Venezuela’s Socialist Policies cause Runaway Inflation and High Prices

Posted by PITHOCRATES - November 24th, 2013

Week in Review

Socialists who attack capitalism say they are the champion of the poor.  And yet the poorest of the poor are in socialist countries.  Where some live without indoor plumbing or electric power.  While the poor in capitalist countries can suffer from obesity.  And most if not all have indoor plumbing and electric power.  As well as refrigerators, microwaves and televisions.

Venezuela is an anti-capitalist, socialist country.  So you would think it’s a poor person’s paradise there.  But because of runaway inflation only the rich do well in this socialist paradise.  While the poor can barely afford to live (see Venezuela jails 100 ‘bourgeois’ businessmen in crackdown by Andrew Cawthorne and Deisy Buitrago, Reuters, posted 11/14/2013 on Yahoo! News).

Venezuela’s socialist government has arrested more than 100 “bourgeois” businessmen in a crackdown on alleged price-gouging at hundreds of shops and companies since the weekend, President Nicolas Maduro said on Thursday.

“They are barbaric, these capitalist parasites!” Maduro thundered in the latest of his lengthy daily speeches. “We have more than 100 of the bourgeoisie behind bars at the moment.”

The successor to the late Hugo Chavez also said his government was preparing a law to limit Venezuelan businesses’ profits to between 15 percent and 30 percent.

Officials say unscrupulous companies have been hiking prices of electronics and other goods more than 1,000 percent. Critics say failed socialist economic policies and restricted access to foreign currency are behind Venezuela’s runaway inflation.

So what’s to blame for these high prices?  Capitalism?  Or socialism?  Well, if you blame a devalued currency and a scarcity of basic goods, you have to blame socialism.

Venezuela’s official inflation, 54 percent annually, is the highest in the Americas…

Given Venezuelans’ anxiety over inflation, and scarcities of basic goods from toilet paper to milk, Maduro was risking a backlash at the December 8 nationwide municipal elections…

Critics say the moves do not tackle the roots of Venezuela’s economic malaise, like an overvalued bolivar that forces many importers to buy black-market dollars and then pass those costs on to consumers.

The government has ordered local telecom companies to block various websites showing the bolivar at 10 times the official rate of 6.3 to the greenback on the illegal market.

The socialist economy of Venezuela can’t provide the basic necessities.  So they have to import a lot of goods.  But before you buy a country’s exports you have to exchange your currency first.  And when you’ve devalued your currency by printing money to pay for a welfare state you don’t get a lot of foreign currency in exchange.  Because your money is worthless.  And no one outside the country wants it.  For what are they going to spend it on?  It’s not like Venezuela has a booming export market to shop at.  So when you can’t exchange bolivars for US dollars you have to get US dollars some other way.  On the black market.  So you have a currency that has some purchasing power to pay for those US exports.

So inflation, scarcity and the cost of black market US dollars adds a lot of costs to businesses.  Which they have to recover somehow.  And the only way they can is through higher prices.  Which hurt the poor the most.  For they’re not getting big pay raises to keep pace with rising prices.  In fact, Venezuelans don’t even want to hold on to their own currency.  Because it’s losing purchasing power at such a great rate that the longer they hold on to it the less it will buy.  Which is why they want those imports.  Because you can’t inflate manufactured goods.  So they hold their value.  Unlike a savings account full of bolivars.

It’s not the bourgeois capitalist parasites making life miserable for the poor.  It’s Venezuela’s socialist policies.  Just as similar policies caused people to flee Cuba on rickety boats to get to America.  And East Germans risked their lives to climb over the Berlin Wall.  If you put two societies close together, one socialist and one capitalist, the flow of people between the two will be from the socialist state to the capitalist state.  Which is why socialist states are often police states.  So they can prevent their people from escaping their socialist paradise.

