“The propensity of government intervention to have unintended consequences and expand from its own shortcomings has taken over a vital U.S. industry. It is time for fundamental free-market, classical-liberal reform with electricity.”
For some time, I have questioned the work of electricity specialist Lynne Kiesling in regard to classical liberalism, market process economics, and Public Choice theory. She dons the mantle of all three traditions; I believe her approach is the opposite.
There are hidden assumptions and views that she does not want to talk about: climate alarmism; forced energy transformation. (Why?) And down under, her premise is that a “market failure” exists with electricity that necessitates government intervention. And with this intervention, she has fallen into a central planning approach that begs for a classical liberal autopsy and policy reversal. (And perhaps no one better than she could explain the problem!)
I recently had the beginnings of a productive discussion with her in front of a classical liberal crowd. But things went quiet just when my challenge was getting toward key inflection points.
In this post, I share that discussion; tomorrow, I will list a number of questions for Kiesling to elevate the debate at a time when grid instability (and actual electricity crises) have hit the U.S. as never before in the 140-year history of the industry. Part III will revisit a book gone sour co-edited by Kiesling on Texas’s electric restructuring.
Social Media Exchange
The conversation began with a Facebook post from Austrian economist Peter Boettke:
From NYT today: “None of these changes has nearly the impact that federal action would. But smaller changes can still add up — and even foster broader changes. Consider the vehicle market: By mandating electric vehicles, California and other states will lead automakers to build many more of them, likely spurring innovations and economies of scale that will reduce costs for everybody and thereby increase their use around the country.”
The spurring innovation part is what I want to focus on because it highlights I think an elusive but important concept in the theory of regulation and intervention… Kirzner’s notion of superfluous discovery. Let’s discuss.
To which Lynne Kiesling replied:
This question is squarely in the work that I do every day. Most people working in energy policy, including academics, discount the argument that emergent processes can yield sufficient, and sufficiently coordinated, action on whatever policy question they care about. Many have a top-down rather than bottom-up or even hybrid of both view. Most do not think about epistemology at all, and think that they know what the “right thing to do” is. When a regulation generates superfluous discovery (and the associated unintended consequences), the response usually is “we didn’t do enough” or “we were constrained in how stringent a regulation we could impose”.
This is why I do what I do, every day, communicating these principles to regulators and other people in energy policy and academics. It’s playing the long game, and as Michael Munger would say it’s directionalist and not destinationist, but I do find more people willing to acknowledge the epistemic benefits of markets, their error correction properties, and the flaws of regulation. In energy policy I think it will always be a hybrid context, with a mix of planned and emergent, intervention and market, top-down and bottom-up. That means having to adjust your expectations about what’s feasible (again, directionalist).
I question your whole approach to electricity. The [Independent System Operator/Regional Transmission Organization] ISO/RTO model based on mandatory open access is a central planning scheme that is now in crisis mode. Here in Texas, monopolist ERCOT sets rules on pricing (how to price reliability is a bugbear!)–and it subsidizes wind and solar in the process.
And now that the Texas grid is wounded badly, the central planning turns to elaborate demand-side schemes to ration the shortage (your work?).
We need new blood in Austrian/Public Choice to, respectively, explain the failure of this ‘market socialism’ variant and to chronicle the political takeover. I say this not only as a classical liberal identifying what I believe classical liberal policy is but as a historian explaining the failure of central planning in real time.
She responded (#1):
I know you do. Please recognize the pluralism in classical liberal approaches; yours is not the only model of classical liberal theory *and practice* of regulation and energy policy.
I also invite you to consider the extent to which your critiques fail to incorporate the physical and engineering aspects of network industries like electricity.
And as I have suggested to you before, your recommendations would benefit from more attention to the grid as a common pool resource with ill-defined property rights, with deeper analysis drawing on Ostrom and others developing the IAD framework.
To which I answered:
Thank you for your comments.
First, is electricity a ‘commons problem’? Did Ostrom ever recognize it as such?
Yes, there are control areas because of the unique properties of electricity, but that just results in one company controlling an area of wires–or having contracts with other companies to the same end.
Second, mandatory open access and government-directed wholesale power monopolies is about as non-classical-liberal as one can get. Particularly when the “market failure’ interpretation of electricity is wide open to criticism.
Finally, the idea that a centrally planned wholesale market that allows for retail rivalry (neoclassical competition) and thus brings the insights of Hayek, Schumpeter, Coase, etc. is a serious misapplication. (“Planning for freedom” is given new meaning.) This said, I beg for people a lot smarter than me to get into the mechanics of this new planning experiment to educate us all on what is going on. I fear it is all the Mises Interventionist Thesis at work.
In another comment on the thread, she responded (#2):
And I agree with you that TX Lege and PUCT have made multiple wrong decisions in their responses to Uri.
To which I answered:
Re ERCOT decision-making, that is a case study of government failure for the ages–one of the most serious cases of Mal-coordination in U.S. industrial history. (Need to suggest a whole dissertation on that, Professor Boettke.) And Public Choice too to get away from Nirvana assumptions about government power policy.
At which point she grew silent.
I am far less bothered by one person’s (mainstream) view of electricity policy than by trying to sell them as “classical liberal.” The “directionalist, not destinationist” admission is a dodge; it is wrong direction, wrong destination. The Great Texas Blackout of February 2021 is full of informational and planning errors that were predicted by the critics of the governmental approach. And now we have expensive, wounded grids spreading through America.
The propensity of government intervention to have unintended consequences and expand from its own shortcomings, in short, has taken over a vital U.S. industry.
It is time, even past time, for a whole new rethink of good-versus-bad public policy with a major U.S. industry. To this end, I have provided a placeholder to what I believe is sound theory and good history that is firmly within the classical liberal tradition.
This said, there simply is no substitute for others much younger and smarter than me to delve into the issues and examine tens of thousands of pages of documentation on what is going on with The Independent System Operator/Regional Transmission Organization control of wholesale electricity, upon which a ‘competitive’ retail market exists. I believe that significant dissertations in market-process economics and Public Choice are there for the best and brightest of the next generation of classical liberals.