“You really not have addressed my criticisms about your accepting, at face value, climate alarmism, forced energy transformation, and a technocratic solution to the current grid problems brought on by the wind/solar takeover.” (Bradley to Kiesling, below)
“You clearly disagree with my synthetic theory of regulation and technological change. I synthesize institutional and transaction cost economics, Schumpeterian innovation economics, economic history, public choice, and yes, Austrian economics….. I think this theory … does a better job of helping us understand the institutional and organizational, and technological, reality of what’s feasible in liberalizing the electricity industry and its regulation.” (Kiesling to Bradley, below)
More than a century of increasing government intervention has created today’s crisis in electricity. It is not only a crisis of performance (affordability, reliability). It is a crisis where the cumulative interventionist process is now coming to your home or business. The shared narrative (of which Lynne Kiesling is a part) is that supply-side problems (created by a witches brew of intervention at all levels of government, btw) now require a demand-side solution of demand modeling and smart-meter control of your usage, part of the virtual power plant.
I argue as an industry historian and political economist why this is wrong–and why a thoroughgoing move toward real free markets will best coordinate electricity going forward. I also as a historian of energy thought interpret why a ‘classical liberal’ is anything but in the area of electricity, ignoring what is professed to believe elsewhere (the free market as a discovery process; the knowledge problem of central planning; the process of regulation; the ‘romantic’ view of government….).
Kiesling brings in a variety of academic traditions and technical concepts (economic and engineering) to state her case. But with the exchange below, it is time for her to show her hole cards. Ducking the hard questions will be much harder now with our public exchanges. May a one-sided debate be joined.
This is anything but an idle tiff. The Texas electricity debacle just over two years ago (which free market types predicted, and Kiesling, et al. did not) was carnage on a scale not previously experienced or even imagined in the industry. It has many governmental mothers and fathers–even grandmothers and grandfathers. In an industry premised on reliability, the whole system exploded! And all the studies (including that of Michael Giberson for Reason) stopped at the physical why, with just hints of the why-behind-the-why, the unseen.
If $65 billion in wind and solar (mal)investment in Texas did not have anything to do with the performance issues with thermal generation … if disappearing wind/solar when most needed is okay because ‘we expected that’ … if central planner ERCOT did not fall prey to the ‘knowledge problem’ …. if market learning/improvement could not be expected after the 2011 Texas freeze … and if climate models and NOAA predicting warmth going into the winter of 2020/2021 did not affect any of the decisions on the margin …. then I guess (per Kiesling) I am badly misinformed since I know much too little about economics, technology, and electricity.
My post, “Electricity Policy: An Exchange with Lynne Kiesling (more evasion, statism from a “classical liberal”) from last week started the exchange. I reprint Lynne’s three-part comment/rebuttal with my responses. [P.S. I have a public debate with Michael Giberson on the specific issue of the why-behind-the-why of the Texas debacle of February 2021. I will deal with our exchange(s) separately.]
Kiesling: (Part 1 of 3) I have tried not to respond to you since [Texas Storm] Uri [in February 2021] because I find your approach to both substance and rhetoric fundamentally flawed. [emotionalism, deleted here–see below]
First, on the substance. Your understanding of the relevant economics is incomplete, and what economics you do bring to your analysis is filtered through an ideological lens that leads you to engage in such highly motivated reasoning that it damages your economic logic beyond repair. You either choose not to learn or choose to ignore the relevance of institutional, organizational, and transaction cost economics to industrial organization questions in electricity (Coase, Williamson, Ostrom, etc.).
You have similar blind spots with the economics of innovation and technological change, such as Christensen’s work and Henderson’s work on S curves and technology maturity models. Putting those two fields together would enable you to engage with how digitization reduces transaction costs and how new, more energy efficient generation technologies like the combined cycle gas turbine changed the industry cost structure and made competitive wholesale markets feasible. But they still needed a transportation network, and there were still substantial economies of scale in the wires, so to this day the wires are ROR regulated.
