The cdesign proponentists of Economics

I am a bit late to this party, but seeing as how I live in the state I thought I would point out something about the idea of remote controlled thermostats. Fortunately, the idea is being shelved for now, or at least not being made mandatory yet. I am sure a bit of googling will get you commentary on the Orwellian nature of it, but I want to concentrate on the economic idiocy behind the whole deal.

Can we spot the real problem? Monopoly and price controls. The so called deregulation of the electric market in the 90's in California had nothing to do with deregulating it. It is still all price controls and government grant of monopoly. The idiots think that some intelligent designer must set prices and thermostats or else no one will get it right. How about market pricing and removing barriers to entry? Shortages and gluts (i.e. waste) are what necessarily comes from price controls. Simple intro to microeconomics bit here. This isn't rocket science, but it is well established economic science - for private goods (like electricity) the free market works, do not mess with it.

Sorry folks, I am getting nearly as frustrated with people refusing to believe economics as I am the geocentrists for refusing to believe Galileo and creationists for not believing Darwin. There really is no excuse for any of it in this modern society.

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people who hold inefficient

people who hold inefficient beliefs will pay a price for it. as students of free-market ideals, we should be willing to let the free market punish or reward people as necessary. if public officals are excessively inefficient, then the state will experience a flight of citizens and the resulting drop in public revenue that threatens their job. or perhaps get voted out of office.

Economics?

Sorry folks, I am getting nearly as frustrated with people refusing to believe economics

I don't know. With "first rate", "Nobel short-listed" economists like Paul Krugman out there, I'm not sure I know any more what "economics" says about anything. I wouldn't put it past Paul Krugman, or someone like him, to claim that the energy problems in California really are the fault of capitalism and that government control is the only solution. I don't know what economics is good for any more, other than sowing confusion with authority. I suppose that I can stick with the economists who don't seem to have it in for capitalism, but then I'm just cherry-picking the economists who agree with me. I suppose that I can try going it on my own (doing my own economic thinking, which I do), but then if I actually try to argue with it, I'll get some big shot economist thrown in my face, who presumably knows much better than I do and agrees with my opponent that capitalism and freedom suck.

Well, I do trust my own mind, and my mind picks the economists who make sense, and I trust my picks, but it's simply not all that useful in argument. The counter-moves are so easy for anyone who is motivated.

I'm aware of the "consensus" option - employing "consensus" among economists to bludgeon dissident economists. However, I don't trust that tool, I don't think much of "consensus", and I don't expect others to either.

I'm aware that most people who argue against capitalism and freedom really are ignorant of economics, both pro and con. However, if I use the "you are ignorant" move on them, then I'm just taking advantage of their ignorance, because I know full well that someone armed with the likes of Krugman and Stiglitz isn't vulnerable to that charge and can come to the same conclusion as my opponent and probably find some pedigreed defense of it.

Same problem here. I believe

Same problem here. I believe I have some understanding of economics and a decent intuition, but I'm not going to convince anyone that I know better than Stiglitz.

Maybe one way to get out of this argument from authority is to point out that economists with widly different views have been considered authorities, and therefore - since it is impossible to rely on a coherent authority argument - to use only logical and common sense arguments for the sake of the discussion. The same goes with statistics. Few people will go for that though.

Last but not least, if you need to pick a group of economist, financial economists might be a  good choice because their incentives are probably less ideological than other economists. It does not mean they are right, but that is at least a rational somewhat unbiaised choice.

Careful here...

There isn't as much lack of consensus in economics as people often think. There are nuances - monopoly, monopsony, public goods, externalities where economists are not sure of things and where there is not consensus. But the particular circumstances are, as I mentioned, well settled. Or did I miss something by Krugman, Stiglitz or others that says electric markets are necessarily in one of the exceptional areas?

David Masten

Krugman on electricity

Or did I miss something by Krugman, Stiglitz or others that says electric markets are necessarily in one of the exceptional areas?

When I wrote that, admittedly I had no specific clue what Paul Krugman's view of the California electricity debacle was. My defense is that it was a general point, based on my sense of things and people. However, since you challenged the point, I googled: krugman california deregulation. The I'm feeling lucky result, a piece by Krugman preserved by the "unofficial paul krugman web page", was this:

SYNOPSIS: Switching to free markets without adequate study is a recipe for failure. Power failure, that is.

California's deregulated power industry, in which producers can sell electricity for whatever the traffic will bear, was supposed to deliver cheaper, cleaner power. But instead the state faces an electricity shortage so severe that the governor has turned off the lights on the official Christmas tree — a shortage that has proved highly profitable to power companies, and raised suspicions of market manipulation.

The experience raises questions about deregulation. And more broadly, it is a warning about the dangers of placing blind faith in markets.

[...]

But in the deregulated market, where prices fluctuate constantly, companies knew that if they overinvested, prices and profits would plunge. So they were reluctant to build new plants — which is why unexpectedly strong demand has led to shortages and soaring prices.

[...]

How might market manipulation work?

[...]

