Classical Liberalism and Electricity: An (Unfinished) Exchange with Lynne Kiesling

From MasterResource

By Robert Bradley Jr. — August 16, 2022

“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.

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 Kieseling 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 replied:

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.

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tgasloli
August 18, 2022 11:25 pm

I’m not sure the black outs are “unintended consequences.” They are too obvious and predictable consequences of the energy policies.

Steve Case
Reply to  tgasloli
August 18, 2022 11:43 pm

Probably the real elephant in the living room. When the USSR collapsed Christmas of 1993 those old bolsheviks didn’t go quietly into the night. They are still busy undermining capitalism and what better way to do it than the climate madness that is going on today.

Graemethecat
Reply to  Steve Case
August 18, 2022 11:57 pm

The Tankies merely moved sideways into Environmentalism and Wokism.

griff
Reply to  tgasloli
August 19, 2022 12:07 am

The few blackouts that have taken place are all associated with extreme weather events, which would equally have challenged an entirely fossil fuel grid.

Felix
Reply to  griff
August 19, 2022 12:25 am

Really? An unstable unpredictable unreliable power grid is just as useful as a stable predictable reliable one?

Hoo boy! Tell you what, I’ll sell one of the suspension cables on the Brooklyn Bridge and make some extra money while you buy the bridge with just the one cable remaining. Just as stable, you say. Time to put up or shut up.

Jay Willis
Reply to  griff
August 19, 2022 3:00 am

Griff, you plonkers have been banging on about climate change for 30 years and have been spectacularly unsuccessful at building any resilience to climate change into the energy system, while spending astonomic amounts of other people’s money to tackle the problem. The level of failure is unprecedented.

CarGuy Pete
Reply to  griff
August 19, 2022 4:22 am

How can you be so wrong all the time, unless you are just trolling?

Mark D
Reply to  CarGuy Pete
August 20, 2022 11:49 am

For some even negative attention is better than no attention.

ATheoK
Reply to  griff
August 19, 2022 5:58 am

are all associated with extreme weather events”

Willfully, maliciously wrong.

Thunderstorms are normal.
Snowstorms are normal.
Even tornadoes are normal.

Green orders to change fuel control parts of the pipeline from fossil fuel energized to an electric gadget. To use electricity from wind and solar.

Renewable grid goes down and electricity to the control part is shut off, shutting off the pipeline fuel supply.

Of course, trollop giffie paints that failure as caused by the ice/snowstorm. When evidence proves that it was a government mandated electric conversion to the control part, not the perfectly normal winter storm.

LdB
Reply to  griff
August 19, 2022 7:27 am

Well you have come down you were claiming the renewable grid was going to be better. So it’s a bit like those stranded fossil fuel assets then 🙂

Want a bet the UK doesn’t get thru winter without a blackout Griff?

Last edited 1 month ago by LdB
MarkW
Reply to  griff
August 19, 2022 8:01 am

Worse weather events have happened in the past, without the grids collapsing.

Fraizer
Reply to  griff
August 19, 2022 8:40 am

I’ll actually give Griff a win on this one. The base culprit is that producers are not incentivized/rewarded for reliability. When producers get paid on the basis of capacity don’t be surprised when reliability takes a back seat.

Yes, overbuilding wind has exacerbated this. Going all electric for some gas compressor stations has exacerbated this. But even in the 80’s during a cold snap the South Texas Nuclear plant had to shutdown because of cold weather problems on the condensate and cooling water side of the steam system. I can remember one of the newscaster joking “Couldn’t they have just wrapped the pipe with newspaper?”

It doesn't add up...
Reply to  griff
August 19, 2022 9:17 am

Did MISO or SWPP collapse?

Steve Case
August 18, 2022 11:31 pm

A [Ctrl-F] “Climate” and “Carbon” search of the WUWT article and the the two links comes up with about five hits.

After reading through all three, it’s apparent that this is a discussion of the elephant in the living room without ever defining the elephant.

There’s this:

    “There are hidden assumptions and views that she does not want
     to talk about: climate alarmism; forced energy transformation.”

Most people stop playing “Let’s Pretend” before their double digit birthdays.

Felix
August 19, 2022 12:09 am

“Market failure” — has any phrase been so mistreated? Entrepreneurs recognize market failures as opportunities to introduce new products, new methods, and other innovations.

