Argentinian Government Proposes Price Controls

25 October 2021 - 0 Submitted by FTN Editorial Team

Controlling the price of over 1000 household consumer goods will inevitably result in shortages and black markets.

Dear readers,

A few days ago, the government of Argentina declared its plan to impose price controls on more than 1,000 household consumer goods, from dairy and frozen foods to school supplies and household items.

According to the Socialist President Alberto Fernández, this measure is necessary to combat Argentina’s inflation, which stands at 50 percent per year.

Argentina's secretary of internal commerce, Roberto Feletti, argued that the price control policy would result in a scenario where businessmen would obtain profit "by quantity and not by price."

"We think that prices have to go back and stabilize for 90 days and take advantage of a scenario of a higher level of consumption that entrepreneurs are going to take advantage of by quantity and not by price," Feletti said.

Secretary Feletti added that the executive will give a few days to reach an agreement with the businessmen. If no agreement is reached, Feletti declared that the executive will unilaterally determine the maximum prices for each of the more than 1000 products.

As an economist and as a Venezuelan, this measure puzzles me. Both economic theory and the history of our countries have shown us that price controls are not only ineffective, but counterproductive.

In Venezuela, the effect of price controls was more than clear. The controls triggered a generalized shortage of goods and services. In Venezuela, there was a shortage of goods as basic as bread to as necessary as acetaminophen, which resulted in a deep economic and social crisis – unprecedented in Latin America.

Price controls are counterproductive for the simple fact that no government can legislate the economic value of a good or service. The economic value of a good can only be determined by its relative scarcity, that is, it can only be determined by the market.

Since the real economic value of a good can only be determined by the market, pricing a good below its real economic value will always end up producing both scarcity and black markets.

When explaining this phenomenon, I like to use the example of the thermometer. This is an example that I heard from economist Anthony Davis on the YouTube channel Learn Liberty, which seeks to explain economic concepts in an easy and didactic way. This channel is a project of Students For Liberty; Learn Liberty has over 250 thousand subscribers.

At Learn Liberty, Davis illustrates the similarities between a thermometer and the system of relative prices. The professor comments that when a person has a fever, it does not occur to anyone to freeze the maximum temperature of the thermometer as a solution. This, since everyone understands that thermometers do not establish temperatures, but reflect them.

Similarly, market prices do not establish the economic value of a good or service, but rather reflect its economic value. In other words, prices are market signals, they are transmitters of information that allow cooperation and trade between economic agents. Without the price mechanism, there can be no social cooperation, which results in a total paralysis of the productive system. This, paradoxically, ends up increasing prices even more.

So how could Argentina control its inflation? Very easy, the empirical evidence shows that Argentine inflation has a great cause: its fiscal deficit. In other words, the Argentine government spends more money than it receives. Therefore, the government turns to the central bank, which finances the deficit through monetary issuance. This devalues the Argentine currency, resulting in the relative increase in prices.

Therefore, the solution to the inflationary problem is to reduce public spending. Otherwise, the Argentine government will continue to finance its fiscal deficit through monetary issuance. This process will continue to devalue the Argentine peso, squandering the purchasing power of its citizens.

By Jorge Jraissati

Jorge Jraissati is a Venezuelan economist and freedom advocate. He is the Director of Alumni Programs of Students For Liberty, an NGO advancing the ideas of a free society in over 100 countries. Beyond SFL, Jorge is a research consultant for IESE Business School, an economist from the Wilkes Honors College, and the President of Venezuelan Alliance, a policy group specialized in the Venezuelan humanitarian crisis. Jorge is a weekly columnist at Freedom Today Network.