Mises Daily Articles
The Real Cause of Blackouts
Sometimes (well, often) you just want to say: down with the state!
Consider that an outburst, the kind you feel like making when the lights won't come on. And the heat wave — and the public utility response — is the news that prompts it.
All last week, major parts of Queens, New York, were without electricity following a failure of power that plunged much of the city into darkness amidst sweltering heat for more than a week.
For many, it was the Ten Days of Hell. There were thousands who were without air conditioning, lights, refrigeration, internet connections, and, well, modern life generally.
And get this: no one is sure why, precisely, it happened, other than to say that the system became overloaded. What will happen as a result? Hearings, reports, meetings, yammering, resolutions, reforms, and, in time, another black out followed by hearings, reports, meetings, etc., all of which will be filed in that huge warehouse where all the other reports on past blackouts reside.
What do the consumers do about it? They follow the news and keep paying the bills, to the same company that let them down. They can't switch. They can't influence the production process. They are powerless in more ways than one.
Meanwhile, on the other side of the country, California residents are putting up with blackouts, threats of more blackouts, denunciations from politicians, and even death: 56 people so far. All because of a heat wave, and all because the structure of the industry is not designed for extremes.
Now, if markets were in charge, a heat wave would not be looked at as a problem but as an opportunity. Entrepreneurs would be swarming to meet demand, just as they do in every other sector that is controlled by markets. The power companies would be praying for heat waves!
After all, do shoe manufacturers see a massive increase in footwear demand as a problem? Do fast food companies see lunchtime munchies as a terrible threat? On the contrary, these are profit opportunities.
Just who is in charge of getting electricity to residents? A public utility, which, in the absurd American lexicon, means "state-run" and "state-managed," perhaps with a veneer of private trappings. If you look at the electrical grid on a map, it is organized by region. If you look at the jurisdiction of management, it is organized by political boundaries.
In other ways, the provision of power is organized precisely as a central planner of the old school might plan something: not according to economics but according to some textbook idea of how to be "organized." It is "organized" the same way the Soviets organized grain production or the New Deal organized bridge building.
All of centralization and cartelization began nearly a century ago, as Robert Bradley points out in Energy: The Master Resource, when industry leaders obtained what was known as a regulatory covenant. They received franchise protection from market competition in exchange for which they agreed to price controls based on a cost-plus formula — a formula that survives to this day.
Then the economists got involved ex post and declared that electrical power is a "public good," under the belief that private enterprise is not up to the job of providing the essentials of life.
What industry leaders received from this pact with the devil was a certain level of cartel-like protection, the same type that the English crown granted tea or the US government grants first-class postal mail. It is a government privilege that subjects them to regulation and immunizes companies from business failure. It's great for a handful of producers, but not so great for everyone else.
There are many costs. Customers are not in charge. They are courted only for political reasons but they are not the first concern of the production process. Entrepreneurial development is hindered. Our current system of electrical provision is stuck in time. Meanwhile, sectors that provide DSL and other forms of internet and telecommunication services are expanded and advancing day by day — not with perfect results but at least with the desire to serve consumers.
Markets don't denounce us for our "consumerism" and "greed"; if anything, these things are courted and encouraged. Indeed, isn't this why markets themselves are denounced? They encourage consumers to spend, spend, spend, consume, consume, consume. Well, think about the alternative. It exists right now with electrical provision. We are denounced for not wanting to live in 90-degree houses and sleep in puddles of sweat.
How New York and California consumers would adore a setting in which power companies were begging for their business and encouraging them to turn down their thermostats to the coldest point. Competition would lead to price reductions, innovation, and an ever greater variety of services — the same as we find in the computer industry.
What we are learning in our times is that no essential sector of life can be entrusted to the state. Energy is far too important to the very core of life to be administered by a bureaucracy that lacks the economic means to provide for the public. How it should be organized we can't say in advance: it should be left to the markets. Whatever the result, you can bet the grid would not look like it does today, nor would its management be dependent on the whims of political jurisdiction.
What we need today is full, radical, complete, uncompromised deregulation and privatization. We need competition. That doesn't mean that we need two or more companies serving every market (though that was common up through the 1960s). What we need is the absence of legal barriers to enter the market. If that market is served by a single company, fine. Competition exists so long as the state is not prohibiting other companies from trying their hand.
How important is this subject? It is crucial. The continued development of civilization depends heavily on the provision of electricity and other forms of power. But what should be a major political priority isn't even on the agenda. You might think that continued blackouts and the like would change matters. We'll see.
Just think about this general principle. When some good or service is in high demand, and economically feasible to deliver to those who demand it, and it is not being delivered in a way that is consistent with consumer welfare, you can bet that the state is involved. Get the state out of it, and you will see the dawning of an era without fear of blackouts.
Let me add this: many people want to avoid the topic of energy because it is technical, large, and seems too specialized. But Robert Bradley's book tells you what you need to know, from the perspective of history, economics, and politics; and it does so understandably. You must have a working knowledge of these issues to communicate effectively on this topic. So get his book Energy: The Ultimate Resource. It will be the best $15 you will spend this summer.