The Institute for Energy Research (IER) is dedicated to the promotion of free-market solutions to America’s need for abundant and affordable energy. On issue after issue, IER points out the shortcomings of government intervention and the benefits of allowing the operation of the market. The present article will sketch the broad reasons for this general presumption in favor of free markets over bureaucratic planning.
Why Markets Are Efficient
Going back to Adam Smith’s famous metaphor of the “Invisible Hand,” economists in the classical liberal tradition have known that decentralized, competitive capitalism harnesses the self-interest of ambitious and talented individuals. Rather than using their powers to dominate others, extraordinary individuals in a free-market setting stay up worrying at night about how to please their customers.
In contrast, the government bureaucrat doesn’t have the same incentive structure. For example, if a teller at the DMV is rude to a customer, the insulted patron can’t take his business elsewhere. No, if you want to get your license renewed, you have to do what the DMV tells you. So even though some people working in government may happen to be perfectly pleasant, there is no institutional reason for them to be so. And in the bad situations where a citizen encounters an unpleasant government employee, there is little recourse.
Beyond the issue of incentives is the problem of knowledge, a point that Friedrich Hayek stressed in the great debate over socialism in the first half of the 20th century. Even if we stipulate for the sake of argument that government officials have the purest intentions, Hayek argued that they couldn’t possibly mimic the outcome of a decentralized market economy. This is because the market, relying on the price system and its profit-and-loss signals, effectively taps into the “local knowledge” held by billions of people around the world. Socialist central planners wouldn’t be able to distill and absorb all of this dispersed knowledge into one committee—let alone one dictator—in order to draw up a great blueprint for the economy.
Thus we see the two great virtues of a decentralized, competitive market economy—what most people mean when they discuss “laissez-faire capitalism.” Such a system of private property and free enterprise provides the right incentives to workers and business owners to channel their efforts productively. It also takes advantage of everyone’s unique knowledge by using the price system as a sort of communications network.
A Free Market in Energy
The general superiority of the free market over central planning bureaucracy manifests itself in the energy sector. For example, contrary to the doomsayers who are always predicting the extinction of “exhaustible” resources, the student of economic liberty knows that free individuals have always kept innovating ahead of the crisis. Doomsayers have been warning that the West’s material progress was unsustainable, going back to Thomas Malthus. In my book on capitalism, I list some funny warnings about the “imminent” collapse of U.S. energy supplies from the early 1900s. IER founder Rob Bradley’s book is a more comprehensive exploration of the fruits of freedom in energy markets.
For other examples, consider the debates over “green” technology. Interventionists make all sorts of arguments for this subsidy or that mandate. Yet they don’t see the hubris behind their policy recommendations: They think that they can accumulate all the relevant technological, financial, and even climatic data, in order to come up with “tomorrow’s energy sources.”
Those with a deeper understanding of markets are wise enough to recognize their own limitations. When we at IER oppose, say, mandates for ethanol or fuel efficiency standards, this isn’t because we disagree with a particular percentage of ethanol or a particular target for miles-per-gallon in the U.S. car fleet in the year 2020.
Rather, we reject the entire premise that a group of “experts” should be picking such numbers in the first place. We don’t have it out for ethanol (or wind turbines or solar panels), and we don’t relish gas guzzling for its own sake. Rather, we recognize that there are tradeoffs in the real world, and that the best solutions arise when people voluntarily come to arrangements with their property. If it really makes sense to put corn into our cars, then market forces will lead to that outcome. If consumers really do want to save money on gasoline by buying lighter vehicles, then car producers will cater to that preference.
Market Failure in Energy Markets
A sophisticated critic might agree that in general, markets outperform government agencies. However, the critic could argue that this general presumption fails when it comes to energy markets, because of the threat of climate change. Here—the argument goes—capitalism’s normally efficient outcome is perverted, because businesses and consumers aren’t taking into account the impact of their actions on future generations.
Elsewhere I have more formally dealt with this standard case for a carbon tax. Note that even if we accept the basic premise of “market failure,” we must balance it against the undeniable prevalence of “government failure.” Politics is messy, and the proponents of various interventions to arrest climate change must see the risk in entrusting the fate of the planet to fickle governments all over the world. (What happens if Sarah Palin is the next president?)
For example, if a cap-and-trade program ever went through, it would not be a textbook plan devised by academics. On the contrary, it would contain all sorts of loopholes and handouts of permits to favor politically connected groups. The targets would be low in the early years, in order to overcome political opposition. Further, it would not be coordinated with similar agreements with other governments around the world, meaning that industry might relocate to China or other regions where carbon emissions are higher for a given amount of output. When all was said and done, the package might do more harm than good, even from the perspective of the interventionists.
When it comes to mundane items like restaurant meals and iPods, most people recognize the tremendous superiority of the free market versus government bureaucrats. Yet this conclusion doesn’t magically flip when we switch to the crucial area of energy. On the contrary, precisely because energy is so vital to our standard of living, we need to remove government interference and free entrepreneurs to serve consumers in this sector as well.