Robert Herbold’s Shared Delusions

July 19, 2011

In a recent essay in the Wall Street Journal Robert Herbold, former chief operating officer at Microsoft, uses a recent trip to China to offer his opinion on what ails the United States. First, Herbold gushes about the success of China’s “five-year plans:”

In every meeting we attended, with four different customers of our company as well as representatives from four different arms of the Chinese government, our hosts began their presentation with a brief discussion of China’s new five-year-plan. This is the 12th five-year plan and it was announced in March 2011.

Of course, central planning is not compatible with the decentralized decision-making that goes with free markets. Yet, Herbold writes, “The autocratic Chinese leadership gets things done fast (currently the autocrats seem to be highly effective).”

And so, how to dig the U.S. out of its hole? Among other things, you guessed it, Herbold advises “start approving some winning plans.”

Herbold seems to be completely ignorant as to how “winning plans” really evolve. Are they really accomplished through central-planning and autocratic leadership?  Would I be rude to wonder if Herbold is a student of economics or history? Could he be unaware of what centralized “winning plans” have wrought in North Korea?

If Herbold is as deluded as he appears, many Chinese are not. Just a few days before Herbold’s essay appeared, Liu Junning wrote in the Wall Street Journal, “Westerners who think that authoritarian rule is China’s natural state misunderstand its culture.” Junning adds that China’s prosperity is not due to a mixture of central planning and markets.  Instead, “the most significant transformations from the perspective of boosting prosperity,” according to Junning, “have involved loosening of control over the people, not some alchemy of power and Marxism.”

Why is the Wall Street Journal allocating space for Herbold to share his delusions? Presumably because, as Junning points out, many others share the belief that Chinese success is due to central planning. Further, Herbold has credibility because presumably he had a successful tenure at Microsoft. But did he really?

In his 2002 Harvard Business Review article “Inside Microsoft: Balancing Creativity and Discipline,” Herbold describes the cultural differences between Microsoft and his former employer Proctor and Gamble:

It was exhilarating to experience this degree of informality and delegation of responsibility to individuals throughout the organization, which clearly fostered both creativity and speedy decision making. But the experience was also disorienting. At Procter & Gamble, where there was a procedure for almost everything, board meetings were tightly scripted affairs.

Herbold then explains his job which he held from 1994-2001:

My job was to bring some discipline to Microsoft without undermining the very characteristics that had made it successful. I hoped to do this by creating central systems that would standardize certain business practices and give managers instant access to standardized data on each business and geographical unit.

Herbold goes on to claim that his central-planning reforms were responsible for rising profit margins at Microsoft during his tenure. Then he “charitably” adds, “I don’t take sole credit for this.”  Nowhere in the essay is there any hint that Microsoft’s success had anything to do with an unprecedented mania for technology stocks, strongly rising demand for personal computers, and most importantly, Microsoft’s game-changing smash hit, Windows 95, which Herbold had absolutely nothing to do with.

Yes, like most of us, Herbold has legendary status in his own mind. But Herbold has not matured to the point that he can recognize that his legendary status is delusional. In other words, Herbold is as deluded about Microsoft as he is about China and, importantly, he is deluded about the way to cure the American malaise.

No doubt in the coming years the snake oil that Herbold peddles will be increasingly welcomed by a segment of the American population—those who almost every day ask, “Why don’t they do something?”

Every day, many entrepreneurs are doing more than “something;” they are inventing the future Microsofts of the world. They don’t need Herbold to tell them the “winning plan.” They need those who are ignorant and delusional to stay out of their way. As Herbold’s delusions are increasingly shared by others in the United States, future Microsofts will find their homes in other parts of the world.


Nuclear Politicians

March 24, 2011

Yesterday my wife and I were out for lunch, and she was enthusiastically telling me about the fine work her marketing students are doing. Her students are examining many companies that have an entrepreneurial culture. In every case, these companies have found consumer needs that were going unfilled; and they built their company by satisfying those needs.

