Big Government, Little Buns

You’re kidding, right? It’s 2015. How can a populated country run out of bread? It would be understandable if a natural disaster or devastating war caused a shortage, but neither of these is happening in Venezuela – and they seem to be running out of bread. Why? Well, Socialism, of course.

So, what’s Venezuela doing about this? Over the weekend the Associated Press reported that Venezuela will begin installing 20,000 fingerprint scanners at supermarkets nationwide before customers can buy bread and other items. The idea is that in order to stop food shortages the government must limit people’s ability to buy food. Seven large private chains have already “agreed” to install the scanners. The government will give you a smaller slice of the pie, so that more people can have pie and you will have to wait in a longer line to get it. One of our favorite definitions of socialism is “Ideas so good that they have to be mandatory.”

If socialism was so great, then why would the government have to do this? We in America take for granted the fact that we can buy up all the bread we want because we know the shelves will fill right back up again. It’s a miracle Adam Smith described as the “Invisible Hand.” It’s important to remember this because capitalism gets no credit. Milton Freidman once said “The free market has no press agents. The government has a great many press agents, and, the Federal Reserve has a great many press agents.” Unfortunately this means they often have the ability to define the narrative and the narrative in Venezuela is that greedy shoppers are causing shortages.

So this bread shortage is a good lesson in why socialism will never work. In a normal economy, as the price of something rises, consumption falls and production increases. In Venezuela the opposite is happening. Constrained supply pushes the price of bread higher, but consumers sense a shortage and demand more, anyway. The only way to correct this problem is to focus on supply and not demand. How? By lowering barriers for production – like tax rates, regulations and corruption. And since the only reason people produce is so that they can consume, limiting demand can actually hinder production because work effort falls in value. Venezuela is entering a downward spiral and fingerprint scanners are just the latest piece of evidence.

On the other hand, living standards (real GDP per capita) in the US have risen 20-fold since 1850. Government did not do this, although the establishment of a rule of law, a protection of property rights, a strong national defense system, and limited interference in private activity allowed capitalism and the entrepreneur to flourish. If Venezuelans want to consume all the bread they desire, all they need to do is drop the scanners and free up the markets, move back toward capitalism and give up their failed socialist experiment.

Brian S. Wesbury - Chief Economist
Robert Stein, CFA – Deputy Chief Economist

These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

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