Caracas Chronicles

Over on Distortioland, @Econ_Vzla has an enlightening little essay on the way wage hikes can make people worse off in an economy like ours.

The first problem is that, in a shortage economy, free time is what people have left over after having stood in long and numerous queues. Add to that the fact that, on the other hand, the size of the queues depend upon the size of excess demand. That is to say, its size depends the imbalance between what the population is willing to spend, on the one hand, and the diminished availability of goods to be purchased. A notation for this might look as follows:

Welfare=Consumption + Free Time
Free Time = Time not working minus hours spent in queues
Time Spent in queues=f(Excess Demand)
Excess Demand = Real Income minus Total Goods offered

What characterizes the Venezuelan shortage economy is that the supply of consumer goods is completely restricted, that is, it does not respond to shifts in demand. It is thus easy to demonstrate that, at a certain point, any increase in income will necessarily translate to a increase in demand, given that no additional goods exist that might be consumed. Therefore, necessarily, an increase in real income can only result in an increase in the size of the queues, with no effect upon the level of consumption.

Therefore, it can only reduce the welfare of the population.

That’s a bit abstract – bueno, it’s Distortioland! – but I think the way to wrap your mind around it is to think back to Carlos Hernández’s post about going out to stand in line in Ciudad Guayana. The thing he found out right away is that, when you’re trying to find scarce goods, money is useless. 

Seriously, when it comes to really scarce products, money is useless. That day in the Mercal they were “sacando” (newspeak for “selling”) two bottles of cooking oil per person and one Kg. of powdered milk, but I wasn’t interested in the cooking oil. Once inside, one of the Mercal workers advises me to buy it anyway so I can trade it for something else – gosh I was such a newbie.

I end up buying the two bottles and selling one to the old lady in front of me who gives me Bs.50. Later I forget to give her the change (30 bs), and apparently she forgets about it too. It doesn’t matter, because the money I keep will only be enough to pay for a bus ride, or a plastic bag.

Money is useless, and back in the real market that cooking oil is way more useful that the Bs.50.

That’s the main distinguishing characteristic of a scarcity-plagued, price-controlled economy: how much you consume comes to depend much more on how much time you have (to stand around) than on how much money is in your pocket. In that kind of situation, putting more money in people’s pockets doesn’t really help them access the products they need, because the thing that scarce isn’t money, it’s products.