Bad advice

One of the things that America does better than us Europeans is its inclination to give (at least in business) another chance to those who at first don't succeed. Whilst bankruptcy is seen in Europe as evidence that someone is not to be trusted with money, in America it is far less of an obstacle to raising money for another venture.

But not all failures are noble. A good test of whether someone who has failed deserves another shot is their attitude to the failure. An acknowledgement of mistakes made, and an understanding of the lessons learned and how to avoid repeating them, should be viewed as a mark of strength. Conversely, blaming others for the previous failure should be viewed as a warning of intellectual and moral weakness and the likelihood of repeat offending.

This came to mind when reading an interview in the Financial Times with Professor Robert Merton, Nobel-prize-winning economist at Harvard University. Prof. Merton was a partner in the Long Term Capital Management (LTCM) hedge fund, which imploded in 1998. I am sure that Prof. Merton is a clever and honourable man, but his explanation for that failure, as reported in the FT, suggests that one should be very wary of utilising the services of the consultancies (IFL and Trinsum) in which he is now engaged (notice that he is no longer risking people's money directly, but charging to advise other people how to risk their money). Many see the collapse of LTCM as symbolising "the perils of excessive speculation", but:

"The causes of the hedge fund's collapse, though, are widely misunderstood, says Robert Merton. While some observers blamed events on the faith that the fund placed in financial models - founded on a belief in rational markets - Prof Merton says the real problem was the way that LTCM's counterparties behaved. When the fund started to suffer losses, the counterparties did not behave as proponents of finance science - or rational markets - predicted. Instead, they sold assets in a seemingly indiscriminate panic, triggering market swings more violent than anything Prof Merton expected."

This displays not only a staggering ignorance of economic history - has the bursting of a bubble ever been accompanied by anything other than "indiscriminate panic"? - but an equally staggering level of hubris. It is not the models that were at fault for failing to reflect actual behaviour, it was the people who were at fault for failing to behave as the models said they should have done. This is a man who sets altogether too much faith in models. That is a warning not to set too much faith in him.

As any psychologist can tell you, denial can manifest itself outwardly in destructive ways. I recently attended a workshop where a member of the British Government's Renewables Advisory Board (RAB) introduced himself as a serial founder of renewable-energy businesses. His explanation for why he had had to start again after his previous adventure in biomass-fired power-generation: the Government had failed to take account of the fact that his technology was more expensive than some, when it had created a competitive market in renewable electricity. Well, isn't that always the problem when businesses struggle - that the Government has failed to compensate for their lack of competitiveness?

He explained that his renewable energy should have received a better price than other forms of renewables because you wouldn't expect to pay the same price for a Mercedes and a Mini. But people choose to pay for a Mini or a Mercedes based on their perceptions of the different values provided by those different marques. They are palpably different products. Is there any difference between the carbon avoided by straw-fired electricity and the carbon avoided by electricity from wind or landfill gas? Carbon is carbon. The more cheaply we can avoid it, the more we can afford to save in total. (The extent to which one might want to do that and the price that is worth paying is another story - the point is that whatever that price is, it shouldn't differ according to how it is saved.) Expensive carbon-savings aren't a virtue, they are a vice.

This was a simple plea for government to pick technological "winners" in the renewable-energy field, and moreover that one of those "winners" should be the technology in which he had previously and has once again invested. This is one of the two independent businessmen advising the Government on renewables policy. The other is an Australian who returned to his native country several months ago. The other members of the RAB are representatives of "big energy", City institutions, pressure groups, and academia. Most academics and pressure groups favour certain technologies over others - after all, what would be their raison d'etre if it weren't to analyse solutions and prognosticate on what our preferences should be? "Big energy" and the City likes nothing better than a rigged market. They can try to promote their preferred solutions through their preferential access to Ministers. A rigged market minimises risk - you don't have to worry about whether you have backed the right horse, the government has already decided that for you. And a rigged market reduces the opportunities for smaller, more-nimble competitors to break into the market through innovation - the Government has already decided which innovations will and will not succeed.

Amongst that group, it should have been the independent businessmen who stood as guardians of impartial treatment of all solutions. Instead, this man's denial of the real reasons for his previous failure led him to promote solutions that play precisely into the hands of those big businesses that would prefer to exclude businesses like his from the market, and into the hands of those academics and pressure groups who think that optimal solutions should be determined on the basis of their own opinions rather than discovered through competition in markets. Consequently, we are threatened with a change to the market for renewable electricity that will treat carbon-savings from offshore wind as (perhaps) 50% better than savings from onshore wind and existing landfill gas, carbon-savings from co-firing biomass and possibly from new landfill gas as worth only a fraction of that from more expensive technologies, and carbon-savings from new installations of immature technologies (such as wave, tidal and biomass) as twice as good as savings from not only more mature technologies, but also from existing installations of the immature technologies (penalising those who had risked most by early innovation).

Already, the Renewables Obligation (the mechanism for supporting renewable electricity) is too partial - treating carbon-savings from some forms of renewables as worthwhile and from others as worthless. If these changes are implemented, as the Government has indicated is very likely, we will have an exercise in picking losers on a massive scale. The ultimate losers will be the consumer and the environment. And all because the Government chose to base policy not on logic and rigorous analysis but on advice from a group where the balancing view is provided by an unbalanced perspective.