If government bureaucrats and politicians had any brains, they look for static markets as opportunities for governments to interfere. If only one company has been making buggy whips for the last 100 years, well, it could be a corrupt monopoly, but more likely it’s such a dinky market that no one else wants in.

observa
Reply to  Felix
August 19, 2022 3:07 am

The mistake so many make is to believe free markets demands many suppliers when it’s nothing of the sort. The only prerequisite is there be free unfettered entry to any and every newcomer that spots any supernormal profits to be had. Hence our mythical buggy whip maker has no fear of a hostile takeover unless the climate changers get their way perhaps.

Richard Page
Reply to  Felix
August 19, 2022 5:58 am

The energy market is a curious beast, however. I don’t really know of many other markets that must have both a free market element and a centrally planned element to ensure sufficient capacity is available for supply. Other alternatives have been suggested but all seem to rely on a planned capacity to ensure consumers have the supply when and where they need it.

Felix
Reply to  Richard Page
August 19, 2022 6:45 am

No such thing. As Bastiat said, “Paris feeds itself”, meaning huge cities somehow manage to be fed and supplied without any central planning. Energy is laughably simple compared to food, clothing, toys, furniture, and a zillion other products of daily life which need no central planning.

James B.
Reply to  Richard Page
August 19, 2022 7:17 am

The planning occurs within the capitalist market participants. No government agency is needed.

MarkW
Reply to  Richard Page
August 19, 2022 8:04 am

They don’t need this centrally planned element, it’s forced on them by government.

Fraizer
Reply to  Richard Page
August 19, 2022 8:53 am

There needs to be some oversite to avoid unfair monopolistic practices concerning infrastructure that can’t be economically duplicated. For example, treating all pipeline customers equally – or allowing generators access to the distribution grid. And given that it takes years to engineer and construct extensions and upgrades to these facilities some sort of planning clearinghouse is required.

Unfortunately government agencies go well beyond then regulation that is required and promulgate corruption, graft and stupidity.

Tim Gorman
Reply to  Richard Page
August 19, 2022 11:35 am

How did electric and telephone companies do it for over 100 years => until government got involved? Mainly it was because regulators set return-on-investment levels while also mandating service levels with the threat of fines as incentive.

This did have some negative results, innovation was artificially limited. Not that it didn’t happen but its introduction into the networks didn’t happen as fast as it could have.

The minute this regulation method was abandoned in favor of mandating network makeup based on political agenda’s it all started down the primrose path to perdition.

D. J. Hawkins
Reply to  Felix
August 19, 2022 6:46 am

How, exactly, do “markets” fail? It seems like the intent of the phrase is to move the onus for economic disruption from human stupidity to some nebulous entity. You might as well blame a building collapse on “gravity failure”.

MarkW
Reply to  D. J. Hawkins
August 19, 2022 8:05 am

It seems to me that “failure” is defined as any output that a leftist doesn’t like.
Sort of like whenever a non-socialist wins an election, it’s proof that democracy is broken.

Last edited 1 month ago by MarkW
Felix
August 19, 2022 12:22 am

Here’s another clue about how markets work. One of the possible “market failures” is when someone realizes he can build a cheaper product. When he does so, the previous makers lose sales, and either shift to something else, or find their own ways to make that product cheaper.

In both cases, resources are freed up for other uses. This is “creative destruction”. The result is that markets always drive towards efficiency, freeing up resources for new products and new methods.

When governments subsidize or tax specific products or otherwise distort prices, markets lose the signals which direct that drive to efficiency. Market lose efficiency, building products that aren’t wanted as much as the products they used to build. The result is a net loss to the economy.

Don’t pretend you are “correcting” markets. You are distorting markets, slowing down the growth which has made people so much better off today, which raised billions of people out of poverty while your collectivist instincts were murdering 100 million. You are directly responsible for impoverishing future generations compared to how much better they’d be if you’d just butt out and mind your own business. You are selfish beyond compare.

Drake
Reply to  Felix
August 20, 2022 8:53 am

Nice way to say that CAGW unreliable “energy” supporters just HATE poor people.

TonyS
August 19, 2022 12:24 am

Griff will be along in a minute to tell us the Texas outage was a failure of fossil fuels when solar and wind failed to generate.

Davidf
Reply to  TonyS
August 19, 2022 1:22 am

Too late, and thats exactly what he said.

fretslider
August 19, 2022 2:00 am

Supply and demand

They say greater supplies of gas, which is a big part of UK electricity generation, won’t lower gas prices

They agree that an increase in housing supply will bring down prices and rents

Doublethink

Richard Page
Reply to  fretslider
August 19, 2022 6:20 am

Greater production of gas and increased housing will only bring down prices when supply is greater than demand. The problem has always been that the government, to save on spending, has tried to match demand, not exceed it, then gets confused and disillusioned when the expected drop in prices fails to materialise. Producers have always been wary of producing too much and risking a glut on the market – this is why we’re in this mess; there is enough gas to keep prices down to a reasonable level but we have removed a huge amount from the market, artificially creating a scarcity. Government intervention has created high gas prices and can maintain them at that level if it so chooses; a reversal of that government intervention would cause a sudden drop in price to more reasonable levels if it wanted to value the lives of its citizens above international relations with other countries.

