LESSONS LEARNED #66: “In socialism you don’t get what you want. You settle for what you get.” -Old Pithy

Posted by PITHOCRATES - May 19th, 2011

Prices, Price Controls and Rationing

People think high prices are just how rich people stick it to the poor.  But prices, high or low, are an automatic mechanism that matches supply to demand.  Things in high demand but low supply have high prices.  This helps discourage some from buying leaving supply available for those who are willing to pay the higher price.  High prices also tell the market where to expand.  Because high prices typically indicate high profit.  So others will rush in to fill that demand to get in on those high profits.  That’s why store shelves are typically full in capitalistic countries.  Because prices are always matching supply to demand.  And shelves are often empty in socialist countries.  Where a distant bureaucrat decides what people should build.  And what people should buy.

When you interfere with this automatic mechanism you get market failures.  As in socialist, command economiesPrice controls, though they sound kind and caring, hurt.  For example, rent controlled apartments in New York reduced the supply of apartments.  Which reduced the supply of affordable housing.  The exact opposite of the goal of price controls.  Why did this happen?  For the same reason you don’t invest your money for a negative return on investment.  Investors build and manage income properties (i.e., apartment buildings) for a profit.  With rent control, apartments became a bad investment.  So investors built condominiums instead.  And did little to maintain their rent-controlled income properties to limit their losses.

Price controls put people before profits.  Or so they thought.  Rent control kept rental prices down.  But only for the few who could find an apartment.  And those who did saw the quality of their housing decline.  Because they couldn’t pass on the cost of any improvements in higher prices, owners made few improvements.  With no profits there are no incentives.  So rent-controlled housing served as little more than a write-off against profits made from other good investments.  Rent control ultimately destroyed low-income housing.  In quantity as well as quality.  And low-income renters had to settle for what there was.

When OPEC cut oil shipments to the West in the Seventies gasoline prices soared.  People demanded that the government do something.  So the Nixon administration did.  Price controls.  They reduced the price of gas to what people were willing to pay.  And what happened?  The price indicated there was a higher supply of gasoline than there was.  So people bought as if there was more gasoline than there was.  Until the gas pumps pumped dry. And cars ran out of gas.  Gas was affordable.  There just wasn’t any to buy.  If the market had set the price, there would have been gas.  It would have been expensive, but it would have been there to buy.  Price controls took a scarce commodity and made it even scarcer.  So instead of gas at any price, people had to settle for life without gas.  And find another way to get places.

The People have Voted, Capitalism is Better than Socialism

After the communist revolution in China, Mao Tse-Tung began to collectivize agriculture.  Taking land from the wealthy and giving it to the poor to work.  For the state.  The People’s Republic of China.  Who cared about the people.  And even more about the grain they grew.  Because that was how they were going to raise the capital to industrialize China.  Buy low (i.e., take from the farmers) and sell high.  And beat anyone who didn’t get on board with the new way.  So there was no price mechanism.  No profit incentive.  In fact, the only incentive was not to get beaten.  They called this great plan the Great Leap Forward.  It was a disaster.  Unless famine was the goal.  And as far as famines go, this was one of the bigger ones.  They call it the Great Chinese Famine.  Some 15 million died.  Or 30 million.  Depending on who crunches the numbers.  No, the people did not fare so well in the People’s Republic of China.

Doing things for the people sounds good.  It sounds like you care about the people.  But the people rarely do well in nations with ‘People’ in their name.  The Chinese suffered and died wholesale.  They’re doing a lot better now.  But that’s only where they let some capitalism loose.  Allowed people to make a profit.  Gave them an incentive.  In the big cities by the sea.  Life was good.  Soon, people left the poverty and famine of the rural country and looked for a job in the city.  For a better life.  A better life provided by capitalism.  Not socialism.  They had had enough of the kind and caring state taking care of them.   They’d rather work for some rich guy who paid decent wages in a factory.  Because they could choose their life.  And not settle for what the state would give them.

You see, there is no such thing as a communist/socialist utopia.  The truth is, life is horrible in communist/socialist countries.  That’s why Cubans risked their lives on rafts to cross the ocean to escape their utopia and go to Florida.  And why Haitians did likewise.  Even though Cuba was far closer and was itself a communist utopia.  They said thanks but no thanks and took the longer and more deadly trip to Florida.  For they knew life was better in the United States than in Cuba.  Because capitalism is better than communism/socialism.  The people have voted.  At least the Cubans and the Haitians.  And everyone else that went to America.  Or any other capitalist country.

Venezuela Rations Food and Electricity

Hugo Chávez of Venezuela is a big fan of socialism.  He’s turned the whole country into a socialist utopia.  He launched a revolution.  The Bolivarian Revolution.  Nationalized industries.  Including the big one.  Oil.  Put people before profits.  Set up price controls.  Expanded education to the people.  And health care.  The kind of things that resonate with the people.  The people love him.  For sticking it to the rich.  And to the United States (who gets a lot of oil from Venezuela).  Oh, they got a kick out of him saying he smelled sulfur following George W. Bush to the UN podium.  Because George W. Bush was the devil.  He even said he smelled sulfur from Barack Obama in Copenhagen.  Where he called capitalism “the road to hell.”  So he sports true socialist bona fides.  So Venezuela must be a socialist utopia.

