How Not to Cure an Energy Crisis

Dr. North, economist, lecturer, author, currently is an associate of Chalcedon, an educational organization dedicated to Christian research and writing. His latest book is An Introduction to Christian Economics, Craig Press, 1973.

President Nixon went on national television on November 7, 1973, to announce to the nation that we are in the midst of an energy crisis. He said that citizens and industry should be willing to work in 68-degree semi-comfort, thus cutting fuel use by 10 per cent. We should also drive at 50 miles per hour, thus increasing our gasoline mileage.

Since the mid-1950′s, when the construction of Federal highway projects was seen as the eighth wonder of the world, we have now come full circle. Highways are bad; now we need rapid transit. Southern California, which once had a quite serviceable electric trolley car network — the Pacific Electric — now must spend billions of dollars of taxpayers’ money in order to achieve as good a system as we had in 1950, before the days when government-financed "freeways" were built.

We have the best possible highways — safe at 70 miles per hour on some stretches, safe at 65 virtually everywhere. Now we are told that we should only drive 50. Of course, during the rush hours when most of the driving is done, no one really worries about driving 50; if you’re lucky, you’ll average 35. Freeways, being "free" to any motorist at all hours of the day, provide little economic incentive to drive at less crowded hours of the day. But you can always drive 65 miles per hour during the hours when you aren’t actually on the highway. As I said, we have the best highways tax money can buy (less kickbacks in certain unmentioned states, of course).

So now Mr. Nixon says we should drive 50. Unfortunately, as General Motors President Edward N. Cole has pointed out in a letter to Sen. Jennings Randolph (November 8, 1973 release), most of our driving is done under 50 anyway — around town or on country roads. United States Department of Transportation data indicate that only about 42 percent of the driving is done at speeds of over 50 — and I wonder if this takes into account the driving done at under 50 during traffic jams on the superhighways. So the new speed restrictions, even if imposed in all states, even if obeyed by drivers used to 70 miles per hour driving, even if enforced by overtaxed highway patrols, would only save the nation 45 million barrels of crude oil annually, or about two and a half days’ worth of consumption. Terrific!

Effect of New Speed Limits on the Trucking Industry

Then, of course, there is the effect the new speed limits will have on the trucking industry. Shipments will be delayed, since truckers will not be able to drive at the higher speeds. This is not a pleasant prospect, given the potential danger of a breakdown in train transport in the northeast section of the nation. Government regulations over rail transport, coupled with near-monopoly status of the "favored" railroads, now offer us another crisis. Some cities face both power shortages and shortages of other goods and services. Government regulations are like stones tossed into pools of water; they create ripple effects that not even the most sophisticated computer predictions can foresee. Government agencies toss in great handfuls daily.

So we return to the first half of the proposed crisis cure: restrictions, voluntarily imposed, on energy use. We turn off all neon signs, for example, as they have done in Oregon cities. A spokesman for the Outdoor Advertising Association of America informs us that this will save about 1 per cent of all electricity used in the country. With all gasoline signs off in the evening, it’s a good thing that our faithful motorist is holding his speed to a fuel-conserving 50; he’s going to need those extra miles for his search for an open gas station. Most won’t be open anyway, I presume, since the gasoline shortage encourages them to shut down after 6 p.m., but without brightly lighted signs, motorists will be hard-pressed to tell the open from the closed stations. This will, no doubt, encourage people to do their driving before evening, thus clogging the "freeways" even more during the peak hours.

Washington‘s response? Another handful of stones.

What about voluntary restraint on heating homes and businesses? Perhaps it may be healthier. It may encourage higher output. But why should a firm or a housewife keep the temperature down? By their own demonstrated preference, people like warmer climatic conditions in the winter, cooler in the summer. Each man will always have that nagging doubt: I’m living less comfortably, but what about everyone else? What good does one uncomfortable family (or work crew) count in a nation of millions?

Not Much Difference

Indeed, the problem is very much like the smog problem or the traffic jam problem. How much pollution or how much used up space will one additional automobile cause? An infinitesimal quantity, obviously. Literally unmeasurable by macro-economic tools. Each family or each driver or each business concludes that his presence or his use of power won’t make that much difference. Each person is absolutely correct; it won’t make much difference. All those micro decisions, however, produce macro crises in today’s world.

