Kasinomics

Unrealistic hope among libertarians to save the climate by waiting for the market

Why Karl Rove should call himself a libertarian is a mystery, given that the Bush Administration, which he served as a central adviser to, has greatly expanded, not reduced, the goverment impact on American citizens. In Art Diamonds Blog, another example is given for Mr. Rove’s hypocricy: Rove criticizes McCain for not having understood Schumpeter.

Schumpeter is, besides Smith and Mises, probably the most quoted economist among libertarians, even though few people have bothered to read his works. Libertarians, and Rove as well, often quote the notion of the destructive and innovative power of capitalism, bringing to the front new solutions and technologies. Schumpeter argues that innovation often comes from outside an established industry - and that should give readers a clue why Roves defense of the American Energy Policy is so mistaken.

Rove argues, blatantly with Schumpeters words, that the American Energy Companies should not be held responsible for investing in alternative energies because a) they know better than government b) they already invest in alternative energies c) the market produces the best energy mix incorporating both costs and possible profits.

Surely Schumpeter would have easily dismissed such a short-sighted argument. In modern terms, there are number of reasons why we would not necessarily expect the market to work perfectly. Oligopols reduce competition and allow excessive rent-seeking - something quite visible in most energy markets in the world. Regulatory capture prohibits internalizing potential risks and external costs into the decision-making process. Path dependence makes it difficult to switch a network technology from one alternative to the other.

None of these have to do with government interference - no, that’s not true. All of them have to do with government interference, but not necessarily with too much government interference.

Oligopolies in network technologies (energy, transport, communication) are difficult to break up, the European Union can sing plenty of songs about their efforts to break up the Energy-Quadropoly in Germany. Regulatory capture is particularly difficult if the administration, as under Karl Rove, is heavily tilted towards an industry and does not encourage regulators to intervene. Path dependence can only be reduced by subsidizing alternatives - heavily!

What the American Libertarians need to learn is that there is little hope for the market to magically bring about alternative energies. It needs an approach on several levels:

On the demand side, give incentives to consumers to use less energy, save energy or buy alternative energies. Government-supported renovation programs to make houses up-to-date with heat- and electricity-standards can help. Lower taxes on fuel-efficient cars are good incentives. These instruments do not prescribe a certain behaviour, but simply encourage another market framework.

On the supply-side, it helps to pay a higher reimbursement to providers of alternative energy, something which has been running successfully in Germany and has drastically increased the share from Wind- and Solar-Energy.

On the network-side, it is crucial to separate the various stages: from production to transport to distribution of energy. This can only be done by a tough regulatory agency.

It is difficult to acknowledge this, but libertarians who like the market, need to empower the goverment to create a market framework which works. This is in fact what Schumpeter was skeptic of, that a government could be too weak to harness the destructive force of the capitalism. Schumpeter actually argued that capitalism will eat itself because bureaucracies would be too weak.

Karl Rove seems to be unaware of that position of Schumpeter.

See also

• The mechanisms of the Credit Crisis - George Reismans article