The conversation turned to business people who instead of satisfying needs turn to government for subsidies. My wife responded, “I don’t call those individuals businessmen, I call them politicians. If a business does not have to meet the test of the marketplace, those who run the business are not businessmen.”

I thought of nuclear power. One of the biggest misconceptions in contemporary America is that nuclear power is a safe, cost-efficient form of energy that would flourish in the free market if it were not hampered by environmentalists and overzealous government regulators. Nothing could be further from the truth. In the absence of government regulations and subsidies, the nuclear power industry would not exist at all.  My 1984 Cato Institute study explains why.

The Price-Anderson Act places a cap on damages that a nuclear power plant operator will incur should the plant have an accident. In other words, for over fifty years the government has introduced the same type of systemic risk into the nuclear power industry that we have seen in financial industry. The industry gets the rewards; the rest of us absorb the risks.

The single best judge of the safety of nuclear power plants is the insurance industry. The insurance industry has an incentive to properly assess risks as they determine appropriate premiums. If they overestimate the risk involved in an activity, their premiums will be too high; a competing company will take their underwriting business away. If they underestimate the risk, they make their shareholders vulnerable to huge losses. Thus, when determining the risk of nuclear power, insurers have an incentive to listen to all voices and all scientists on all sides of the issue.

The bottom line is that the insurance industry says that nuclear power is unsafe. This is demonstrated through their unwillingness to sell operators of nuclear power plants anything more than a small fraction of the insurance they would need in the event of a major accident. Absent adequate insurance, the financial markets would simply not accept the risk of holding the stocks or bonds of a nuclear power utility.  In its wisdom, the marketplace has judged nuclear power to be unsafe.

My Cato Institute study explains why the proponents of nuclear power, who understood this, sought the protection of the Price-Anderson act all the way back in the 1950s:

Consider the following statements from the 1956 and 1957 hearings on the then-proposed Price-Anderson amendment.

A vice president of Westinghouse, Charles Weaver, stated: “Obviously we cannot risk the financial stability of our company for a relatively small project no matter how important it is to the country’s reactor development effort, if could result in a major liability in relation to our assets.”

In further testimony Weaver indicated that even Westinghouse’s suppliers were unwilling to go ahead with the contract unless Westinghouse agreed to indemnify them against risks. General Electric also indicated during the hearings it was prepared to halt its work in the nuclear industry should a limitation on liability not be passed. Suppliers of reactor shields also indicated their unwillingness “to undertake contracts in this field without being relieved of uninsurable liability in some way.”

There are of course other reasons why nuclear power would not exist without the umbrella of government. We are seeing in Japan that the storage problem of spent fuel rods has never been properly addressed. The same spent fuel rod problem exists in the United States too, with, according to the Los Angles Times, “about 65,000 tons of the material spread from the East Coast to the West Coast and from the northern woods to Mexican-border states.”

General Electric designed the Fukushima Daiichi nuclear plant.  According to the New York Times “G.E. began making the Mark 1 boiling-water reactors in the 1960s, marketing them as cheaper and easier to build — in part because they used a comparatively smaller and less expensive containment structure.” Early on the risks were clear: “In 1972, Stephen H. Hanauer, then a safety official with the Atomic Energy Commission, recommended that the Mark 1 system be discontinued because it presented unacceptable safety risks.”

So who are the nuclear politicians? They include all those who believe they are smarter than the collective wisdom of the marketplace. In his State of the Union address in 2010, President Obama called for “building a new generation of safe, clean nuclear power plants in this country.” Despite their professed claims of support for the free market, Republican politicians join him in their own pro-nuclear madness. Presidential hopeful Newt Gingrich advocates, “We should also create a streamlined regulatory and tax regime for the creation of more nuclear power plants.” 2012 Front runner Mitt Romney wrote, “I confess that I don’t understand why some environmental activists still consider nuclear power such a bogeyman.” House Speaker John Boehner maintains, “Nuclear energy in the 21st Century is the safest, cleanest source of energy you can find.”