Yet, in other areas of our lives, the micro decisions do not produce macro crises. The newspaper boy fails to deliver a paper one day. This is an inconvenience, but not a disaster. You can call up the local distributor, and a man will send out the paper. If this happens too often, there is an economic incentive for you to take another newspaper. The newspaper managers know this, so they take care to organize their staffs so that the paper does get delivered most of the time. It pays them to have built-in self-correction devices that operate against micro-economic errors.

A person can take an unannounced day off from work once in a while. This is a bad policy morally — a person is not fulfilling the terms of his contract. But if the practice continues, the company will impose counter-pressures. The public’s position is protected by internal company policies. Service is more constant, more predictable, which is what the public expects and pays for. There is an economic incentive for companies to see to it that micro failures do not become macro failures. And they have a reliable indicator to remind them of their task: the profit and loss statement. It works so long as there is the right to exchange property (including labor) on a market of freely changing prices.

These are outright micro failures. But what about micro decisions that should not be, in and of themselves, detrimental? Suppose pizza eaters who have for years ordered their pizzas with mushrooms should decide to order them with pepperoni. All of a sudden, pizza shops have to order more pepperonis and fewer mushrooms. As always, customers set prices. Their increased demand for pepperonis increases the price of the available supplies of pepperonis, for the customers are bidding (as always) against each other. Meanwhile, the price of mushrooms tends to drop, since fewer customers want to consume the available supplies of mushrooms. In a long chain of economic reactions, the costs associated with pepperoni production rise (labor, machinery, the costs of breeding more and more little pepperonis, and so on). Then entrepreneurs will concentrate their attention on increasing the supply of pepperonis more efficiently — more inexpensively — in order to reap profits. Up goes the supply of pepperonis, which is precisely what the public has demanded, while the mushroom producers are forced to cut production, freeing economic resources (such as capital) for more important uses. No "crisis" emerges — no television speeches by the President, no Congressional hearings, no paperbacks from Nader’s summer vacation student lawyers — unless someone tries to impose price controls on the pepperoni industry.

Breaking the Chain

With price controls, however, the complex chain of economic events is disrupted: no one is quite sure just how much pepperoni should be produced or which pizza shops should get priority consideration in receiving the now short supplies — short in relation to public demand at the artificially low price of pepperoni. Soon the Italo-American Society will be picketing on the Capitol steps, the Pizza and Staw Hat Amalgamated Brotherhood will be petitioning Earl Butz, and the FDA will send out preliminary warnings against debased pepperoni quality to all the pepperoni producers of the nation. We will then have a full-blown crisis. The public will be asked to order at least one mushroom pizza for every three pepperonis, with rationing of pepperoni pizzas threatened if "voluntary" restraints — one’s patriotic duty in the war against spiraling pepperoni prices — should fail. Then the Cost of Living Council will add a new department: the Pepperoni Control Division. A chain of underground black market pepperoni pizza parlors will spring up. All over America, certain unpatriotic citizens will be whispering into door-slits, "Luigi sent me." A simple shift in taste at the individual level, when coupled with price controls, can produce a national macro catastrophe. (In the midst of this crisis, no one even notices that Congress has passed, and the President has signed, an omnibus bill onto which — in section 84b — a $17,234,187.57 appropriation for the floundering mushroom industry has been attached.)

Therefore, we can adopt a simple (though not infallible) principle: where micro decisions produce macro crises on a regular basis, someone — probably the civil government’s officials — is probably interfering with the right to exchange property (including labor) on a market of freely changing prices.

Who’s to Blame?

Are the Arabs cutting off our oil — variously estimated from 6 per cent of our total supplies to 12 per cent, which tells us something of the accuracy of statistical reporting — thus producing a crisis? Why didn’t we have a reserve, such as the north-slope Alaskan oil? Because ecology advocates prohibited the construction of the pipe to transport it; they got government agencies to stop construction. Because ecologists stopped drilling for new oil in places like the Santa Barbara channel— again, by state interference. (This ecological activity was necessary, at least in part, because laws of property are not enforced by the courts and legislatures, thereby failing to make oil firms completely responsible financially for their own errors of judgment in not protecting the environment against oil spills.) Because interference in capital markets by governments makes it more difficult for newer, smaller, innovative firms to gain needed capital to develop alternative power sources.’ Because government bureaucrats interfere with licensing of alternative power sources (yes, even non-polluting systems) already developed. In other words, because of a massive list of statist "becauses."

