Robert Murphy

Of course there will be other ramifications from the currency devaluation. The actual currency arrangement in Venezuela is complicated, with different official exchange rates for different goods, but the general principle still holds: The previously overvalued bolivar made imports into Venezuela artificially cheap, and the prices of these imported goods will instantly double at the new exchange rate. Predictably, Chavez warned businesses not to gouge their customers through price hikes and threatened to seize any businesses that did.

"The bourgeois are already talking about how all prices are going to double and they're closing their businesses to raise price," Chavez said on state-controlled television. "People, don't let them rob you, denounce it, and I'm capable of taking over that business."

True to his word, Chavez sent troops into retail shops to inspect prices. Economists know the effect this will have. Chavez will find that no amount of populist rhetoric or military might can overturn the laws of economics.

By definition, the market-clearing or equilibrium price is the one that equates supply and demand. By using soldiers to intimidate businesses into keeping their prices below the (new) market-clearing level, Chavez will cause demand to exceed supply, creating a shortage. Venezuelans will find that the items in question will simply disappear from the shelves, and will be available only in the black market.

Americans would do well to follow the situation in Venezuela and learn the lesson. If and when price inflation picks up steam in the United States, politicians may be tempted to "protect" American consumers with similar policies here. Attentive Americans will have learned from Hugo Chavez, economist, that price controls don't work.


Robert Murphy

Robert Murphy has a Ph.D. in economics and is the author of The Politically Incorrect Guide to Capitalism (Regnery 2007).

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