How Not to Cure an Energy Crisis; G. North

How Not to Cure an EnergyCrisis GARY NORTH PRESIDENTNIXON 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 gas oline milea.ge. Since the mid-1950's, when the construction of Federal highway projects was seen as the eighth wonder of the world, we ha.ve 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 "free ways" were built. We have the best possible highDr. North, economist, lecturer, author, cur rently is an associate of Chalcedon, an edu cational organization dedicated to Christian re search and writing. His latest book is An In troduction to Christian Economics, Craig Press, 1973.

"rays - safe at 70 -miles per hour on some stretches, safe at 65 vir bllally everywhere. Now we are told that we should only drive 50. Of course, during the rush hours "rhen most of the driving is done, no one really worries about driv ing 50; if you're lucky, you'll aver age 35. Freeways, being "free" to any motorist at all hours of the day, provide little economic in centive 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 nloney 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 l'f. Cole has pointed out in a letter to Sen. Jennings Randolph (N0 vember 8, 1973 release), most of our driving is done under 50 any \vay - around town or on country roads. United States Department of Transportation data indicate that only about 42 per cent of the driving is done at speeds of over 67 68 THE FREEMAN Februar~ 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 con sumption. Terrific!

Effect of New Speed Limits on the Trucking Industry Then, of course, there is the effec~ the new speed limits will have on the trucking industry. Shipments will be delayed, since ttuckers will not be able to drive at the higher speeds. This is not a pleasant prospect, given the po tential 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 ser vices. Government regulations are like stones tossed into pools of water; they create ripple effects that not even the most sophisti cated computer predictions can foresee. Government agencies toss in great handfuls daily. So we return to the first half 0: the proposed crisis cure: restric tions, voluntarily imposed, on en ergy use. We turn off all neOl signs, for example, as they havl done in Oregon cities. A spokes man for the Outdoor AdvertisinJ Association of America inform us that this will save about 1 pe cent of all electricity used in th country. With all gasoline sign off in the evening, it's a gooe thing that our faithful motoris is holding his speed to a fuel conserving 50; he's going to neel those extra miles for his searcl for an open gas station. Most won' be open anyway,' I presume, sinc, the gasoline shortage encourage them to shut down after 6 p.m.

but without brightly lighted sign~ motorists will be hard-pressed t tell the open from the closed sta tions. This will, no doubt, encour age people to do their driving be fore evening, thus clogging th "freeways" even more during th peak hours. Washington's response? Anothe handful of stones. What about voluntary restrain on heating homes and businesses Perhaps it may be healthier. I may encourage higher output. Bu why should a firm or a housewif keep the temperature down? B; their own demonstrated prefer ence, people like warmer climati conditions in the winter, cooler il 1974 HOW NOT TO CURE AN ENERGY CRISIS 69 the summer. Each man will always have that nagging doubt: I'm liv ing 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 automo bile cause? An infinitesimal quan tity, obviously. Literally unmea surable by macro-economic tools.

Each family or each driver or each business concludes that his pres ence 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, prod uce 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 in centive for you to take another newspaper. The newspaper man agers 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 unan nounced day off from work once in a while. This is a bad policy nlorally - a person is not fulfilling the terms of his contract. But if the practice continues, the com pany will impose counterpres sures. The public's position is pro tected by internal company poli cies. Service is more constant, rnore 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 fail ures. And they have a reliable indi cator to remind them of their task: the profit and loss statement. It vvorks so long as there is the right to exchange property (including labor) on a market of freely changing prices. These are outright micro fail ures. But what about micro de cisions that should not be, in and of themselves, detrimental? Sup pose pizza eaters who have for years ordered their pizzas with rnushrooms should decide to order them with pepperoni. All of a sud den, pizza shops have to order rnore pepperonis and fewer mush rooms. As always, customers set prices. Their increased demand for 70 THE FREEMAN Februarl pepperonis increases the price of the available supplies of pepper onis, for the customers are bidding (as always) against each other. Meanwhile, the price of mush rooms tends to drop, since fewer customers want to consume the available supplies of mushrooms.

In a long chain of economic reac tions, 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 pepper onis more efficiently - more inex pensively - in order to reap prof its. Up goes the supply of pepper onis, 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 pep peroni 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 consider ation in receiving the now shor1 supplies - short in relation to pub lic demand at the artificially 10'"