But, it is also important to list the nuclear politicians that may not be so obvious. For decades, the leadership at General Electric has acted on the belief that it is important for General Electric to earn profits by selling nuclear reactors. General Electric’s legendary CEO Jack Welch, lionized by many, led the way for approximately two decades. Fortune magazine named Welch “manager of the century” in 1999.

In a free market—pursuing and earning profits is necessary for the good of both the firm and its consumers. In a free market, earned profits are a signal that a firm is utilizing resources in a way that satisfies the most urgent needs of its customers. Thus in a free market, firms and consumers happily share the same interests.

Of course, markets are often not free. When a firm or an industry seeks privileges and subsidies from government, they are operating outside of a free market—their interests and the interests of the consumers are divorced. Instead of having an entrepreneurial culture that stands the market test by serving its customers, the firm thrives by having a political culture where success is measured by the latest government subsidy.

One way to put an end to this destructive behavior is for the public to see that true business leaders are entrepreneurial heroes; they are not mere politicians. Why lionize someone like Jack Welch? Isn’t it better to shun or ignore those who choose to harm rather than to serve?

Perhaps you think those are harsh words. Jack Welch and other nuclear politicians may never have dreamt that in a first-world capitalist society, like Japan, a nuclear accident would be so catastrophic.  Perhaps so, but they consciously chose to override the wisdom of the marketplace by their support of government interventions like the Price-Anderson Act. They chose to earn profits by using the coercive power of government against consumers. Ask the people in Japan about the consequences of their conduct.

Let a Billion Blooms Bloom

June 10, 2010

Bloom Energy builds energy servers. An energy server runs on clean fuels cells. An energy server provides “100kW of power, enough to meet the baseload needs of 100 average homes or a small office building… day and night, in roughly the footprint of a standard parking space.”

Science fiction? Not at all. For 8 years, Bloom Energy has been in development mode; they have just started to deploy their servers to companies such as  Google, Walmart, Staples, and FedEx.  Each server currently costs $750,000; the goal is to slash the cost to $3000 within a decade.

A price of $3000 for a locally distributed, clean energy source would obviously revolutionize power generation. Will Bloom Energy be successful? We do not know. They have been successful in generating publicity, and the early results for their product are promising. Yet, for every Bloom Energy we hear about, a 1000 more Blooms are still in stealth (development) mode. Most will never be successful, but the few who are will transform world. And no one can predict which Blooms will succeed.

In the months to come, politicians, the economically illiterate, and those who support a larger role for government will chant louder and louder:  We need a new energy policy. The government owes it to the people to do something about the coming energy crisis. Someone needs to do something to secure our energy future.

The federal government was designed by the framers of the Constitution to be slow-moving. Legislation was to be hard—not easy—to pass. The Senate was designed to be the place where bills without broad support would die.

Why would the Founders design our system of government in this way? They understood that a free society innovates and creates wealth —politicians and planners are unable to do that. Elected officials were to be stewards of the founding principles of the country and not central planners meddling in every aspect of our lives. The Constitution was designed to bind the government to very limited and enumerated powers.  Thomas Jefferson wrote clearly, “In questions of power, then, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution.”

There is seemingly no end to the mischief that politicians propose. And, about the effects of what they propose, they are seemingly ignorant. In his book The Fatal Conceit, Nobel laureate in economics Friedrich Hayek observed, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Having written The Road to Serfdom, his seminal cautionary book, Hayek would not be shocked by how vivid the imaginations of American politicians have become as they “design” our future.

Entrepreneurs are essential to secure our future freedom. They help lower the costs and improve the quality for essential products. They help to decentralize power by overthrowing incumbents and channeling decision-making away from government. Congress does the exact opposite—they centralize decision-making and raise costs by subsidizing that which cannot exist in a free market.

