A free-market energy blog
Random header image... Refresh for more!

Wartime Energy Planning: Not Good for Veterans (or civilians either)

[Editor Note: This discussion is taken from chapter 5 of the author’s Oil, Gas, and Government: The U.S. Experience (Cato Institute: 1996).]

“Allocation regulation, in turn, sought to cure the problems created by price regulation. Government intervention during wartime encounters many examples of regulation begetting other regulation, a major theme of peacetime intervention as well.”

Government direction of economic activities, rare in U.S. history, has typically accompanied wartime situations. In particular, government petroleum planning has occurred during World War I, World War II, and the Korean Conflict. Standby oil and gas planning also followed the Korean Conflict.

General Theory

Economic understanding reaches the conclusion that consumers are best served when entrepreneurs are not subsidized or penalized by government involvement.  Conceived abstractly, consumers could be a private individual or even a government agency. Furthermore, the conditions surrounding production and consumption are not defined; it could have been during wartime, the aftermath of a calamity, or a period of relative tranquility.

The question is: can the market be relied upon in wartime as in peacetime?

Emergency Planning

It almost has been a foregone conclusion that centralized planning is necessary for wartime and emergency mobilization to replace market competition with cooperation—and to replace interfirm rivalry with pooling of managerial talent, physical facilities, and stocks-on-hand.

It is true, as planning proponents point out, that rivalry entails experimentation and error (waste) by some firms, and that, in unique circumstances such as war and disaster aftermaths, the complexity of end-uses is simplified for government coordination. But this assumes far too much to establish even a conditional case for central planning (economic constructivism).

Competitive experimentation through market entrepreneurship performs a vital role in wartime as in peacetime for “the discovery of such facts as, without resort to it, would not be known to anyone, or at least would not be utilized.”[1]

Government-engineered cooperation, on the other hand, discards the “trial and error” process in favor of the status quo, which becomes less innovative and more inefficient as conditions change. [2]

A Simple Example

Let cooperative pooling to achieve a particular end represent Plan X (such as a trans-Atlantic shipment of petroleum product), whereas in a competitive market there is Plan X+1, Plan X-1, Plan X+2, Plan X-2, etc. distinguish­able by price, location, and means of service.

In the latter rivalrous situation, it may be that several alternatives are inferior to the best alternative and that waste is created in the process of revealing what indeed in the best process. Even so, the best alternative is discoverable, from which the consumer benefits and rivals beneficially adjust, and constant pressure is placed on entrepreneurs to employ new ways to cost-minimize and improve the quality of goods and services. 

Dependence on the status quo, contrarily, makes the elementary constructivist error that all relevant facts are known or can be discovered outside of the market process and that this information can be implemented by planners and government-appointed industry councils.

If the constructivist assumptions were true, the issue between centralization and interfirm pooling versus decentralization and inter-firm rivalry would become moot. Since it is not, a case is made for allowing unhampered market processes to provide economic calculation to rationally decide which goods and services should be produced and which firms should enter, exit, contract, or expand in emergency situations.

Government as Demander

Economic calculation in the market instructs firms of the relative merits of cooperation versus autonomous strategies. Where the government is a major demander in the market, contracts can be expected to be larger and more uniform than under conditions of predominantly private sector demand.

This suggests that cooperative strategies and scale economies will have a greater role than otherwise. Thus under imperfect calculational conditions where the government crowds out private sector activity, there is a role for cooperation, whether informal agreements or joint ventures, without government planning. This assumes that antitrust law is suspended and that such cooperation passes the market test of profitability.

Market Failure—or Government Failure?

Planning has not emerged from market failure. It has arisen because government interventions such as monetary creation, subsidies, antitrust law, and price regulation damaged the ability of the price system and entrepreneurship to effectively perform. [3]

This was the case in all three wartime experiences as described in Oil, Gas, and Government in exploration/production (chapter 5), transportation (chapter 13), refining (chapter 20), and retailing (chapter 24).

Who Plans?

The government alternative raises questions concerning the mentality of the planners themselves. Either a regulator is from the industry and is thus often favorably inclined toward particular firms (such as, for example, the firm he was with most recently or the firm he expects to be with) or they are from outside the petroleum sector and lack basic knowledge of the industry. Either way, there exists a propensity for decision-making that is different from the market’s tendency to favor of the least cost-highest quality alternatives.

Historically, wartime regulators have come overwhelmingly from the petro­leum industry, and whatever their patriotism, the pressure to at least preserve, if not to enhance, the position of firms where their loyalties lie in relation to other firms, both existing enterprises and would-be entrants, must be recognized.

