The Myth of the “Fair Price” and Venezuela.

The Venezuelan Army, under orders from Socialist leader Nicolas Maduro, occupied a popular chain of Venezuelan retail stores last week. Maduro ordered this in the name of a supposed need to enforce “fair prices”, and to supposedly protect the battered Venezuelan economy from “price-gouging”. It apparently required a battalion of soldiers to change price tags.

As Reuters reports:

Venezuelan President Nicolas Maduro’s socialist government “occupied” a chain of electronics stores on Saturday in a high-profile crackdown on what it views as price-gouging hobbling the country’s economy.

Authorities arrested various managers of the five-store, 500-employee Daka chain, sent soldiers into the shops, and forced the company to start selling products at cheaper prices… Maduro, who accuses rich businessmen and right-wing political foes backed by Washington of waging an economic “war” against him, said the occupation of Daka was simply the “tip of the iceberg” in a nationwide drive against speculators…

“The ones who have looted Venezuela are you, bourgeois parasites,” Maduro said, accusing Daka of raising some prices of products beyond 1,000 percent of cost. He showed particular astonishment at a washing-machine on sale for 54,000 bolivars ($8,571 at the official exchange rate of 6.3 to the dollar).

“Inflation’s killing us. I’m not sure if this was the right way, but something had to be done. I think it’s right to make people sell things at fair prices,” said Carlos Rangel, 37, among about 500 people queuing outside a Daka store in Caracas.

Venezuela is run by real Socialists. The country is marked with rampant inflation, rolling electricity blackouts, and shortages of basic necessities: all hallmarks of a real socialist government. The Venezuelan Government is nothing more than a pack of idiots and a gang of thieves.

Venezuela is wracked with rampant inflation, over 50%. That is why the retailer had the prices hiked so high: too many Bolivars (their currency), chasing too few goods. When the Army entered the store and forced the employees to lower prices, customers flocked to the store to take advantage of the sudden windfall in prices. The ensuing chaos turned into looting at some stores, apparently.

Beyond being a good example of the horrors of inflation, this story is a good opportunity to reiterate an important economic concept everyone should understand. Allow me to drill this idea into your skull: Anytime a purchase is voluntarily made by both the buyer and the seller, the final price is inherently “fair”.

The questions to be asked are these:

1) Was the buyer involuntarily coerced into buying at a given price?

2) Was the seller involuntarily coerced into selling at a given price?

If the answer to both of these questions is “No”, then bingo: We have a fair price.

Any price voluntarily agreed to by the buyer and seller is inherently fair.  If a price were unfair, then the deal wouldn’t be made. The deal is only being made because both buyer and seller agree to it. They are voluntarily making a transaction because they approve of the terms.

Imagine you want to buy a carton of eggs. You go to the grocery store, and the grocer wants $30 for a plain ol’ carton of eggs. Would you call that a fair price? Probably not. I wouldn’t either.  But how do we know it’s not a fair price? There is no set standard by which we determine a “fair price”. As buyer, you base your judgement on the range of other possibilities which you could spend $30 on, and you come to the conclusion that you would rather spend $30 on something else other than a carton of eggs. Therefore, this price is unfair… to you.  That’s the key thing to remember: The price is relatively unfair to you, and it may be unfair to a lot of people; but if even one person is willing to buy the eggs for $30, then that deal is fair to the parties involved. A “fair price” is subjective to the buyer and seller, not objective to some abstract standard of “fairness”.

That is why a statement like “The Government should enforce fair prices” is pure baloney from start to finish. In the case of the Venezuelan retail store, was the Government enforcing fair prices from the point of view of the business-owner? No. He was not voluntarily agreeing to cut his prices. He was forced to by the military. It is ironic; the Venezuelan government invaded the store in the name of ostensibly upholding “fair prices”, when in all actuality the Venezuelan Government was stepping in to make all the prices in the store “absolutely unfair”.

Look at it this way: before the military stormed the storefront, was the store making any sales? Any sales they made were “priced fairly”. Any sales they were not making were “priced unfairly”. If nobody was buying anything, than apparently the prices were indeed “unfair”. A store which sells nothing may be suffering from “unfair prices”. Businesses with unfair prices don’t make sales, and then they go out of business. The Army wouldn’t need to invade; the market will punish the “unfair” business on its own (unless the Government steps in to protect the unfair seller somehow). Therefore, a store which is making voluntary sales under free will is a store of “fair prices”.

Whenever a transaction is voluntarily made, the price is inherently fair. If the price were unfair, then either the buyer or the seller would not make the transaction. Transaction made = fair price. Get that idea cemented into your brain, and you’ll be that much closer to understanding economics. A buyer or seller may not be happy with a price, but they are implicitly acknowledging a price as “fair” if they go ahead with the deal anyway. There is no such thing as an “unfair price” in a voluntary transaction. It doesn’t exist. Such a thing can never exist.

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