The Blooms of the world need capital. Unfortunately, we are in a destructive spiral in many areas of the economy—more government involvement and more subsidization which leads to more problems and triggers more demands that government “solve” the problems.

George Gilder gives us the antidote: “The first great rule of enterprise is do not solve problems, pursue opportunities. Problems are infinite and they multiply continuously; when you solve them, you are back where you began. Governments specialize in creating problems that they then generously solve for the people, creating yet more serious and more systemic problems in the process.”

Every day, tens of thousands of people are working tirelessly to secure our energy future. Like Bloom Energy, they’re doing it in stealth mode—we won’t hear about them until they begin to be successful. Politicians will tell us it’s too risky to bet on Blooms. Should we trust the “wisdom” of the politicians or of the Blooms?

The Failed Assumption

June 3, 2010

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.

A Prosperous Future for Al Gore, A Poorer Future for America

November 20, 2009

Suppose there was a man who lectured and wrote about the catastrophic consequences of climatic change to adoring audiences worldwide. Yet, suppose this man was so ignorant about basic facts of science that recently, when on the Conan O’Brien national television show, he promoted geothermal energy stating the inner core temperature of the earth was several million degrees and that there are drill bits that could withstand that heat. (If the earth was that hot at its center it would be a star. The actual core temperature is very speculative, but is estimated to be around 3000°C  to 7000°C. )

Further, suppose this man, who wants to control the lives of others, is an avid meat eater; even though if he switched to vegetarianism, he could shrink his carbon footprint by up to 1.5 tons of carbon dioxide a year. Further, suppose he has become so wealthy from his alarmist message that he owns a large home, and his home uses more energy in one month than the average household uses in a single year. Further, suppose he has convinced the government to subsidize a company in which he has invested, because the company makes an electric car that will sell for $89,000. Yes, according to the Wall Street Journal “A tiny car company backed by [this man] has just gotten a $529 million U.S. government loan to help build a hybrid sports car in Finland that will sell for about $89,000.” This man according to the London Telegraph could become the “world’s first carbon billionaire” after investing heavily in green companies receiving government subsidies.

You already know from the title of my post that I’m talking about Al Gore. You might wonder why anybody listens to him? A charitable interpretation would be that, even though he is a flawed human being like us all, people listen to him because they value his message about controlling the effects of man-made global warming. No doubt that is true of at least some of his followers. In my view, many are not cheering his message of “climate control;” they are cheering his message of “control.”

It is a dirty secret of academia; professors who cannot teach well but who do mediocre research that very few will ever read, can earn a very nice salary. On an unsubsidized free market, the value of their services would be much less than it is today. There would be no government grants and contracts for their research. Consumers (students and their parents) would be less tolerant of shoddy college courses; and if these professors couldn’t teach, they might find themselves without a job at all. Some people value and cheer any message of control—because it is in their economic self-interest.

Of course, professors receiving government grants and contracts are not the only ones who value any message of control. Mediocre artists who depend upon government grants for their livelihood value control. Government workers of all types, as well as union workers, who depend upon government privilege cheer for more controls. And now we have a growing class of business executives who instead of selling products valued by the market turn to the government for subsidies and bailouts. They too are in the corner cheering for Al Gore, because it means more handouts for them.

None of these people read my blog; and even if they did, they are unlikely to be convinced by the arguments I make. They have weaved a tangled nest of lies in their minds which allows them to justify seeking for wealth that other human beings have produced and that they have not earned. Barring some epiphany in which they clearly see the unrevealed values they live by, they will never be convinced to change their behavior.

But there’s another group of people who support controls—not because they’re trying to live off their fellow human beings—but because they are fearful of the world without controls. They believe for instance that we are running out of fossil fuels and that they will be cold at night if government does not subsidize new green fuels. Al Gore feeds off this energy of fear.

