Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Sunday, November 13, 2005

A Progressive Approach to Free Markets II

Hi Folks,

Here is another in what I hope will be a series of attempts to debunk myths about the free-market perpetuated by both the right and the left. The first entry was about school vouchers and how applying the "free market" to education in the way usually suggested by the Republicans won't do what they say they want it to do. This entry will address the issue of utilities, especially electricity, and "natural monopolies."

The Republicans argue that electricity is and should always be a "natural monopoly" in which it is most efficient for one company to provide the electricity for everyone. The idea is that since the biggest production cost is wrapped up in building the power plants and the transmission lines, there are such enormous "economies of scale" that competition won't work. As Homer Simpson once said, "Well that will work 'in theory.' And Communism works 'in theory.'"

The flaw in the Republicans' reasoning is two fold. First, they argue that a private monopoly is inherently superior to a government monopoly (thus their preference for private utilities instead of public). But there is little reason to assume a public monopoly is so inferior, especially when one considers that a private monopoly requires either an expensive government regulatory structure to monitor its behavior or an acceptance of abuse by the private monopoly.

Second, the Republicans assume that there is no alternative to the costly, centralized power generation scheme we have now. However, (and Dr. Strangelove will have to fill in the details) the technology exists to shift much of our reliance to solar power at least for residential needs in the parts of the country with the fastest population growth. In other words, the so called "economies of scale" that the natural monopoly theory relies upon are considerably less important now than 30 years ago.

So here is my progressive market based alternative. The government would take over transmission lines completely. Private power companies would be free to build and maintain enormous power plants which would produce most of the power for industrial/commercial use. Residential home owners would be encouraged through tax breaks to put solar collectors on their roofs. Any excess power they produced could be sold back to the government controlled transmission grid and resold. This would seriously reduce the monopolistic grip the current group of private power companies have.

Dr. Strangelove gave us a great comparison of alternative energy sources a while back. I'm wondering if he could reprise that with particular attention to technologies that would enable small scale power production.

14 comments:

Anonymous said...

"Dr. Strangelove gave us a great comparison of alternative energy sources a while back. "

Where? When? Using blogger to search this blog for "energy" doesn't find it, so I'm guessing it's in the archives. I would like to read this, so guidance on how to find it is much appreciated. 

// posted by Bob

Dr. Strangelove said...

I believe that you will find the post RxR is referring to here. The post was about global warming, but in response to a comment by RxR, I posted a lengthy comment about alternative energy.

I am somewhat confused by RxR's recent statement in this current post, however, when he says that, "The Republicans argue that electricity is... a natural monopoly..." Wasn't it the Republicans who pushed for deregulation, to break the natural monopoly? In my opinion, the argument about natural monopolies is typically a liberal or socialist argument employed to explain why the government should run that sector of the economy, rather than let it be part of the free market.

Anonymous said...

The effect of deregulation was not to create a competitive market for energy (production is still done through enormous power plants that require huge initial outlay). What they did was to remove the regulations that the government had imposed on private monopolistic companies. The result was that private power companies were free to abuse their position to manipulate the supply and price of electricity (as happened in California). In some cases Republicans even advocate the transfer of government utilities (which are monopolies) to private utilities (which are also monopolies). They call that a "market based appraoch" or "deregulation." Your confusion - caused by Republicans' inappropriate use of words like "market," "privatization" and "deregulation" as almost interchangeable - is part of what I'm complaining about.

You are right that the left typically advocates government run monopolies. I only slightly prefer that to a private monopoly. The left assumes that all market approaches are bad. My goal in this series is not to say "hurray for the left" but rather explain two things: 1) Republicans abuse the terminology of the market to justify anti-competitive, regressive policies. 2) Left wingers often reject market based solutions out of hand simply because they wrongly assume progressive policies must be statist. I apologize for not making that more clear.

In the energy issue, there are voices on the left that advocate decentralizing the power grid but they are voices in the wilderness now.

By the way, you'll notice that Bush's favorite alternative to gasoline is hydrogen rather than electric. Why? Because hydrogen based cars would require filling stations while electric cars would not. In other words, his buddies in the Big Oil cartel could keep their grip on us by convertig their gasoline infrastructure (which is privately held largely by an anti-competetive cartel) to hydrogen.

Decentralizing the energy distribution mechanisms is possible now and we should do it. It would be a major step forward for individuals! 

// posted by Raised By Republicans

Anonymous said...

The question of Public vs. Private Monopolies is a good time to make a comment about market ideologues. RBR is correct that conservatives presume, without evidence of course, that a privately-run monopoly would be more efficient than a public one. My reply is this: a private company has to squeeze profit out of the system, while a public entity does not have to. In a competitive market, the assumption is that a private company will be more efficient than a public one. Speaking as a sometime antitrust lawyer, monopolies are, well, different. Private sector monopolists have no free-market limitations on their profit, i.e., no incentives to increase efficiency, so they may simply acquire profit as a surcharge. In other words, private sector companies are subject to all the vices of public monopolies, but also must be run at a profit. One would think this might even exacerbate the problems, by adding greed to incompetence and inefficiency. The best of both worlds is a public company that, somehow, has the incentives to efficiency as a private one. Not sure that's ever been seen.  