Part of that ongoing regulation includes participation in the transportation network, implemented through the open access tariff that you decry so vehemently. That institutional choice reflects the physical reality that AC power networks are common pool resources with ill defined property rights, another piece of economics that you refuse to acknowledge.
Where the RTOs should have done better IMO is in governance, which is quite flawed but flawed differently in each RTO, and here Ostrom’s work on common pool governance institutions is a valuable analytical lens (and Mike Giberson and I have done some preliminary work on this).
The second way your economics is wanting is in your cartoonish caricature of Austrian economics and Hayek in particular. You use only a small portion of his Road to Serfdom argument against central planning, and never engage with his deeper treatment of market epistemology in his (1937) and (1945) seminal works on knowledge. You also project your didactic binary perspective onto his ideas, ignoring all of the nuance of his articulation of emergent order but within an institutional framework that admits roles for the welfare state and other non-market institutions (some voluntary, some coercive), as he does in the Constitution of Liberty (1960) and Law, Legislation and Liberty Vol. 1.
Hayek died before electric system liberalization in the UK and US started, so we can’t know, but I think you’re wrong to say that he would have rejected the move to liberalize wholesale markets. In our Hayek and the Texas Blackout article, Stephen Littlechild and I make some pretty deep critiques of RTO practices and market designs, all grounded in our reading of Hayek’s larger body of work, a reading that I think is more thoughtful and informed than yours.
Bradley: I am aware of your economic writings in Austrian economics. I don’t disagree with their substance. This is what is so disconcerting. Your fatal flaw is forgetting these writings (and classical liberalism in general) when it comes to electricity analysis and policy. The economists and concepts you mention–a lot of different literatures–can be used against the notion of central planning of electricity.
You somehow think that these literatures and disciplines can be used in a government context. One question you have refused to answer: apply the knowledge problem to ISOs/RTOs. Can you do that for us all at substack? And not only Hayek–bring in Don Lavoie’s analysis on noncomprehensive planning, and the Austrian view of competition.
Lots of mumbo-jumbo above–but can you apply it to a free market where entrepreneurs take advantage of new situations in electricity? And please do not say this is all in the service of government-subsidized/enabled wind/solar, dilute/intermittent technologies that have nothing to do with the economic traditions above. Check your premises–don’t make flawed premises and try to intellectualize your way out of it.
Kiesling: (Part 2 of 3) Another substantive area where your lack of knowledge diminishes your analyses is in power systems engineering. Successful markets must be embedded in the physical reality of AC power systems, which require substantial coordination among participants through voltage support, reactive power, frequency support, and other grid services. Market products and market designs have to reflect this physical reality. Again, the grid is a common pool resource in which it is literally—literally—impossible to define and enforce property rights.
Nothing that you critique or suggest as an alternative reflects any understanding of the implications the physics of the system for how to operate liberalized markets. Open access membership in a larger network exploits the economies of scale in operating such a complex system, and in the abstract that’s the impetus behind the operations side of the RTO.
I’m also mystified by your fanciful counterfactual of an industry with multiple competing vertically integrated electric and gas companies, each owning their own pipes and wires networks and enabling interconnection through contract. As a good Coasean I’m open to contracting, but in order for your proposal to make any sense there has to be pretty serious economies of scope across both sets of production assets and both sets of transportation networks.
I find that idea analytically dubious, and you have never offered any data to suggest how and why it might be the logical, organic organizational structure to emerge out of a liberalized but not open access framework. It’s much more likely to devolve into monopolies again, and if I am anti anything I’m anti-monopoly.
[emotionalism, deleted here–see below]
While you call yourself a classical liberal, your rhetorical approach and your intellectual framework are so rigid and you are so convinced that your way is the One True Way that you are more of a Rothbardian. That is not a compliment. Given that, why would you expect me to choose to join in discussion with you? I have no expectation that you would enter into that discussion in good faith, so better not to even provoke it.