In his book The Origin of Wealth, Eric Beinhocker estimated that the complexity of the economy in New York City alone generates tens of billions of available products to New Yorkers. To many this is evidence of waste that should be controlled by government. After all someone might say, “Why do we need 500 kinds of breakfast cereals? Why do we need to be able to choose from hundreds of automobile models?” For many caring and economically illiterate individuals, it is natural to believe it would be better if smart people, like Al Gore, directed us to develop the “optimal” car model that was both safe and fuel efficient.

Beinhocker estimates, “Over 97 percent of humanity’s wealth was created just the last 0.01 percent of our history.” Complexity goes hand-in-hand with wealth creation—it is no spurious correlation. What seems to be a mess of competing products is what leads to the discovery of new, innovative solutions. Currently, there are literally tens of thousands of entrepreneurs working in the green energy field. Like Al Gore, some of those are not real entrepreneurs; they are simply political operatives getting wealthy off their political connections. They prevent real discoveries from taking place. Every dollar directed to them, is a dollar that the market cannot allocate towards viable solutions. In contrast, real entrepreneurs only make money when they serve the most urgent needs of the consuming public.

Al Gore may well be right in that geothermal energy may be an important part of our energy future. But, there are many different ways to harness geothermal energy, many yet to be discovered; just as there are many different ways to harness solar energy, many yet to be discovered. More importantly, just as no one ever heard of the internet company Amazon in 1990, there are forms of energy that we have not yet heard of that will change our lives in lasting and meaningful ways.

The more the likes of Al Gore gets to control, the poorer we and children and our grandchildren will become. Instead of being directed to the most promising new sources of energy—as it would be on a market system of profit and loss—energy resources will be directed to wasteful products, like Al Gore’s hybrid sports car.

Al Gore, like all of us, has a narrow mind filled with ignorance. The discipline of the marketplace reduces our ignorance and helps to direct our energy and our capital in the service of others. Those who do not understand this and those who feel a sense of entitlement that others should serve them want more controls. They want others to serve them more than they want to serve others. Of course, this is the age-old human story—human beings trying to live off the labor of others. To the extent that we collectively forget that this path leads to economic ruin, is the extent to which Al Gore’s future brightens while ours dims.

Android Changes Everything

September 17, 2008

Do you remember life before Amazon? Do you remember life before Google? Or even, life before personal computers? Every so often a new product creates a sea change so big that life before the product seems like just a vague memory of a previous existence in a foreign land.

And now there is Android. Android is an operating system for mobile phones that is being developed by Google. I would bet on Android to crush the iPhone and other competitors.

Now, this is a rather bold prediction coming from someone who hardly uses his mobile phone, has never seen an iPhone, and knows nothing of Android other than what he has read in news stories. True confession—I have never sent a text message. So, what the heck can I know about the future of mobile phones?

In contrast to my prediction, many technology experts, such as Matt Asay, believe Android is no match for Apple’s expertise. Asay explains, “In part this is because Google may lack the aesthetic touch that Apple has in spades, just as Microsoft does… Android is still no iPhone killer.”

Asay is wrong. Aesthetics are critical when products are close competitors in price and quality, but no amount of design aesthetics would currently sell many Changfengs (a Chinese car) over Hondas in the United States. The why is clear—a Changfeng would not be in the same quality league as a Honda.

I understand that to Apple fans, such as Asay, my comparison is ridiculous. The iPhone to them is the current pinnacle of mobile phone development. However, what Asay may not understand is the enormous flexibility and innovative capacity of open source operating systems. Unlike the iPhone and every other competitor, Android is an open source operating system.

True, there are smart developers at Apple who have apparently made a pretty good product in the iPhone. But a handful of smart developers can’t compete against many smart developers, and pretty good can’t compete against great. Planned development can’t compete against the decentralized forces of spontaneous development. Self-organizing systems are more powerful than a thousand Steve Jobs; and they rarely behave as experts, such as Asay, predict.

