Power Struggle vs. Free Markets

By: Jim Allard

The following, very short article from Electrical and Computer Engineering (ECE) News captures a worldview that is ubiquitous in today’s culture: one person’s self-interest is attained at the expense of others.

POWER STRUGGLE: Advocating for energy consumers

Professor Lesieutre is investigating (probably with your tax dollars) “whether electrical suppliers can manipulate the markets to their advantage.” Notice the word “manipulate.” What is this alleged “manipulation?”

Turns out that “power lines have a limited capacity” and therefore under some conditions “the lines cannot carry any more power.” The result? Some energy suppliers “might not be able to supply power to where it’s needed.”  Well, this does sound like a problem, but it’s not the problem the professor has in mind.

According to the professor, the problem is not the inability to supply power, but the ability to do so. If one power company is able to provide power while the others are not, “they can raise their prices to make more money.” This is the so-called market “manipulation” that the professor is determined to prevent. Companies that attempt to maximize profit for their own self-interest are derided for “taking advantage of those scenarios.” But what exactly are they taking advantage of?

Prices (in a free market) reflect certain facts of reality. In this case the rising price of energy reflects the fact that demand is high and supply is low—that energy is highly valued relative to it’s availability.

Rising prices are a signal to consumers of an economic reality: energy is in short supply relative to demand. Knowing this (via prices) benefits consumers by allowing them to adjust their energy usage according to how much they value it, which has the effect of ensuring that energy will be available to those who really need it (and are willing to pay a premium for it).

Rising prices are also a signal to producers. They tell producers that consumers value energy and are willing to pay more for it. Knowing this benefits producers (and potential producers) by allowing them to adjust their investments and development strategies to meet rising demand and increase profit.

There is no “power struggle” between consumers and producers (as the title suggests)—both benefit when prices reflect freely chosen trades. These choices reflect countless facts—facts such as energy demand, grid overload, number of suppliers, future demand and risk, regional differences and much more. Setting prices to reflect these and a myriad of other facts (i.e., maximizing profit) is self-interested for both consumers and producers.

The only alternative to self-interested profit maximizing is to play make-believe. Price-regulation, as the professor is advocating, ensures that prices no longer reflect realty, but the whims and desires of politicians and political pressure-groups. It’s a fantasyland where the fact of supply and demand is replaced by the desire for this fact to be otherwise. When a regulator caps the price of energy he is effectively putting blinders on market participants, telling both the consumer and producer “it doesn’t matter how much energy is actually worth (i.e., the freely traded price) we’re not going to let this fact be reflected in the price.”

This—government regulation—is the actual market manipulator. It manipulates the free choices of individuals in a market by preventing them from producing and acquiring the goods that they actually value. This destroys the very essence of a “market:” a “regulated trade” is a contradiction in terms.

The only way for government to “advocate for consumers” is to recognize that trade is not a “power struggle” but a fundamentally self-interested and mutually beneficial activity. It should then advocate and protect free-trade instead of manipulating and regulating it out of existence.

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