// posted by LTG

Dr. Strangelove said...

The post office isn't a bad example. I mean, I know people like to make jokes but really, for 34 cents I can send a letter anywhere in the country in a couple of days? Not bad. And their shipping prices are competitive. Just a thought.

Anonymous said...

Um ... 37 cents. It does go up pretty often. 

// posted by Bell Curve

Anonymous said...

I agree completely with what LTG says about private monopolies. His characterization about "market ideologues" is kind of what I'm on about here. The people he describes don't actually understand market forces very well if they think a private monopoly will face market based incentives to be efficient. In fact, they actually face market based incentives to UNDERPROVIDE electricity to keep demand higher than supply ensuring high prices. That's why we haven't had many new power plants built by these increasingly deregulated and privatized power companies.

Market forces are always at play but they don't always interact with policy the way Republicans (or Democrats) would have us think. 

// posted by Raised By Republicans

Dr. Strangelove said...

Yes, 37 cents. Shows you how often I mail letters :-)

Anonymous said...

The Post Office is also interesting because it shows a difference in monopolies. The electric company provides power. Without power, you have... candles. But while the USPS may have a monopoly of a kind, it does not have a monopoly on shipping or communication. It must compete with various other media (telephones, telgrams, e-mail) to survive. So it prices bulk mail low. Where it has actual competition - FedEx and UPS (which compete with USPS in the very narrow area of express parcel delivery) - it's not the best. It has some incentives to be efficient. Not the power company. 

// posted by LTG

Anonymous said...

Also the telecommunications revolution has provided consumers with several substitutes to regular mail through the post. We can use email, cheap telephones, blogs etc.

In many countries postal services also have a monopoly on sending money orders and use that to subsidize publically owned banks run by the same postal services. The one in Japan is nortoriously inefficient. 

// posted by Raised By Republicans

Anonymous said...

FYI, the post office announced that first class stamps will go up to 39 cents on 1/8/06. 

// posted by LTG

Dr. Strangelove said...

"Efficiency." This word has different meanings in different disciplines, and conservatives always mix them together to claim that capitalism is the most efficient economic system--but this approach is intellectually dishonest. Efficiency does not mean what you think it means.

For example, farmers measure efficiency as food-calorie output per acre of cropland. Over the past 300 years worldwide population has increased tenfold while cropland has increased fivefold (roughly) so by this standard, agriculture is now twice as efficient. In the U.S., where some of the greatest gains have been realized, efficiency has increased fourfold in 80 years.

Yet physicists measure efficiency differently--as the ratio of energy output to energy input. By this standard, agricultural production has become less efficient over the past 100 years. This is due to several factors: the increasing use and cost of pesticides and fertilizer, and the shift toward meat production, which produces only one tenth of the calories for the same energy input.

Economists use "efficiency" in a completely different way: they speak of "market-clearing" efficiency. If every widget made gets sold and nobody wants to buy more widgets at the going price, then the widget market is said to be "efficient." Thus if food cost a million dollars per meal, and every millionaire ate their fill with no meals left over, then economists would call the food market efficient--even though food would be so grossly overpriced and production so terribly low that 99% of the world would be starving.

And then businessmen speak of efficiency in yet another way--as profitability. To a businessman, the most efficient company is the one that produces the highest rate of return--the most profit for the least investment--even if the product is shoddy and the employees are miserable.

Finally, for a consumer, an efficient economy produces the highest quality product at the lowest price. Alas, this kind of efficiency is not what the businessman is incentivized to generate, nor is it what economists guarantee for a free market. And unfortunately for our environment and natural resources, this kind of efficiency does not usually lead to better agricultural efficiency or thermodynamic (energy) efficiency of production.

I say all this because the much lauded "efficiency of free markets" is a statement often taken way out of context! The laws of supply and demand say only that a free market will be efficient in the economist's sense only, not in that of the businessman, the consumer, or anyone else. To obtain other sorts of efficiency, one can and must apply external pressures and create alternative incentives in the economy--and I argue that this is the proper role for government.

Anonymous said...

Dr. Strangelove is making a point that I hoped to make in a latter post. The "market" as we know it is not simply the absence of government regulation as so many conservatives assert. Rather it depends on a fairly complex network of appropriate regulations.

What's more, while market forces (such as incentives and supply and demand etc) are powerful natural forces they are not a magic wand that makes everything better all the time (the error of the right). Nor are they something can be ignored if only we wish hard enough (the error of the left). 

// posted by Raised By Republicans

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