Google is not going at this alone. Scott Taves writes that Google has put together a “collaborative group including Google and more than 30 semiconductor and software companies, mobile operators and handset manufacturers.”

But it doesn’t stop there. Most importantly, Google is encouraging independent teams not affiliated with any company to develop applications for Android. To kick off interest among developers, Google is awarding $10 million dollars in prize money to developers with the best applications. Developers, according to Google’s Eric Chu, “will be able to make their content available on an open service hosted by Google that features a feedback and rating system similar to YouTube…We feel that developers should have an open and unobstructed environment to make their content available.”

Even before the first Android phone has even been released, there are applications that will interest even a “not much use for a cell phone other than to call and say I’m stuck in traffic” person like me.

How about these features? You are out shopping and about to buy something on impulse. But you wonder, is it a good price? You scan the barcode of the item into an Android phone; and the phone gives you the best price online, as well as the prices at local merchants nearby you.

Or, consider this. There is an emergency; immediately, you need to physically locate a family member. Android will be able to do that too.

Here is the bottom line—free-markets always beat centrally planned economies; and similarly, Android will beat Apple and any other closed operating system. Due to compounding inherent in the market’s discovery process, five years from now, the Android powered mobile phone will be a gadget that we could hardly recognize today. In ways we can’t anticipate today, the long-promised era of convergence among all of our various electronic gadgets with different operating systems will be at hand. If Google is successful with Android, imagine next a Google computer with the open source operating system Linux. Imagine your phone seamlessly integrating with your computer. Imagine no longer having to gnash your teeth over whatever future proprietary operating system Microsoft will be trying to sell. If I was Microsoft, I would be very scared. But then again, those in Microsoft who urged a movement away from proprietary software have long ago been forced out of the company.

A world without Windows is hard to imagine, but then again, so was a world with personal computers. Smart people make mistakes, because they can’t anticipate the power of markets to change the status quo. In 1977, when IBM and Digital Equipment Corporation (DEC) dominated the computer industry, DEC’s CEO, Ken Olsen, said, “There is no reason for any individual to have a personal computer in his home.”

Of course, there turned out to be thousands of reasons; but those reasons needed to be discovered by the market process. Android will unleash a new process of discovery, and the results are likely to be as revolutionary as the personal computer.

Parts of this piece may read like a gushing press release for Google. I assure you that I am not on Google’s payroll. With unrelenting bad news unfolding in the economy and the iron fist of government increasingly choking off innovation, it is good to know that American entrepreneurs are still busy changing the world and making all of our lives better in the process.

This is the free-market at its best. Without any direction from politicians, Google is about to revolutionize the world—again.

Consumers Vote No Confidence in U.S. Energy Policies

May 28, 2008

The Conference Board said yesterday that its Consumer Confidence Index fell to its lowest level in 16 years. No doubt, sharply rising energy prices have contributed to this fall.

I have often told my classes that rising energy prices are not something I fear, and then I proceed to give a big exception: “If government becomes heavily involved in the market for energy, I will add rising energy prices to my list of fears.” Allow me to explain.

Before the Industrial Revolution, life for most was lived at a bare subsistence level. Most grew their own food and made their own clothing. Few lived in cities, most were malnourished, and energy was very expensive.

Before 1700, charcoal was the dominant fuel used in England. By the 18th Century, England had used up most of its forests to make charcoal. So how could the Industrial Revolution have begun in England without a viable fuel source? Did an English king or parliament promise to solve the problem? Did they punish speculators? Did they subsidize some alternative forms of energy? None of this occurred, but alternative fuels began to arise as ironmakers began to use cheaper coke (a form of coal) instead of charcoal.

Until 1850, in some homes, whale oil was the preferred form of fuel for indoor illumination because it burned with less smoke and odor. By contemporary standards, whale oil was enormously expensive; the average home could not afford it. For many Americans at that time, indoor activities basically ended at sunset.

