Argentina just set price controls on food – let’s see what happens as a result

Prices are not just random numbers that get picked out of thin air. Instead, prices communicate information about supply and demand. So when the supply and/or demand situation changes, it makes perfect sense that the price would change accordingly.

Economic theory predicts that when the government sets the price of something lower than the supply/demand equilibrium, the demand will exceed the supply, which is the definition of a shortage. More than 4,000 years of various examples of price controls from all over the world show this to be the case.

Today, the BBC reported:

Argentina pegs supermarket price rises for two months

February 4, 2013

The Argentine government has put a temporary price freeze on all products sold in the country’s main supermarket chains to try to fight inflation.

Argentina’s commerce ministry has asked consumers to monitor prices in the chains.

It wants them to keep receipts and has set up a hotline for shoppers to call if they spot any price rises.

The inflation that’s referred to in that article is caused by the government increasing the supply of money with nothing of real value to back it up. This makes the money worth less, and causes prices to rise. But that’s not a real price increase. So, as inflation devalues the currency, the government’s price freeze will actually force food sellers to lower their (real) prices.

If it really is a “temporary” measure for only two months, it’s possible that inflation might not be severe enough for the price controls to result in a substantial drop in (real) food prices.

But I am skeptical about these price controls being “temporary.” My guess is that the price controls will last a lot longer than two months, and as time goes on, inflation will devalue the real value of the currency enough so that the (real) prices will fall significantly, which will cause shortages. And then the government will wrongly blame the shortages on the supermarkets and farmers, and instead of getting rid of the price controls, the government will take action against the supermarkets and farmers, which will cause the situation to get even worse.

Of course, I could be wrong about all of this.

Anyway, let’s see what happens in Argentina as a result of these price controls.

For the record, here’s what happened after Venezuela set price caps on food a decade ago:

Since 2003, Hugo Chavez has been setting strict price controls on food, and these price controls have been causing shortages and hoarding.

In January 2008, Chavez ordered the military to seize 750 tons of food that sellers were illegally trying to smuggle across the border to sell for higher prices than what was legal in Venezuela.

In February 2009, Chavez ordered the military to temporarily seize control of all the rice processing plants in the country and force them to produce at full capacity, which they had been avoiding in response to the price caps.

In May 2010, Chavez ordered the military to seize 120 tons of food from Empresas Polar.

In March 2009, Chavez set minimum production quotas for 12 basic foods that were subject to price controls, including white rice, cooking oil, coffee, sugar, powdered milk, cheese, and tomato sauce. Business leaders and food producers claimed that the government was forcing them to produce this food at a loss.

Chavez has nationalized many large farms. Chavez said of the farmland, “The land is not private. It is the property of the state.” Some of the farmland that had been productive while under private ownership is now idle under government ownership, and some of the farm equipment sits gathering dust. As a result, food production has fallen substantially. One farmer, referring to the government officials overseeing the land redistribution, stated, “These people know nothing about agriculture.”

Chavez has seized many supermarkets from their owners. Under government ownership, the shelves in these supermarkets are often empty.

In 2010, after the government nationalized the port at Puerto Cabello, more than 120,000 tons of food sat rotting at the port.

In May 2010, after price controls caused shortages of beef, at least 40 butchers were arrested, and some of them were held at a military base and later strip searched by police.