Bradley: We had this argument after the February 2021 debacle where I again and again said control areas and the unique properties of electricity do not require a centrally planned wholesale market. You first said that ERCOT was not a governmental organization in our exchange–and you backed off from that. ERCOT is a central planner that does not know how to price reliability, for starters. And they totally messed up with their analysis of supply and demand going into the Texas debacle. (The Knowledge Problem, right?)
Why central planning? You assume what must be debated. You say: “Again, the grid is a common pool resource in which it is literally—literally—impossible to define and enforce property rights.” What???
Explain why the market cannot handle electricity please. You might have to share (I have asked you to many times) your theory of market failure and natural monopoly. “Liberalized markets”? What is that–‘planning for freedom’?
Power systems engineering–that is a question for markets, free market entrepreneurs, not central planners. If this is not true, then what is classical liberalism applied to electricity? Your criticism of me here is a non sequitur.
Bradley Regarding integration, we have oil majors, and the power industry pre-regulation (and post-regulation where Insull was ahead of cost-based rates) was vertically and horizontally integrated. This was a market development that was violated by New Deal legislation that had a false diagnosis–and bad cure. (Should have eliminated existing regulation, not added it.)
Transaction costs is an economic force that must be dealt with in a market. Coordination between the different parts of electric provision and of natural gas provision suggests having it under one roof. Not always, but as the market decides. Do you know what that is?
Could have gas/electric companies where everything is integrated in-house on each side. THAT would have prevented the mal-coordination that occurred when upstream gas was not weatherized–or gas compressors were cut off from electricity at the height of the Texas crisis.
Speaking of Coase and transaction costs, do you recognize that consumers having to deal and choose with different providers (and switch for this-or-that reason) under mandatory open access is a transaction cost? On Facebook once, you excitedly reported about racing around your house because of a price change to do something with your electricity usage. I asked you how much money your saved. No response–again a ducked hard question. Coase might have wondered if you were engaged in peculiar action.
Most of us just want our electricity on and from a free market (no wind or solar or central planning) and be done with it. Don’t want a ‘smart meter’ that is a cost (subsidized by intervention, another story) and an invasion since it can be controlled from the outside.
Lynne, my evidence is based on the history of the industry and noting the huge mal-coordination problems coming out of Texas. And I simply submit to you the question: why not let the market decide the form of industrial organization between nonintegrated independents and integrated majors? A true market discovery process that has been hijacked by a witches brew of government intervention (including antitrust law).
That’s economy of scope. On scale, central station electricity has high scale economies. Not only in generation but also in consumption (the load factor). Wind and solar and other on-grid distributed generation lack scale economies.
Lynne Kiesling (Part 3 of 3) [emotionalism, deleted here–see below] I have no intention to enter into a hip-thrusting machismo contest with you on which one of us is the “better Austrian”, because such purity tests are pernicious and anti-intellectual (again your desire for such a purity test shows you to be more Rothbardian).
But setting the record straight about my scholarship, you and your readers may benefit from reading my chapter, Knowledge Problem, in the Oxford Handbook of Austrian Economics (2014), the Littlechild and Kiesling article I mentioned above, or any of my other works published in Austrian journals. Can you say the same for your scholarly record?
I’ve also taught History of Economic Thought for 20 years, at College of William and Mary, Northwestern University, and Purdue University. My class always included coverage of Menger and Hayek. Your characterization of me as being unfamiliar with Austrian economics is deeply false and deeply petty. What do you expect to achieve with a characterization that is so different from all of my publicly available information?
You clearly disagree with my synthetic theory of regulation and technological change. I synthesize institutional and transaction cost economics, Schumpeterian innovation economics, economic history, public choice, and yes, Austrian economics. If you want me to point big neon arrows and scream AUSTRIAN ECONOMICS, you’ll be disappointed. But I think this theory of regulation and technological change does a better job of helping us understand the institutional and organizational, and technological, reality of what’s feasible in liberalizing the electricity industry and its regulation.