In 1857, a clean burning kerosene lamp was introduced, and the use of relatively scarce whale oil ended very rapidly. By the end of the 1800s, refined petroleum was selling for literally pennies a gallon—there had been an astonishing reduction of almost 97% in the price of refined petroleum.

Since falling energy prices in real terms has been the norm for centuries, it is instructive to ask: What has gone wrong in the past few years? Many explanations are offered: The “peak oil” theorists say we are running out of fossil fuels. Others blame growing demand from the emerging economies of China and India. Others blame large oil companies. Still others blame speculators. All of these explanations do not reveal the truth.

First, consider that we were running out of charcoal; then we were running out of whale oil; but yet, alternatives—developed by entrepreneurs on the free-market—pushed energy prices down at dramatic rates. This dramatic fall in the cost of energy has played a large role in the growth of the middle class.

Next, consider the dramatic rise in energy usage caused by the Industrial Revolution and by the growth of the United States. During this same period, energy prices fell dramatically. Rising demand coaxed out more supply and more efficient ways to find and use energy. When we review history, we see that neo-Malthusians, such as Paul Ehrlich and the Club of Rome, have been claiming for decades that we are running out of resources. The truth is that the emergence of the Chinese and Indian economies is a happy occurrence for the billions who have been impoverished for so long.

Then, consider large oil companies. I will not defend their honor, but I will point out that the assertion that they have formed a nefarious cartel, impervious to market forces, is about as believable as saying that Ford, Chrysler, and GM could band together and increase prices in order to solve their woes.

Finally, consider speculators. A speculator is a friend of the consumer. Speculators can only make money if they buy low and sell high. In other words, they will make money only if they transfer supply from times of relative plenty to times of relative scarcity. If they are wrong, they must sell when prices are lower; thus speculators have every incentive to avoid such blunders.

If mainstream explanations for rising energy prices hold little water, what instead can we look towards? First, the Fed by destroying the value of the dollar must take a large share of the responsibility. As importantly, we can look towards ethanol subsidies that have drained away billions of dollars from the market—dollars that could have been invested in the discovery of truly viable alternative fuels.

Obama and Clinton are promising more of the same. Obama ‘s official web site promises this:

Obama will invest $150 billion over 10 years to advance the next generation of biofuels and fuel infrastructure, accelerate the commercialization of plug-in hybrids, promote development of commercial-scale renewable energy, invest in low-emissions coal plants, and begin the transition to a new digital electricity grid. A principal focus of this fund will be devoted to ensuring that technologies that are developed in the U.S. are rapidly commercialized in the U.S. and deployed around the globe.

Did you feel angry or did you laugh when you read “Obama will invest…”? No, Obama will not contribute any of his own money; he will drain away $150 billion from consumers and entrepreneurs who can fund viable alternative energy and, in the process, throw away on follies such as ethanol not his own but other people’s money.

As for Clinton, her official campaign site promises:

Hillary would transform our economy from carbon-based to clean and energy efficient, jumpstarting research and development through a $50 billion Strategic Energy Fund and doubling investment in basic energy research.

If you believe that Hillary and her band of experts are smarter than thousands of entrepreneurs who are committing their own resources toward discovering alternative energy sources, then you should vote for her.

As for McCain, he has been all over the place on ethanol. His web site promises: “John McCain Will End Policies That Contribute To Higher Transportation And Food Costs. Ethanol subsidies, tariff barriers and sugar quotas drive up food prices and hurt Americans.”

Clearly, of the three, McCain currently has the most promising position on energy; but he may flip-flop yet again. When in the debates he will have to talk in 30 second bites, McCain is likely to be hammered by Obama alleging that he is not doing enough to help the American people.

And what of the American people? It is a truism that we will get the government we deserve. If we collectively have little understanding of history and economics, we will fall for the seductive call for yet more government intervention. If we are seduced, the current level of consumer confidence will seem in hindsight to have been high.

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