MarkW
Reply to  Richard Page
August 19, 2022 8:11 am

Price affects demand. When supply is less than demand, prices go up which in a normal world causes two reactions, demand goes down and supply goes up. Until supply and demand are once again in balance. When supply is greater than demand, the opposite happens.

Any change in either supply or demand will impact prices.

Richard Page
Reply to  MarkW
August 19, 2022 8:35 am

I thought that was too obvious a statement to need repeating, frankly. The issues with both the housing and energy markets are not with the supply/demand curve but with government control and intervention which can skew that process markedly. These markets have been constrained artificially, creating a scarcity situation (and vastly inflated prices) where there needn’t have been one or needn’t have been so extreme.

It doesn't add up...
Reply to  Richard Page
August 19, 2022 11:33 am

In each case you must look properly at the structure of supply and demand. For gas in the UK, summer supply from the North Sea (now including Norway, but previously just the UK on its own) is sufficient to meet demand. No need for expensive LNG imports. The market is effectively isolated, and the price can be as low as the marginal cost of supply, as it was e.g. in 2020.

In winter, extra supply is needed, some of which comes from extra Norwegian pipeline supply (we used not to need it when production was higher and we were self sufficient), but supplemented by imports of LNG and previously by imports via Bacton from the Continent ex gas they had stored to meet winter peaks: I suspect we won’t see that this winter. We have seen a very considerable seasonality of gas prices this year because LNG has been expensive.

Cut the need for imports, and we have more months of cheaper self sufficiency. Moreover, we don’t then need to bid for cargoes from Australia that are very expensive because of the huge transport cost. The less we need to import the less far afield we have to go to meet that demand, lowering the cost of all imports. Otherwise imports can price at the cost of the most expensive marginal source. In all cases supply and demand are matched.

For housing the supply comes from sales by executors, emigrators, those moving to nursing homes, landlords selling up as well as newbuilds. Midchain transactions for movers wash out. Demand comes from first time buyers establishing a new home, immigrants and landlords expanding portfolios. Building is only a part of the supply picture. It turns out that building has almost no influence on prices. Builders build when they can sell at a profit, so the extent of price rises can increase supply. Net demand or supply from landlords depends on the prospects for capital gain and a variety of taxes.

But the reality is that house prices are largely determined by what the cost of a mortgage is. When interest rates remain low, house prices can grow rapidly. Now that we are seeing rising rates, expect prices to fall. People cannot bid any higher than the mortgage they can barely afford. With other costs rising rapidly, that will be an even smaller sum. Expect building to grind to a halt, and in due course for supply to increase through repossessions where people took out mortgages they can no longer afford at more normal interest rates.

rxc
Reply to  Richard Page
August 20, 2022 12:50 pm

Everyone wants to have extra marginal production capability available, but no one wants to pay for it.

observa
August 19, 2022 7:04 am

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.

More of the same in the UK as the usual suspects run around like headless chooks trying to justify their their bumbling incompetence by doubling down on it-
I worked for BP for 30 years – the energy sector has become incompetent and greedy (msn.com)
They originally wanted to tax fossil fuels to reduce consumption as well as strangling new supply and now Putin has given them exactly that. Now they want to lower prices and get hold of more gas. It’s like this you morons. You can control either the price or the quantity but never both at the same time. They’ll never get it on the taxpayer dime.

August 19, 2022 7:50 am

Blackouts don’t come as a surprise. Here in California I got a post card from Pacific Gas & Electricity asking me to register any critical life-support devices. We have smart meters. The message is clear – they EXPECT blackouts. To complete the picture, I can not buy a quiet Honda generator. Our beloved governor Gavin Newsom(D) banned them.

Last edited 1 month ago by Curious George
MarkW
August 19, 2022 7:57 am

Anytime someone chooses to do something that a liberal doesn’t like, it’s proof that the market doesn’t work, and only government intervention can save the world.

August 19, 2022 8:35 am

All of this discussion is about deregulated markets. This is from Wiki “This is known as locational marginal pricing (LMP) or nodal pricing and is used in some deregulated markets, most notably in the Midcontinent Independent System Operator (MISO), PJM InterconnectionERCOTNew York, and ISO New England markets in the United States,[2] New Zealand,[3] and in Singapore.[4]“.
The southern part of the US uses a different and for the customer cheaper system. Please lookup various KWH rates.