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Prices, Scarcity and Value

Posted by PITHOCRATES - December 12th, 2011

Economics 101

“Economics is the Study of the Use of Scarce Resources which have Alternative Uses”

Agriculture advances gave us food surpluses.  Food surpluses gave us a division of labor.  The division of labor gave us trade.  Money made that trade more efficient.  Religion and the Rule of Law allowed great gatherings of people to live and work together in urban settings.  Free trade let us maximize this economic output and elevated our standard of living.  And free labor sustained economic growth by increasing the number of people making economic exchanges.  Of course, we need something else to facilitate these economic exchanges.  Prices.

British economist Lionel Robbins defined economics as the “study of the use of scarce resources which have alternative uses.”  Resources are the things we buy.  Or they make up the things we buy.  We can use these resources to make many different things.  For example, we can eat corn as a food.  It can be an ingredient in food.  We can make it into a sweetener.  We can use it to make bourbon whiskey.  We can even use it to make fuel to burn in our cars.   So corn has many alternative uses.

Depending on the corn harvest corn can be abundant.  Or scarce.  We can have a lot of it.  Or if there was a drought we may not have so much of it.  For another example of scarcity you can consider a concert.  Whether it is for your favorite band or a Broadway show, ticket prices for that show will vary.  The pair of tickets that are front row center are the most coveted.  And typically end up with a service or a scalper.  Thousands of people may be able to enjoy the show.  But only two can sit front row center.  These two tickets are very scarce.  And if you ever bought a pair of these tickets you know how expensive these tickets can be.

We Agree to Economic Exchanges when both Buyer and Seller Agree on the Value which is Communicated by Price

Those tickets are expensive because they are scarce.  The price of these tickets tells us this.  There are more seats available that are not as good.  And they cost less.  Because there are so many of these ‘cheap’ seats pretty much anyone can buy them.  Unlike the front-row center seats.  The scarcer something is, then, the greater its value.  And the more expensive it is.

Something becomes scarcer when the alternative uses for it grows.  For example, we now use corn to make ethanol to fuel our cars.  Leaving less available for food.  So food prices rise.  Because with this new use for corn the users in the food industry have to compete with each other to buy the smaller amount of remaining corn.  Corn, then, became scarcer when we added another use for it.  And more expensive.

We determine the price we are willing to pay for something based on the value it has to us.  In every economic exchange both buyer and seller assign a value.  Of what the buyer is willing to pay.  And what the seller is willing to accept.  We communicate this information with prices.  And we agree to make the economic exchange when both buyer and seller agree on the value of what they’re exchanging.  By agreeing on a sales price.

‘High’ Prices make sure Scarce Resources that have Alternative Uses are Always Available for those Alternative Uses

In this way prices automatically ration limited resources that have alternative uses.  And directs these limited resources to where their use is valued most.   By automatically flowing to the highest bidder.  This is the hallmark of capitalism.  And why you can walk into any American supermarket and be overwhelmed by the choices available.  But when you interfere with prices you have shortages.  And rationing by government bureaucrats.  Such as the gas lines during the Seventies.  When price controls made gas cheap to buy.  But it was almost impossible to find any to buy.  Because that cheap price for a scarce resource (made scarce by the Arab oil embargo) allowed people to buy it up until there was no more left.  Had we allowed the price to rise we would have bought less gas.  Guaranteeing there would be gas available for those who needed it most.  And who were willing to pay the higher price.

During the height of the Cold War when Soviet defectors came to the United States the American supermarket astonished them.  They never saw anything like it behind the Iron Curtain.  For communism didn’t use prices to manage their resources.  Bureaucrats managed their resources.  Their decisions filled stores with things no one wanted to buy.  And made people stand in line for hours to buy their ration of soap or toilet paper.  Things these defectors could fill a shopping cart with on any day of the week in any American supermarket.  And have money left over to buy so much more.  Thanks to capitalism.

Prices are relative.  Prices that may seem high serve a purpose.  They make sure scarce resources that have alternative uses are always available for those alternative uses.  Yes, the prices may be ‘high’ from time to time.  But these high prices guarantee these scarce resources will always be available to buy.  Unlike a low price.  Which, if too low, it will make a scarce item unavailable.  At any price.  Such as gasoline in the Seventies.

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