Well, we’ve seen what can happen when the market doesn’t set prices to match supply to demand.  And so it happened in Venezuela.  The supply of food dwindled to where they had no choice but to ration it.  They even bartered for food.  Traded some of their oil for Argentine meat and dairy products.  Because the price controls so disrupted the economy domestic production of food plummeted.  Food was affordable.  There just wasn’t much food to buy.

But food isn’t the only thing they’re rationing.  They’re also rationing electricity.  Through rolling blackouts.  This in a country rich in energy.  Oil.  If any nation should not have an electricity problem it’s Venezuela.  But the infrastructure is not there.  What they have is falling apart.  Insufficient.  And nationalized.  That is to say, they put people before profits in the electricity business.  And with no profit incentive, there was no incentive to provide more reliable electricity.  Those in government know they need more.  They tried to add more.  But socialist planners are just not good business people.  Or good electrical engineers.  And they’ve failed.  As an energy-rich nation suffers through humiliating rolling blackouts to ration what electricity they have.

Low Prices and Empty Shelves

People may get what they want in socialism.  For awhile.  At least, they feel good for awhile.  Knowing that the rich are finally getting theirs.  But rarely does life change for the better.  For the little guy.  Those in power live well.  But peasants are still peasants.  The hungry are still hungry.  Or, worse, dying from famine. 

With capitalism, you can always count on a grocery shelf full of stuff you want to buy.  Because prices and the profit incentive put the things you want on that grocery shelf.  Or it puts gas in your car.  Or you in housing.  You can’t always get what you want.  But your complaints will be more of the “I’d rather have steak than hamburger” variety than the “I’d rather have food than fair prices and empty shelves.” 



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Obama Makes FDR Look Like a Conservative

Posted by PITHOCRATES - September 29th, 2010


None of FDR’s New Deal programs pulled the economy out of the Great Depression.  Businesses sat on their cash.  Afraid of further liquidity problems.  Afraid of what anti-business policy the FDR administration would pass next.  And the depression had left them with so much excess capacity (because no one was buying anything) there was no need to hire anyone to expand capacity.  So they didn’t.

FDR tried to stimulate the economy with record government spending.  None of it helped.  There were some make-work projects for some people.  But public make-work projects don’t stimulate an economy.  Jobs in the private sector do.  And excessive government spending just makes the businesses in the private sector nervous.  The government has to pay for that spending eventually.  Through higher taxes.  Excessive borrowing.  Or simply by printing money.  None of these actions bode well for the private sector.  They will just increase the cost of doing business (via higher taxes, higher interest rates or a higher inflation rate which makes everything more expensive).

The Great Depression finally ended thanks to Adolf Hitler and Hideki Tojo.  With a world plunged in war, our allies needed war material.  Enter the Arsenal of Democracy.  The FDR administration suspended the New Deal policies and allowed the private industry to do what it did best.  Unfettered capitalism.  Unimpeded by government.  And the rest is history.


We are trying the failed policies of the FDR administration again.  And they’re working just as well as they did for FDR.  Excessive government spending is making the businesses in the private sector nervous.  Because they know the government will have to pay for that spending eventually.  Through higher taxes.  Excessive borrowing.  Or simply by printing money.  So they’re battening down the hatches.  Preparing for a rough ride through stormy, economic seas.  Sitting on excess capacity.  And piles of cash.  Because they don’t know what anti-business policy the Obama administration will pass next.

It’s worse now than it was then.  The world is not at war.  Massed armies are not threatening our allies.  There are no customers for the Arsenal of Democracy.  World war can’t pull us out of this depression.  We are on our own.  We will pick up the tab for Obama’s spending.  Well, not us.  Our children will.  Or their children.  Or their children’s children.  And each day the Obama administration spends more, the worse that day of reckoning will be. 

It doesn’t have to be this way, though.  If we stop the spending we can mitigate the damages.  But we have to act soon.  For we are fast approaching the point of no return.

I Have this Strange Feeling of Déjà Vu                                                           

Command economies don’t work.  That is, if you go by the historical record.  The New Deal failed.  The Soviet Union failed.  And where they haven’t failed, life isn’t so good.  I mean, no one is trying to sneak into North Korea or Cuba.  Why?  Because it sucks in those countries.  And yet we keep trying to be like those countries.  Why?

How bad is it?  Well, here’s one opinion:  U.S. Economy “Close to a Destructive Tipping Point,” Glenn Hubbard Says (by Aaron Task on Yahoo! Finance).  It’s a discussion of a new book:  Seeds of Destruction: Why the Path to Economic Ruin Runs Through Washington, and How to Reclaim American Prosperity by R. Glenn Hubbard and Peter Navarro.  Based on titles, I’d say it’s pretty bad.  You might want to add this book to your reading list.



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