to top
Copyright ©2008
Liberty Fund, Inc.
All Rights Reserved