Conclusion

The decision to not implement petroleum planning in the Vietnam war, although the matter was scarcely considered, was the correct one. The decisions to regulate prices and allocate materials in World War I, World War II, and Korea were mistakes. Assuming good intentions, intellectual error was involved. 

There were different reasons why an inferior economic means of planning was chosen over the more prosperous means of market entrepreneurship. Government planners were attracted to the power to command. Officials were also attracted to fuel cost savings for the war effort that ceiling prices and requisitioned supply could provide—at least for the short term.

The industry, in turn, was attracted to a safe harbor of cooperation over the competitive gales of the market. But the importance of preexisting intervention “necessitating” greater government involvement cannot be overstated. Currency expansion and antitrust, as mentioned, created the problems that planning sought to correct by regulating pricing and encouraging cooperation.

Allocation regulation, in turn, sought to cure the problems created by price regulation. Government intervention during wartime encounters many examples of regulation begetting other regulation, a major theme of peacetime intervention as well.


[1] F. A. Hayek, “Competition as a Discovery Procedure,” New Studies in Philosophy, Politics, Economics, and the History of Ideas (Chicago: The University of Chicago Press, 1978), p. 177.

[2] This suggests that World War II petroleum planning created more inefficiencies than the other two wartime planning experiences.

[3] For some historical examples of the negative effect of regulation in emergency situations in the United States, see Jack Hirsheleifer, Disaster and Recovery (Santa Monica: Rand Corporation, 1963), pp. 113–24.

4 comments

1 Wayne Lusvardi { 11.11.13 at 1:44 am }

This is a fascinating topic which has gnawed at me for some time.

California is shifting from an electricity generating and transmission system based on redundancy, spinning reserves, and peaker plants to as much of a real-time demand and supply system as possible with a regional Energy Imbalancing Market and very expensive storage batteries. With thin reserves and less redundancy what is the vulnerability of the system in wartime or from terrorist acts?

I worked for a large regional water district in California for 20 years. Southern California’s water “grid” was based on redundancy in pipeline routes. If an earthquake interrupted water deliveries on one line then water could be re-routed through another to the same place. This redundancy is necessary because such pipelines are lifelines. Something like 19% of energy (not electricity) in California is used for water pumping and treatment. So having rapid power available is critical.

Back to the electric grid. Where is defense policy integrated into California’s future electric grid? What will California do if green power is interdicted and there is little backup available? Or what do we do when electricity is needed fast but the sun or wind only generates it slowly?

As pointed out by Robert Bradley in a recent comment, use of coal, oil, and uranium fuels to generate power has its own storage embedded into it. What took eons for nature to make can be unlocked for use rapidly.

Once again: where is the defense integrated into California’s power grid?

2 Andrew { 11.11.13 at 10:19 am }

Not just energy, but essentially the whole economy became a command economy during World War II, as was considered necessary for the war effort.

In fact, by 1945 more than half (almost 53%) of GDP was just the Government spending money. During the Depression the number was closer to 20%, although today, with nothing like World War II going on and with much less of it on defense, the number is about 40% (remember that and laugh or cry next time you are told we have a free market economy).

There were extensive price controls and rationing of all sorts of goods. The Government either directly took people out of the work force to fight, or indirectly put people to work in munitions factories and so forth.

Private investment was essentially entirely supplanted by the Government. History books have long tried to say that the Depression was ended by the war effort-after all, they had low unemployment and high GDP and low (measured) inflation! Nevermind that people were not doing truly productive work, nevermind that if you back the G term out the rest of GDP was down, and nevermind that inflation still happens even if you hide it with price controls.

I doubt many still alive from that period would be eager to return to the war time economy-especially if you proposed to replicate it without even the justification of patriotic duty to defend their country from a malevolent force-and I don’t think many people then would buy an attempt to equate climate change with the Axis.

3 rbradley { 11.11.13 at 10:47 am }

Thanks Andrew:

And the corporate tax rate during WWII was 95 percent. Try to be market-responsive (entrepreneurial) under that constraint!

4 Andrew { 11.11.13 at 11:59 am }

Yes, I had forgotten about the confiscatory tax rates, although some of those were already in place before the war, as I recall. Either way, the economy during WWII was very much on the planned model; more so than any other time in our history. The reduction in command and control to a relatively free economy after the war was nothing short of miraculous, and it was a boon to the economy.

Leave a Comment