You also object to my Substack. It obviously has not occurred to you that, as a professor, I am using educational pedagogy and building a coherent narrative. That narrative does not start with Austrian economics but it’s going to incorporate it soon. I also did not go back and edit a post that you referred to; I mentioned negative pricing because it’s a core issue, so you probably did not read it carefully the first time.
And speaking of opportunity costs, the time I’ve spent writing this involved my giving up time reading Matt Zwolinski’s and John Tomasi’s new book The Individualists, an intellectual history of libertarianism that you would do well to read so you can develop a deeper understanding of the ideas you purport to advocate. We’re done here. Congratulations on burning this bridge.
Bradley: Thank you for engaging further. Good to get this out there. In my decades in classical liberal thought, I have seen a lot of strange things (like Jerry Taylor’s ‘conversion’ to energy statism). But I have never seen a divergence like yours between talking market-process economics and ‘walking’ market process economics in the real world. And all because of a skill set aligned with technocratic planning.
You really not have addressed my criticisms about your accepting, at face value, climate alarmism, forced energy transformation, and a technocratic solution to the current grid problems brought on by the wind/solar takeover.
Yes, you can disengage–and once again, dodge the hard questions. But getting my criticisms out there will let others see what is going on and ask you all the basic, ducked questions–starting with ‘what is classic liberalism applied to electricity’ and ending with ‘are your smart meters coming to the home to ration users, the next step down the electricity road to serfdom?’
Bradley: Lynne: You state: ”It’s much more likely to devolve into monopolies again, and if I am anti anything I’m anti-monopoly.” Now that is interesting. First, ERCOT and ISOs/RTOs are government monopolies that are hard to equate to a free market monopoly. Would a free power market in Texas result in a 90 percent market share for a company, for starters?
I have long argued (as you know) for removing franchise protection/public-utility regulation for natural gas and electricity–and have written primer articles on the origins and history of the regulatory covenant. And outlined a classical liberal approach to electricity (at EconLib). In your substack primer articles (and in our entire discussions), you have failed to bring in the arguments against ‘natural monopoly’.
Harold Demsetz? Walter Primeaux? And can you apply Public Choice arguments to electricity politicization going in–not only in retrospect or as an appendage? I expect you will now do so. Market-process economics, Public Choice … this fronts the debate, not tails the debate.
Now you have impugned both my intellectual integrity and my character, and have done so in a petty way that has lurched from your more typical passive aggressiveness to outright aggressiveness, so I feel compelled to respond.
Finally, the way you have chosen to impugn my intellectual character is shameful, and the way you have chosen to lash out at me in this post is grotesque.
Comment: Lynne’s continuing silence on U.S. electricity’s road to serfdom–and her role in advancing it–should have been called out a long time ago. I have recognized it for many years and hoped for some midcourse correction. She doubles down on Statism and Big Brother with her skill set in tow, advocating more government involvement instead of less. It is time for open debate in the classical liberal community–and far beyond.
In terms of your rhetoric, the way you choose to engage online is distasteful. Your tone is snide and passive aggressive, your various comments that you sprinkle like breadcrumbs on LinkedIn are often incoherent because you are so deeply embedded in your own ideological lens that you cannot (or will not) manage to figure out how to communicate your ideas effectively to people who don’t already agree with you.
Comment: When Lynne has engaged with my critical comments, I have reproduced the exchanges at MasterResource (here and here, not only last week’s post). You be the judge. My questions were probing and firm–and reflected the fact that she disappears just when things are getting very interesting, so I press.
Something else that is disconcerting. I have been surprised, if not shocked, at the lack of understanding and imagination of a free-market alternative to electricity statism from electricity experts on social media. Lynne (above) blames my bad rhetoric and deficient knowledge for this. Another interpretation is that she has misrepresented classical liberalism so badly to wider audiences that they do not even recognize the intellectual and practical case for the separation of government and electricity.