Peta of Newark
August 19, 2022 8:39 am

……and it never will be finished if the protagonists cannot even agree what Liberalism is

Why is everything now= Wrong

griff
Reply to  Peta of Newark
August 19, 2022 9:08 am

Isn’t Liberalism everything the US Republican party disapproves of?

Retired_Engineer_Jim
Reply to  griff
August 19, 2022 11:16 am

Griff, as I understand the US Republican Party, they are very much in favor of Classical liberalism, that is, Liberalism with a capital L, as propounded in the 19th Century, in England. Not this current “liberalism” with a lower-case l, that has morphed into Democrat-Socialism and Progressivism.

Gary Pearse
August 19, 2022 10:48 am

When a regulation generates superfluous discovery…

Ms Kiesling believes that regulations have caused discoveries in sci and tech. Fine, I can believe that “unintended consequences” of gov intervention can on occasion be positive. However, as we know from experience, the “consequences” can be devastating – the Texas example, and what is now looming as a Policy-Made economic and human disaster globally that is baked in. The unimaginable likely loss of life from famine and unheated homes in colder regions and the bitter widening impoverishment and declining of health, closing of industry and its jobs. This is crime against humanity is literally a Hell of a price to pay for a cheaper electric car that even fewer people can hope to drive.

“This is why I do what I do, every day, communicating these principles to regulators and other people in energy policy and academics.”

She’s hitched her wagon to a hurricane. She will be disowning this silliness in a year’s time. God save us from these kindly hubristic generators of apocalyptic “unintended consequences”. Yeah the weasley petroleum companies had better split from the Green Plague darkening the coming days.

August 19, 2022 11:33 am

“Cooperative Federalism” is a dynamic partnership, with the State Utility Commissioners, state utilities, Federal Energy Regulatory Commission, Nuclear Regulatory Commission, Department of Energy, state and regional transmission lines has lasted for almost 80 years with very positive impacts.

The instinct to disparage 80 years of successful electricity system and promote a federal environmental policy is understandable.

However, the federal agencies have not demonstrated an expertise for the technological, scientific, engineering, and economic development since the EPA was formed.

“This uniquely American reliance [Cooperative Federalism] on regulatory, state, and local climate policy has never quite worked [this is not true] —the country still lacks a comprehensive plan to decarbonize its electricity sector, for instance, which remains dirtier than Western Europe’s—and it has been too disjointed to help the United States transition away from fossil fuels.”

Ultimately, federal agencies appear to be
unable to keep politics out of electricity and grid regulations.

https://www.theatlantic.com/science/archive/2022/08/senate-climate-inflation-reduction-bill-passed/671073/

Smart Rock
August 19, 2022 11:38 am

Publicly owned (i.e. government-owned) electric utilities actually work quite well, as long as they are run by professionals who understand that their job is to provide reliable power at a reasonable cost. Pre-privatization/deregulation UK is one that I remember fondly, and I suspect that EdF may still be like that.

Once you have politically motivated goals imposed, either on a publicly owned utility, or a public-private hybrid mash-up, or a fully private system with public control, that’s when things go sideways.

And when future planning relies on technologies that might or might not be invented at indeterminate times in the future, it’s reasonable to expect that chaos will result. I submit that expecting anything other than chaos is utterly delusional.

When strategies that fail are succeeded by a doubling-down on the same failed strategies, a reasonable person might begin to suspect that chaos is not an accident, but the ultimate objective.

observa
Reply to  Smart Rock
August 19, 2022 9:54 pm

when future planning relies on technologies that might or might not be invented at indeterminate times in the future, it’s reasonable to expect that chaos will result. 

The control freaks always mean well-
Silent crisis of soaring excess deaths gripping Britain is only tip of the iceberg (msn.com)
but if you keep failing with unintended consequences with these minor matters then naturally you double down and think big with trying to control the global climate.

Lark
August 20, 2022 10:15 pm

I used to read her Knowledge Problem blog. I think she sees it as her job to make the Texas electricity market as open and efficient as possible. All that does is to make it take longer before the ever-growing parasite load from unreliable expensive energy weakens and breaks it. She hasn’t done much posting on her blog for years now; maybe she had an inkling of what was coming down the pike.

“More and better regulation” never ends up with good results when the regulators have a vested interest — whether financial (cronyism) or political (CAGW) — in bad results.

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