Are persons using too much energy, that is, more than this week’s crisis mentality in Washington would prefer? Well, why not? The governments have subsidized cheap power for years. They have not permitted public utilities — themselves the monopolistic creations of governments —to raise prices on their various products. So the public has accepted as valid economically the one indicator they have to measure the value of the energy source, that is, the cost-per-unit consumed. The government has deliberately subsidized the public by keeping prices lower than the companies have insisted was necessary. So the companies have not been able to afford to hire the best people available. In some cases, they have found it necessary to keep older, less efficient equipment, having it repaired by less skillful repairmen on their staffs. They have found it difficult to raise capital on the free market, for their bonds are rated low (and therefore the interest they must offer to pay must be higher) because some local public utilities commissions have had their eyes on the ballot box instead of the scarcity of capital.

Shielded from Competition

Then, of course, there is the inefficiency of managements that are shielded from free competition. For years they have faced political battles with the public utilities commissions instead of economic battles with competitors that might otherwise have been able to enter the market. Who can say what alternatives might have been developed? Who can estimate the loss of efficiency that has come about because newer, more creative, innovative firms have been kept out of monopolistic, government-created closed markets?

The public supposedly has been protected by these various power monopolies. Now the government finds that the public must cooperate in order to make the jerrybuilt government monopolies work more or less successfully. But the public is not given an economic incentive to co-operate. Are electricity rates boosted sufficiently to cut down the consumption of electricity? No, indeed; that might be politically dangerous! So we go to voluntary controls in the name of the national emergency. They are too much like the "voluntary price guidelines" that were scrapped on August 15, 1971. We co-operate voluntarily, or else… rationing. Nice, inefficient, unpleasant, jerrybuilt, creaking, black-market creating, bureaucratic power-enhancing rationing. All in the name of consumer protection.

There is another consequence of "voluntary" controls to consider. Citizens are asked to cut back on their consumption of power. They are asked to do this in the name of patriotism in order to deal with a national emergency. Before this crisis, individuals were free to use up as much power as they chose, so long as they were willing to pay for it. No one worried about what his neighbor might think about the "morality" of a home heated to 75 degrees. With free pricing, the expenses associated with such physical comfort would have to be borne by the user. But today men are warned that those who keep their homes warmed are unpatriotic, even immoral. They are encouraged to regard their neighbors with suspicion. They are made to feel guilty. Exceedingly ugly circumstances may arise — indeed, are now arising — when someone in a neighborhood wants to put up the traditional Christmas lights or floodlights for home protection.

The macro-crisis has been nationalized officially; micro-decisions are now a part of the public morality, and hence the pressures of public opinion are brought to bear on "deviants." And as Tocqueville wrote in the 1830′s, few things in social life count as highly or are as uncompromising as public opinion, especially in the United States. Displays of the public morality can be irrational and very insensitive to the subtle questions of personal choice. Mobs are not easy to reason with. Hysterical neighbors are not inclined to listen to marginal utility analysis. Yet the daily press reports an endless stream of statements from public officials that is creating a vigilante mentality among the public. The colder the temperature, the hotter the unleashed emotions.

So now, instead of producers competing in order to give the customers what they want, we see the incredible spectacle of gasoline companies telling customers to walk more or to ride the bus! They spend millions of dollars to buy television advertising to ask us not to use their products! And because of the threat of direct rationing and the creation of a "temporary emergency control board," this advertising may be well spent by the oil companies.

The competition we see now is not between the gas company and the electric company, but between the ecologists’ political bloc and the energy-crisis political bloc. This, it should be noted, is precisely what Soviet Russia has developed: the only competition is that between government bureaucratic agencies. The consumer simply hopes and prays that the system will operate after the political dust has cleared, or at least has settled into another province’s back yard. The answer to the macro-economic crises lies in the re-establishment of the free mobility of risk-capital, the free bargaining of private citizens with each other, the free mobility of prices, and the eradication of "free" goods and the fallacious philosophy which undergirds them, whether in this country, Libya, Venezuela, or Japan. Let the free market do the microeconomic rationing efficiently, and we will not need to be burdened with the ghastly inefficiency of state-wide or Federal economic planning. Microeconomic decision-making is the primary device for keeping crises on a micro level. At least, under micro-economic crises, someone gives me a direct incentive for sitting in 68-degree semi-comfort: I don’t wind up with a monthly bill that produces 72-degree financial discomfort.

¹ James Mofsky, "Blue Sky Restrictions on New Business Promotions," Duke Law Review (July, 1969)