The Failed Assumption

Many people have only a vague awareness of how expensive energy was until relatively recently in history. In 19th century America, most Americans consumed very little artificial light, and that included candles. In his brilliant new book The Rational Optimist, Matt Ridley reminds us of just how far energy prices have fallen. In the 1800s, the cost of one tallow candle burning for one hour was the average laborer’s income from six hours of work. If you went back as far as Babylonia where artificial light came from sesame oil lamps, one hour of light cost 50 hours of the average laborer’s work. Today one hour of lighting costs the average worker about one-half second of work. It is easy to see why until kerosene lamps became commonplace, most homes had no light in the evening other than what came from the hearth fire.

Question: Which United States presidents were most responsible for this reduction in the cost of energy? Of course, the answer is none of them. They played no part. Indeed most would not have dreamt of playing a part in directing entrepreneurs in their quest to discover ever cheaper forms of energy. Yet today, people believe this fantastic fairy tale: Without the intervention of government, our destiny is for energy to become ever more expensive and scarce. Why do people believe this when the opposite is the case?

This past Memorial Day weekend, President Obama said of the continuing flow of oil into the Gulf of Mexico that it is “as enraging as it is heartbreaking.” In truth, President Obama is describing his own monumental hubris. His hubris is a visible manifestation of our societal belief that capricious decision-making by our elected officials should take the place of the entrepreneurial discovery process.

Many pundits have predicted that the Gulf of Mexico disaster may be a fatal blow to President Obama’s popularity. They point to his detached attitude and his inaction. Indeed, I have heard strong supporters of Obama, such as Chris Matthews, express anger and frustration at Obama’s behavior.

But the outcome of this political process is unlikely to delight free-market advocates. First, contrary to the facts explained in these two blog posts (here and here), free-market capitalism will be blamed for the Gulf of Mexico catastrophe. Next, the public will embrace politically directed solutions; how could it be otherwise when they mistakenly assume that without central planning the entrepreneurial discovery process cannot sort out which new forms of energy should emerge. Finally, corporations that produce forms of energy that cannot survive without subsidy—such as nuclear—will be lining up at the congressional trough. The likely outcome is more central planning and the redistribution of precious energy funds away from entrepreneurs and into the hands of those touting energy sources that can only be successful politically.

In many countries in Africa including Uganda, the cheapest and most common form of fuel is still charcoal. Why? Gas and electricity cost more. Charcoal is widely available, and the production of charcoal is very low-tech. Charcoal has been used as a fuel for thousands of years. The result is deforestation in African countries such as Uganda and Kenya; the same phenomenon occurred in 17th century England. In contemporary Kenya the result of the deforestation has been called a heartbreaking ecological catastrophe; deforestation has created drought conditions and has dramatically reduced farming yields.

Imagine you are back in 1629 England. Stuart King Charles I has just dissolved Parliament and is determined to govern without it. His power to deal with the charcoal problem and the deforestation of England is seemingly absolute. Should he set up a Royal commission made up of England’s best scientific minds to look into the problem?  Suppose this commission was free of any political influence.

In 1629, the solution to England’s energy problems—high prices and diminishing supplies—was not known. And very importantly, it could not be known. Future solutions, fueled by a rising standard of living and entrepreneurial discovery, had to be discovered in the course of the market process.

My children are finishing their freshman year in high school. They are beginning to have ideas about future careers. Such ideas are in their infancy. They will only come to fruition in the course of a process that allows them to introduce their strengths and their dreams to the world. They will discover new and unexpected things about themselves, and if they are open to the feedback provided by the world and by their souls, they will be able to use their talents in ways that are fulfilling and rewarding. Would it be better for them to take a career test and be told what to study based upon the test results? Would it be better if they were directed into an occupation by their parents or a central authority?

If the entrepreneurial discovery process in energy is allowed to proceed, in less than a century we will no doubt have environmentally safer and cheaper sources of energy. No one, and I must repeat no one, knows for sure what those sources of energy will be. Trying to predict what those energy sources will be is like asking someone in Stuart England to predict the widespread use of kerosene in the 19th century. And even if a 17th century sage could have predicted kerosene, he could not have predicted the process by which it could be produced at a price making it available to the average household. There was no way then, and there is no way now, to bypass the entrepreneurial discovery process.

The alternative to the entrepreneurial discovery process is more central planning. The results of more central planning are likely to be rising energy prices, more use of environmentally destructive energy sources, and as a consequence, a falling standard of living.  The way out of this downward spiral is for the public to question its failed assumption.

Belief in the efficacy of central planning is a persistent belief. One reason for its persistence is clear—there is the appearance that something is being done by planners and politicians. The entrepreneurial discovery process, on the other hand, is largely invisible until the results are apparent. Until the results appear—for instance, a new form of energy is on the market—it may seem to the general public that nothing is happening to solve the problem. Faith in the entrepreneurial discovery process begins with an understanding of how discovery works and why it alone can solve our energy problems. Faith in the entrepreneurial discovery process is faith in something real; faith in the efficacy of central planning to solve our energy problem is literally faith in nothing.

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