Why Government Price Controls Lead to Black Markets

By Christina Grattan

8/10/2020

As the Venezuelan government attributed the mass shortage of goods to consumer hoarding, panic buying, and the black market's capitalistic tendencies, this could not be further from the truth. 1 While the former head of Venezuela's price control agency claimed that "supply and demand is a lie" demonizing capitalism, it is the very policies of price controls that plunged them into the abyss of economic disparity creating the black market. 2 As the Venezuelan government looks at "greedy capitalists'' as the culprits of poverty, this is irrevocably counterproductive.


F.A. Harper, an American economist who helped found the Foundation for Economic Education, states that when the government "endorses any form or degree of price control, he is invalidating the rights of the buyer or the seller. If the buyer or the seller agrees to trade a bushel of potatoes at $2 and the dictator sets a price limit of $1.80… the seller is at the mercy of control instead of being able to pursue his rights in a free market." 3


Instead of looking at capitalists as employers, empowerers, and benefactors who are the very reason most of this world is above the poverty level due to the incentive for innovation and profit, the Venezuelan government views them as a threat to their sovereignty. This makes the government neglect the value of the role of the producer and the consumer in the market, resorting to measures such as price controls. But their interference only exacerbates the problems, further increasing economic devastation.


Henry Hazlitt, a well-known journalist who specialized in free market economics, explains how when the government lowers the price on a good the demand increases for that commodity, and since it is cheaper than the market price people will buy more than they can afford, which reduces the supply causing the producer to cease making it since it is no longer profitable. 1 Placing ceilings on prices inevitably causes goods to run out and become scarce.


The Chavez regime in Venezuela, starting in the early 2000s, implemented price controls on basic goods such as toilet paper, flour, and milk. 2 The artificially low prices caused the supply to decrease and demand to increase as people flooded the shelves for essential goods such as eggs and soap until supplies ran off the shelves. 2 The underlying reason was that the low prices enforced by the government caused the producers to leave the market finding better success on the black market, where their goods would sell for higher prices and were, therefore, more profitable. 2 To financially stay afloat, businesses would only sell some of their products at fixed prices, and then sell the remainder on the black market. These government price controls inadvertently led to illegal activity, and it was the only means for the starving Venezuelans to buy basic goods. 


It would be hopeful that the regime could have avoided their mistakes by looking at the Soviet Union's poor model of price controls, but it is evident that they have no regard for history. By the end of the Soviet Union, even prices of "luxury" goods were set by the state, causing black markets to form where prices were exorbitantly high. 3 Items such as TVs, shoes, and cigarettes were sold for six times as high as state fixed prices since they could not be found anywhere else legally. 4 It is no coincidence that the Soviet Union collapsed soon after, for the quality of life was much worse there compared to America due to centrally planned policies such as price controls. 


It is unfortunate, though, how even the US gravitated towards socialism after World War II with temporary price controls on meat to "stimulate the economy" when, in reality, it hindered economic growth. 3 Rather than increasing access to meat, it increased unemployment since the sale of meat was moved from the legal market into black markets, which caused empty counters in butcher and grocery stores. 3 Butchers would keep the black market meat in the back of the store, only bringing it out if the buyer was willing to pay the higher black market price. 3


In any country where price controls are enforced, it has utterly devastated the lives of countless innocent civilians. Many policies governments implement to do the exact opposite of the goals that they claim it will achieve. Rather than helping the people, it exacerbates the plight of the people. Price controls are one of these degenerate policies that must be avoided at all costs. When any government institutes price controls, people have to go to dangerous measures, including the black market, to fend for themselves since price controls do the polar opposite of making products widely available. 


Sources:


1. Hazlitt, H. (1952). Economics in One Lesson. The Foundation for Economic Education, Inc. p. 109


2. Paul, R. (2019). The Case Against Socialism. HarperCollins. pp. 23, 28, 26 


3. Sowell, T. (2015). Basic Economics. Basic Books. p. 50 


About Christina

Instagram: @christinagoldieruby

Christina is currently a junior political science major at Biola University, who has a genuine heart to help the world. Her strong faith in God drives her to pursue justice to create a freer and better world, which starts with fighting the lies of socialism. In her free time, you can find her reading books to inform herself, discussing politics, and making frozen yogurt runs.

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