A Free-Market Energy Blog

Don Lavoie and Centrally Planned Electricity: Not

By Robert Bradley Jr. -- April 19, 2024

The perverse effort of some “free market” and “classical liberal” intellectuals to promote centrally planned electricity markets at wholesale (thus indirectly at retail) is a very curious example in the history of energy thought. Lynne Kiesling and Michael Giberson (see yesterday) are the guilty.

In AI and Economic Calculation (Substack), Kiesling explains the basics of the central-planning debate but ducks the elephant in her room, the centrally planned wholesale power market.

I have emphasized to Lynne Don Lavoie’s critique of noncomprehensive planning that went alongside his work on comprehensive planning, challenging her to forthrightly apply his argument to her beloved mandatory open access/Independent System Operator/Regional Transmission Organization (MOA/ISO/RTO) framework. The “knowledge problem” she champions reflects badly from her own mirror, if she would only see (impartial observer needed).

In response to her invocation of Lavoie at Substack, I asked:

Can you apply the knowledge problem to centrally planned wholesale electricity markets under the current MOA/ISO/RTO setup?

And in a comment on Facebook:

Now, apply this to the centrally planned electricity market under the current MOA/ISO/RTO framework. Lavoie’s ‘noncomprehensive planning’ in the book referenced certainly applies to the monopolistic setup where reliability and pricing are major issues.

No reply to either—she refuses to engage, saying that she “will not dance to your tune,” which means the music of the free market, classical liberal, comparative economics. What is she hiding?

Kevin Lacobie

At this point, Kevin Lacobie joined in with the comment:

Interestingly, Lavoie became very interested in computational markets. We discussed market design issues, not specifically with electricity. Economic insight has influenced market design issues in many industries, such as programmatic digital ads, where second-price auctions predominate.

Then came Lacobie’s pushback against my view:

I disagree on Lavoie’s position here. As my dissertation advisor [at George Mason University], I knew him well, and I think he would have enjoyed fascinating discussions on how to evolve a market for electricity, just as we discussed with Sun Labs markets for broadband and such.

This also reminds me of related discussions, “transition economics”, that is, how to get from one system (say, socialism) to a free market. These discussions happened shortly after the Berlin Wall fell. A subject area for transition economics – are there path dependencies that matter? Do certain first steps entrench oligopoly or not? These are all enlightening questions for economists, either looking at the former Soviet Union or the Texas electricity grid.

Don Lavoie as sympathetic to central planning of electricity by an agency over multiple utility control areas? I responded:

Yes, this would be a very interesting discussion that Don would be on top of. But, ISOs/RTOs as super-sized government-designed markets have demonstrably failed with ‘the knowledge problem’ — and are vessels for politics. The free market transition argument has failed as ISOs/RTOs have been an effective conduit for Net Zero politics…. A real free market is what Don would have been interested in, with all the technological and informational changes in the realm of market entrepreneurship, not of politicians and planners.

No reply. The next day I again answered Lacobie in search of a reply, if just a clarification:

I want to be extra clear here. I was not saying that Don would not be interested in informational developments and market evolution … but Don would not have endorsed central government planning because of it. As my dissertation advisor on what became Oil, Gas, and Government, Don had no objection to my criticism of mandatory open access (MOA) for natural gas pipelines. If you know of any examples on Don’s writings on how IT developments lessened the ‘knowledge problem’ for central planning (versus free markets), let me/us know.

Again, no social media reply. I then messaged him with the above. No reply. Three strikes and you are out.

Let there be no mistake. Don Lavoie would be fascinated by how central planning and contrived markets in electricity have been waylaid by the “knowledge problem.” And critically, I hold the person in question guilty of trying to muddle the issues from a preference for …. the MAO/ISO/RTO market. This post attempts to set the record straight, and Kevin Lacobie (fourth ask) is invited to agree or state why he thinks otherwise in a comment on this post.

Appendix: Giberson Exchange

Giberson played off of Lacobie’s interpretation.

Indeed, Lavoie’s assessment of knowledge problems is general. It covers both traditional regulation of state-protected monopoly electric utilities and regulated regional RTO markets.

A thoughtful student of Lavoie would likely find problems with both institutions. However the student would likely strongly prefer the institution with lower barriers to exchange and prices over the one centered on regulator-overseen rates.

Incorrect. “A thoughtful student of Lavoie” would note the problems of public-utility regulation to advocate deregulation, as deregulation to address the knowledge/politicization problem of the MOA/ISO/RTO model. Yet again, Giberson (and Kiesling) refuse to see a real free-market in electricity as theoretically defensible and superior to what has emerged from the bowels of experts and planners (including themselves).

Giberson also stated:

The essence of an ISO market is the overcoming of a particular coordination problem that emerges on an interconnected electric power grid with many traders. The result of ISO coordination is both imperfect and yet an immense improvement as research by Mansur and White shows.

In the work, expansion of the PJM market to include the AEP transmission network immediately boosting trading efficiency on the network because of more efficient use of the network. Obviously the market doesn’t “solve” the knowledge problem any more than any other market does, and government involvement injects constraints on dynamism, and rent-seeking abounds in the industry, and so on.

Still, the markets promote efficiency in the corners in which they are allowed to work (link).

To this I responded at Facebook (to no answer):

Full stop. First, how about a real free market instead of this false binary choice between central planning and public utility regulation. (End the intellectual blackout.) Second, Lavoie as a classical liberal never would have endorsed the MOA/ISO/RTO model. Third, the failure of central planning with reliability has wounded an industry that never had these coordination problems before and during regulation.

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