Kristian Niemietz Blog

published on the Institute of Economic Affairs (IEA) blog, March 2009

Eighty years ago the Austrian economist Ludwig von Mises showed how a supposedly “targeted” state intervention in a free economy can produce a whole spiral of follow-up interventions. Government interference produces unintended consequences, which are then, mistakenly, addressed by further government interference.

Mises used the example of government setting a maximum price for an ‘essential’ commodity. Since suppliers are unwilling to sell their whole stock at the fixed price, shortages and waiting lists result. The government then steps in again and forces suppliers to sell off all their inventories. But eventually inventories deplete and there is no incentive anymore to produce the good in sufficient quantities. Hence, the government must take control of the whole process of production.

This process is now taking place in Venezuela. Act by act, events follow the screenplay written by the professor from Vienna. When the Chavez government introduced maximum prices for rice, rice started to run short. After forced sales and production controls did not solve the problem either, the government started taking over producer companies. Seizures are said to be “temporary”, but we know by now what “temporary” means in a political context. And the phenomenon is spreading to other food markets as well.

It is not difficult to guess what the nationalised food producers will be like. After Petroleos de Venezuela was taken over, the company quickly became a mixture of oil producer, government PR department, and funding source for Chavez-cronies at home and abroad (see here).

Ludwig von Mises argued that “partial interventionism” is not sustainable in the long run. An economy will either return to the free market or go down the route to full-blooded socialism. Hugo Chavez would seem to prefer the latter option.