Archive for February 23rd, 2007

From Diocletianus, to Nixon, to Chavez: A history of failed price controls

February 23, 2007

(In Spanish here)

Most people know little about Roman Emperor Diocles or Diocletianus. While drawing parallels across 1700 years of history is certainly perilous, some of the similarities to our current Autocrat/Dictator are simply uncanny.

Like Chavez, Diocles sought his fortunes in the Army, rising through the ranks and becoming Emperor in 285 A.D. Diocles did well in establishing order within the military, establishing a military despotism, but failed at ordering the economy. He printed money like crazy (sound familiar?) and failed to restore faith in the currency. Then, like so many before and after him, he established price controls, as well as social controls. If you were the son of a farmer, you had to become a farmer, as simple as that. But more importantly, he established some of the strictest price controls by imposing the death penalty on violators.

Diocletianus issued the “Edict on Maximum Prices”, which contained 32 sections and established price limits on over 1,000 products. These included maximum prices on beef, grain, beer, transportation and wages. Despite the harsh penalty, this simply did not work. Merchants simply stopped producing items under control or sold them illegally above the controlled prices. Eventually he had to withdraw the decree as shortages and inflation increased, the opposite effect of what was intended.

Diocletianus story is not the only one; there are dozens of examples of failed price controls no matter how harsh the penalties. From the Code of Hammurabi in Babylon, to Egypt, to the US Civil War, to the French revolution, to World War II, to Nixon, to Venezuela, to Venezuela and now again, to Venezuela, price controls just don’t work. In fact, history shows that they always have the opposite effect to that intended. There isn’t a single case of successful price controls and many books and papers have been written in order to prove it.

Which brings us to Venezuela today. After setting price controls three years ago, printing money like crazy which does not help and then watching inflation rise, as expected, President Hugo Chavez issued a decree last week to attempt to create fear in agricultural producers. While I discussed the decree last week, it is only now, upon my return from vacation that I have had a chance to look at the decree. And it is even worse than I expected.

To begin with, the decree is clearly illegal, given that Article 112 grants Venezuelan extensive economic rights which can not be controlled by the Government. In Spanish:

Artículo 112. Todas las personas pueden dedicarse libremente a la actividad económica de su preferencia, sin más limitaciones que las previstas en esta Constitución y las que establezcan las leyes, por razones de desarrollo humano, seguridad, sanidad, protección del ambiente u otras de interés social. El Estado promoverá la iniciativa privada, garantizando la creación y justa distribución de la riqueza, así como la producción de bienes y servicios que satisfagan las necesidades de la población, la libertad de trabajo, empresa, comercio, industria, sin perjuicio de su facultad para dictar medidas para planificar, racionalizar y regular la economía e impulsar el desarrollo integral del país.

Which translated means:

Aticle 112. All people can dedicate themselves freely to the economic activity of their preference, with no more limitations that those contemplated in this Constitution and those established by laws for reasons of human development, security, health, environmental protection or others of social interest. The state will promote private initiatives, guaranteeing the creation and just distribution of wealth, as well as the production of goods and services that will satisfy the needs of the population, the freedom to work, to form companies, industries, without prejudice to issue measures to plan, rationalize and regulate the economy and promote the integral development of the country.

The decree issued this week, violates both the spirit and the letter of the freedoms and rights guaranteed by this article. While the Government may establish certain limitations, it cannot limit it all, like the decree certainly does or pretends to do. And even worse, it cannot bar anyone from “dedicating themselves freely to their economic activity of their preference”. In fact the decree says that anyone found in violation of the decree will not be able to participate in commerce for ten years. The Constitution certainly does not allow that and if it is ever applied it will violate the Constitutional rights of those punished.

But let’s look at some of the texts of the decree to see how it goes beyond what is legally reasonable in defining the scope of the decree:

Art. 24. Anyone who individually o as a group, carry out acts that block, in direct or indirect manner, the production, manufacturing, import, storage, transportation and commercialization of foodstuffs or products subject to control will be sanctioned with prison of two to six years…

Note how diffuse the definition is. Not only does it allow for you to be punished if you participate directly or indirectly, whatever that may mean, but also the product does not even have to be subject to controls! If it’s food you are handling, directly or indirectly, you can be in for a long prison term and if sentenced, you are barred for ten years from getting involved in commerce.

I wonder if we should have a similar decree for politicians that allow inflation to rise above a certain point, directly or indirectly, due to their negligence, ignorance or incompetence. We may not have sufficient cell space for all of Chavez’ economic Ministers if this were the case (or those before them!). But under the autocrat, penalties are a one-way street. Everything they do seems to be always fine and dandy, there is no self-criticism or use of knowledge in establishing policy.

In Article 4, the Government gives itself the ability to declare of public use or social interest the activities of production, manufacturing, import, storage, transport, distribution and commerce of foodstuffs or items under price controls. This simply allows the Government to expropriate or intervene any part of what probably represents a huge fraction of the Venezuelan economy, given the vague, ample and discretionary definition of what it covers. It’s actually hard to think of an area not covered, which is of importance. Is beer food? Gas prices are under control. Some car prices are controlled. Food is food at all levels for the whole chain. Just imagine!

And then it simply get Dictatorial with a capital “D”: The Executive branch, without mediating any formalities ma initiate the expropriation by decree for reasons of security and food sovereignty

In Art. 12. the Government allows itself to “takeover and temporary occupation, confiscation in order to begin selling products again”. While this happens “salaries will continue to be paid”, insuring that you perform a sort of financial hara-kiri or sepuku on yourself.

Of course, never have these guys stopped to think that they are the problem. That much like Diocles, it is their money printing and controls that leads to shortages and inflation. That the more controls that they impose, the more shortages and higher the inflation will be. That fear of confiscation or expropriation will not work, because the fear of death could not stop the same phenomenon in either in Babylon or Rome.

Modern economic history did not begin with Adam Smith, over three thousand years of history have shown that price controls exacerbate the problems and Hugo Chavez’ controls, handled by a corrupt and inefficient bureaucracy are even more likely to fail than in most
of the prior cases in history.

Today is help Bolivia day. Tomorrow?

February 23, 2007

Yesterday it was Argentina, today is Bolivia, tomorrow…the world!!!