Maybe California power companies aren't rigging electricity prices. But they clearly have both the means and the incentive to do so — and you have to wonder why the deregulators didn't worry about this, why they didn't ask seemingly obvious questions about whether the market they proposed to create would really work as advertised.

And maybe that is the broader lesson of the debacle: Don't rush into a market solution when there are serious questions about whether the market will work. Both economic analysis and British experience should have rung warning bells aboutCalifornia's deregulation scheme; but those warnings were ignored — just as similar warnings are being ignored by enthusiasts for market solutions for everything from prescription drug coverage to education.

My emphasis everywhere. Nowhere in this piece does he suggest that the deregulation was done badly, failing to produce anything that could reasonably be described as a free market. Contrast Nobel short-listed Krugman's comments above with your own comment:

The so called deregulation of the electric market in the 90's in
California had nothing to do with deregulating it. It is still all
price controls and government grant of monopoly
.

Do you notice the night and day difference between what you are saying and what Paul Krugman is saying? Does Krugman say "so-called deregulation"? No, he does not. Does he say "nothing to do with deregulating it"? No, he does not. Does he say "it is still all price controls and government grant of monopoly"? No, he does not, nor anything remotely like it. Finally, he ends his commentary with a broad attack on free market approaches to various problems.

Three facts, and one conclusion.

1. California's consumer retail electricity price is still set by committee not markets. This is the very definition of price controls.

2. The wholesale prices are set by a managed market where all units of electricity are bought at the price set by the highest bidder.

3. This piece has not been not peer-reviewed

It is very clear from the article that Krugman is writing on a topic for which he did zero research.

David Masten

Expert opinion

That may be. Nevertheless it is the opinion of a man who does not seem to fit your initial description:

Sorry folks, I am getting nearly as frustrated with people refusing to
believe economics
as I am the geocentrists for refusing to believe
Galileo and creationists for not believing Darwin. There really is no
excuse for any of it in this modern society.

Krugman is analogous to neither a geocentrist nor a creationist. You claim that he did zero research and I do not dispute this (I simply don't know). Nevertheless it's pretty easy for someone to say, "Krugman agrees with me", and then ignore everything else you say, because you're not qualified. Robin Hanson appears to take this attitude.

As I said, and as long as

As I said, and as long as you are talking with an honest debater, the best way out is to agree on a restricted set of arguments. The situation is similar with numbers in statistics, in a debate, someone can always pull a number on you supporting his claim. You will have no way of  checking that number, checking for potential biases in the way it was obtained, what it really means etc. Of course you could just as well throw a number and the debate  would come to a grinding halt. If both parties are honest enough and genuinely interested in the truth, they can agree to refrain from using statistics. Similarly if both parties find out that on a given topic, experts of comparable reputation disagree, then they may decide to both ignore the expert argument in their favor. Of course, if experts agree, then things are different.

A story goes that in Xth century Bagdad, there was a philosophical circle where muslims, orthodox or heterodox, infidels, zoroastrians, materialists, jews and christians would debate. When they would debate together, a rule was that they should abstain to use religious proof based on the scriptures and use only proofs based on human reason. 

I believe this is the kind of attitude that should  be held when debating economics between laymen.

Krugman

"Krugman is analogous to neither a geocentrist nor a creationist."

He is however analogous to a Lysenkoist or a Lamarckian. Politically or scientifically respectible on his home turf.   Otherwise your argument is correct in that there is a lot of bad economics out there that is popular as well as politically, and academically accepted.

What is Krugman saying?

Useful background for earlier comment: Wikipedia: California electricity crisis.

If the dates were not backwards, I would say that Krugman based his op-ed on this paper ($$ for full paper). The paper does not contradict what Krugman or I have stated. In fact by adding a few qualifiers (like a note that retail distribution was not in any way deregulated, and that this was contributory to the problem), I would have to agree with Krugman's op-ed, and then point out that he is not in disagreement with me on the science.

Of course, Krugman apparently disagrees with himself between his op-eds and his scholarly work. So who can say what Krugman's opinion really is?

David Masten

Eh?

I would have to agree with Krugman's op-ed

So you think you and he agree? I'm not even going to try to figure that one out. Looked on the face of it as if Krugman's take is 180 degrees from yours. But I'm not going to follow you into this maze.

California's deregulated

California's deregulated power industry, in which producers can sell electricity for whatever the traffic will bear, was supposed to deliver cheaper,
cleaner power.

The only part of California's power that was anything close to deregulated, was at the generator, not the distribution plant.

But instead the
state faces an electricity shortage so severe that the governor has
turned off the lights on the official Christmas tree - a shortage that
has proved highly profitable to power companies, and raised suspicions
of market manipulation.

PG&E and SoCal Edison both sought bankruptcy protection, so he isn't talking about them. OTOH, Enron was a major electricity and natural gas producer for California and it was this part of Enron that was doing quite well until the scandal broke out. Reliant Energy also did quite well, the only scandal here was that Reliant was manipulating the market.

