In Response to “A Prosperous and Cleaner Future…” by Lynne Kiesling

If I were to describe Lynne Kiesling’s publication “A Prosperous and Cleaner Future: Markets, Innovation, and Electricity Distribution in the 21st Century” as anything, it would be that she is the Friedrich Hayek of energy policy. This paper methodically, and almost poetically, describes a major issue facing the energy and environmental policy world today: archaic design, a design that was put in place during the 19th century Progressive Era which put regulators “as agents, custodians, and stewards of ratepayer resources” (Kiesling 2015).

However, putting regulators in a dynamic and ever-changing market as custodians gives rise to what Austrian economist Friedrich Hayek describes as “The Knowledge Problem” in his 1945 essay “The Use of Knowledge in Society,” in which he says:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. (Hayek 1945).

Politicians and regulators are generally the butt of many party jokes as being incompetent and foolish, however this is a misunderstanding of why regulators stifle markets and innovation. Energy regulators will make bad decisions on what is best for the energy market or the environment not exactly because they don’t know what is best, but because they can’t know what is best.  The same could be said about a CEO of an energy company. Lynne Kiesling explains this idea by saying “[i]n dynamic markets with diffuse private knowledge, neither entrepreneurs nor policy makers can know a priori which goods and services will succeed with consumers and at what prices.”

Thus, it is not the free market assertion that private sector forces know better than public sector forces, per se. However at first glance, it seems that a solution in energy and environmentalism problems can never be found if no one actually knows enough to solve it.  This is not the free market assertion either. Instead it is that a free market is the quickest trial-and-error process for determining solutions based on the dispersed knowledge of private sector actors, which is determined through prices and profit. This is the crown-jewel of competition, which is absent in today’s energy market because of government sanctioned monopolies. Public sector action is simply too slow to enact this trial-and-error method, nor would they be able to determine what is and isn’t successful quite like consumers and the market can. Furthermore public sector forces are too slow to keep up with the innovation of today’s market, which is illustrated by Kiesling through the emergence of new technology like smart-grids, nuclear energy, and combined-cycle gas turbines. Kiesling as a result concludes that our regulation methods are inherently far too static for the dynamic market and technology we see today:

Many of the assumptions of this regulatory model are increasingly untrue in our modern society. The assumption of a single production technology with a declining long-run average curve has long been incorrect, as shown by the smaller-scale combined-cycle gas turbine (CCGT) innovations in the 1980s and the ensuing unbundling of generation from the vertically integrated firm and the liberalization of wholesale energy markets in restructured states in the U.S. This assumption is becoming even more problematic in the face of recent innovations in smaller-scale generation technologies, including natural gas, renewables, and even small modular nuclear power. (Kiesling 2015).

If Kiesling and Hayek are correct, it is clear that a feasible solution to problems we face today in energy and the environment, which are increasingly complicated topics, is the free market, and not an expansion of archaic regulation methods.

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