price of pepperoni. Soon the Italo· American Society will be picketin~ on the Capitol steps, the Pizza anc Staw Hat Amalgamated Brother· hood will be petitioning Earl Butz and the FDA will send out pre· liminary warnings against debase( pepperoni quality to all the pep· peroni producers of the nation We will then have a full-blowr crisis. The public will be asked tc order at least one mushroom pizz~ for every three pepperonis, wit! rationing of pepperoni pizzal threatened if "voluntary" re straints - one's patriotic duty ir the war against spiraling pepper oni prices - should fail. Then the Cost of Living Council will add ~ new department: the Pepperon Control Division. A chain of un derground black market pepperon pizza parlors will spring up. Al over America, certain unpatriotic citizens will be whispering int< door-slits, "Luigi sent me." A sim, pIe shift in taste at the individua level, when coupled with price con troIs, can produce a national macrc catastrophe. (In the midst of thi: crisis, no one even notices tha Congress has passed, and the Pres ident has signed, an omnibus bil onto which - in section 84b - ~ $17,234,187.57 appropriation fo: 1974 HOW NOT TO CURE AN ENERGY CRISIS 71 the floundering mushroom indus try has been attached.) Therefore, we can adopt a sim ple (though not infallible) princi pIe: where micro decisions produce macro crises on a regular basis, someone - probably the civil gov ernment's officials - is probably in terfering with the right to ex change 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 some thing of the accuracy of statistical reporting - thus producing a cris is? 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 gov ernment agencies to stop construc tion. Because ecologists stopped drilling for new oil in places like the Santa Barbara channel-again, by state interference. (This eco logical activity was necessaTy, at least in part, because laws of property are not enforced by the courts and legislatures, thereby failing to make oil firms complete ly responsible financially for their own errors of judgment in not protecting the environment against oil spills.) Because interference in capital markets by governments rnakes it more difficult for newer, smaller, innovative firms to gain needed capital to develop alterna tive power sources. 1 Because gov ernment bureaucrats interfere ,;vith licensing of alternative power sources (yes, even non-polluting 8ystems) 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 Wash ington would prefer? Well, why not? The governments have sub sidized cheap power for years. ~rhey have not permitted public utilities - themselves the monopo listic creations of governments to raise prices on their various products. So the public has ac cepted as valid economically the one indicator they have to measure the value of the energy source, that is, the cost-per-unit con sumed. The government has de liberately subsidized the public by keeping prices lower than the com panies have insisted was neces sary. 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 1 James Mofsky, "Blue Sky Restric tions on New Business Promotions," Duke Law Review (July, 1969) 72 THE FREEMAN Februa,rJ:, repairmen on their staffs. They have found it difficult to raise cap ital on the free market, for their bonds are rated low (and there fore the interest they must offer to pay must be higher) because some local public utilities commis sions have had their eyes on the ballot box instead of the scarcity of capital.

Shielded from Competition Then, of course, there is the in efficiency 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 corne about because newer, more cre ative, innovative firms have been kept out of monopolistic, govern ment-created closed markets? The public supposedly has been protected by these various power monopolies. Now the government finds that the public must co operate in order to make the jerry built government monopolies work more or less successfully. But the public is not given an economic incentive to cooperate. Are elec tricity rates boosted sufficiently to cut down the consumption of electricity? No, indeed; that might bE politically dangerous! So we go tc voluntary controls in the name oj the national emergency. They arE too much like the "voluntary priCE guidelines" that were scrapped or August 15, 1971. We cooperate voluntarily, or else ... rationing Nice, inefficient, unpleasant, jerry built, creaking, black-market cre· ating, bureaucratic power-enhanc· ing rationing. All in the name oj consumer protection.

There is another consequence of "voluntary" . controls to consider, Citizens are asked to cut back O!J their consumption of power. They are asked to do this in the name oj patriotism in order to deal with 2 national emergency. Before thi~ 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 wha1 his neighbor might think about thE "morality" of a horne heated to 7f. degrees. With free pricing, the ex· penses associated with such phys· ical comfort would have to be bornE by the user. But today men an warned that those who keep theiJ homes warmed are unpatriotic even immoral. They are encouragec to regard their neighbors with sus· picion. They are made to feel guil· ty. Exceedingly ugly circumstance~ may arise - indeed, are now aris· ing - when someone in a neighbor· hood wants to put up the tradi1974 HOW NOT TO CURE AN ENERGY CRISIS 73 tional Christmas lights or flood lights for home protection.

The macro-crisis has been na tionalized officially; micro-de cisions 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 opin ion, 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 util ity analysis. Yet the daily press reports an endless stream of sta te ments from public officials that is creating a vigilante mentality among the public. The colder the temperature, the hotter the un leashed emotions. So now, instead of producers competing in order to give the cus tomers 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 w'hat Soviet Russia has developed: the only competition is that be tween government bureaucratic agencies. The consumer simply hopes and prays that the system 1Nill operate after the political dust has cleared, or at least has settled into another province's back yard. The answer to the macro-eco nomic crises lies in the reestab lishment 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 micro-economic rationing effi eiently, and we will not need to be burdened with the ghastly ineffi eiency of statewide or Federal economic planning. Micro-economic decision-making is the primary device for keeping crises on a lmicro level. At least, under micro economic crises, someone gives me a direct incentive for sitting in 138-degree semi-comfort: I don't 'wind up with a monthly bill that prod uces 72-degree financial diseornfort. ~ RALPH BRADFORD CHARLES THE FIRST of England was in many respects a bad king and an uninspiring man. Certainly he can not be held up as a shining example, either of ethical under standing or princely conduct.