The experience
raises questions about deregulation. And more broadly, it is a warning
about the dangers of placing blind faith in markets.

Not really saying anything, intended to induce anti-market bias in the reader. A more charitable reading could be "a warning about the dangers of placing blind faith in managed markets."

True, part of
California's problem is an unexpected surge in electricity demand, the
byproduct of a booming economy. It's possible that the crisis would
have happened even without deregulation.

CYA.

But probably
not. In the bad old days, monopolistic power companies were guaranteed
a good profit even if their industry had excess capacity. So they built
more capacity than they needed, enough to meet even unexpectedly high
demand.

Basic econ - price controls create either shortage or glut, he is right that under the old PUCO arrangement glut was the norm.

But in the deregulated market, where prices fluctuate
constantly, companies knew that if they overinvested, prices and
profits would plunge. So they were reluctant to build new plants -
which is why unexpectedly strong demand has led to shortages and
soaring prices.

He is correct here - in a monopoly situation. Which is what the generators effectively had, and why I use the terms "so-called deregulation".

Now you could
say that in the long run there is nothing wrong with that. Building
extra generating capacity was costly, and the costs were passed on to
consumers; while prices may fluctuate in a system with less slack, on
average consumers will pay less. In fact, textbook economics suggests
that it's actually a good thing that electricity prices skyrocket when
supply runs short: that's what gives the power companies an incentive
to invest. And so you could argue that no public intervention is
warranted - indeed, that the caps that still place an upper limit on
electricity prices only worsen the problem, that we should rely on
market competition to solve the crisis.

No problem here.

But how
competitive is the electricity market? What makes California's power
crisis politically explosive is the suspicion that it's not just about
inadequate capacity, but also about artificially inflated prices.

How might
market manipulation work? Suppose that it's a hot July, with
air-conditioners across the state running full blast and the power
industry near the limits of its capacity. If some of that capacity
suddenly went off line for whatever reason, the resulting shortage
would send wholesale electricity prices sky high. So a large producer
could actually increase its profits by inventing technical problems
that shut down some of its generators, thereby driving up the price it
gets on its remaining output.

Correct, but let's add something that further explains what is happening -And how are these manipulations possible? Monopoly power. There is something fundamentally broken, something major that means we cannot say "free market".

Does this
really happen? A recent National Bureau of Economic Research working
paper by Severin Borenstein, James Bushnell and Frank Wolak cites
evidence that exactly this kind of market manipulation took place in
Britain before 1996 and in California during the summers of 1998 and
1999.

Along with Alberta and Norway. See my previous comment, and the abstract linked to.

You wouldn't
normally expect this to happen in colder months, when demand is lower.
Still, state officials have understandably become suspicious about
California's current power emergency - an emergency precipitated by the
odd fact that about a quarter of the state's generating capacity is off
line as the result of either scheduled repairs or breakdowns.

Maybe
California power companies aren't rigging electricity prices. But they
clearly have both the means and the incentive to do so - and you have
to wonder why the deregulators didn't worry about this, why they didn't
ask seemingly obvious questions about whether the market they proposed
to create would really work as advertised.

That is a good question. Probably because some politicians decided that the market needed lot of safeguards, and the lobbyists hoodwinked them into a system that gave the generators monopoly power.

And maybe that
is the broader lesson of the debacle: Don't rush into a market solution
when there are serious questions about whether the market will work.
Both economic analysis and British experience should have rung warning
bells about California's deregulation scheme; but those warnings were
ignored - just as similar warnings are being ignored by enthusiasts for
market solutions for everything from prescription drug coverage to
education.

Absolutely - just because politicians and the press says deregulation or market-based, do not believe them, look at it closely. Look for regulations that encourage monopoly power, look for regulatory capture, look for auction schemes that reward collusion, look for limits to futures and options trading. In short look for everything that California did in the so called deregulation. The old system of local monopoly with periodic price reviews by the PUCO was closer to the free market than the current mess.

As you can see, other than my preference for rewording to get rid of the inducement to anti-market bias, I basically agree with what Krugman actually says.

David Masten

Not really saying anything...

Not really saying anything, intended to induce anti-market bias in the reader.

But that, to my eyes, is the pulsating heart of his piece. It is not the first or the last time that he has used some real-world problem to try to "induce anti-market bias in the reader".

Absolutely - just because politicians and the press says deregulation or market-based, do not believe them, look at it closely.

But this is clearly not what Paul Krugman meant by his words. Nor do I think his words support your attempted interpretation of them. I think you are twisting them beyond the possible meanings that they can support.

As you can see, other than my preference for rewording to get rid of
the inducement to anti-market bias, I basically agree with what Krugman
actually says.

Other than changing his piece to make an argument opposite to the argument he is making, you agree. Maybe this is humor, but I can't see your wry smile when I read this, so I don't know if you're being fully serious or witty. As wit, I find it to be successful and entertaining.

 

And...

Despite my difficulties with the bits you highlight, I agree with his conclusion - the change in rules was overall bad.

David Masten