Total Economic Quackery

The All Party Parliamentary Group On Peak Oil (APPGOPO) has released a report backing Tradable Energy Quotas (TEQs) as "the fairest and most productive way to deal with the oil crisis and to simultaneously guarantee reductions in fossil fuel use to meet climate change targets". This should serve as a warning to classical-liberals that (a) not everything that uses market mechanisms is a free-market or liberal concept, and (b) despite the presence of one or two saner members in their midst (such as Vince Cable and David Laws), the Liberal Democratic party (to which APPGOPO's chairman, John Hemming MP, belongs) is still fundamentally a beard-and-sandals, Fabian, Rawlsian, meddling, fiddling, egalitarian bunch of moralizing whackjobs, who would happily suck all the fun and reward out of life in the name of "fairness".

TEQs, as the name suggests, is "an energy rationing system" where each adult receives an equal quota of energy (measured in carbon terms) that they are entitled to use annually, calculated as equal shares of 40% of the total amount of energy/carbon permitted to be consumed annually under a falling profile set by the Committee on Climate Change in accordance with the national Carbon Budgets that have recently been enshrined into law. This system is allegedly designed "to prevent the intense competition for fuels that will otherwise develop, and to ensure that every energy-user can access their fair share".

So far, so student-socialist, but the cunning of the modern socialist is that he has learned to dress his communist wolf in a capitalist fleece. So the remaining 60% is bought in weekly government auctions by banks and brokers (no rent-seeking opportunities there) on the instructions of their clients in all those organizations who want to be allowed to use energy. And trading is allowed between possessors of the initially-egalitarian personal quotas and of the auctioned rights. The system thus lays claim to be a "market mechanism", combining "social justice" with the efficiency of capitalism in the approved manner of the Third Way prophets.

It is, in this way, different only in detail of implementation, from other cap-and-trade mechanisms, though the details are particularly draconian and deluded. Capitalists (of the type that we need to save capitalism from) who extol the virtues of cap-and-trade and yet look at personal rationing like this and shudder, ought to ask themselves if they haven't been fooled by the inclusion of the word "trade" in an approach that is fundamentally about overriding the efficient allocation of scarce resources by means of state-imposed rationing. Trading mechanisms within these rationed systems are no more than publicly-authorised black markets, which have the same benefits as real black markets under state-rationed systems, but do no more to eliminate the inefficiency and iniquity caused by the distortions that result from such a system.

We are already familiar with a system that distributes resources on the basis of social utility and provides incentives for people to use more or less of the resource depending on its scarcity. It is called the free market.

Egalitarian allocation can only be thought to reflect social utility more closely than allocation according to demand (desire and ability to pay) if it is thought socially useful for individuals not to be rewarded for their success at satisfying people's demands. If we believe that it is in our interests to encourage others to provide what we want as efficiently as possible, unless we also believe that nature decrees that everyone will be equally good at satisfying those demands, we must accept that some people will accrue more purchasing power than others as their reward for meeting people's demands more effectively. Purchasing power is no reward or incentive if it is frustrated by rationing that deliberately overrides differences in ability to pay. The upshot of inhibiting this incentive is the reduction of social utility due to the subversion of the rewards for satisfying society's needs.

Unless we have a fully communist, state-allocated system, it doesn't work anyway. If we allow for differences in reward, constrain what people are allocated initially, but allow for re-allocation through trading, we will end up with a similar allocation according to ability to pay as we would have had without the rationing. The Third Way socialist believes that this is OK, because the power imbalance has been corrected, and the poor vendor of energy allocations has been properly compensated by the rich purchaser in the process of exchange. This assumes that wages will not correct to take account of this reduction in the value of the purchaser's money. In practice, if the value of high wages is reduced, whether by this sort of rationing or through higher rates of progressive tax, the higher earners will respond either by increasing their wage demands, or by relocating or reducing their output (to the net loss of society). Higher earners are in a position to enforce these demands, by virtue of their ability to bring rewards to their employers by successfully supplying what people want. Conversely, the wages of low earners will be further reduced or their jobs lost, as their low earnings reflect their insignificance to their employers, and as the rationing (or reduced taxation in a progressive taxation system) reduces the amount that competitors for their jobs will be able to live by, and will therefore be willing to accept.

Egalitarian measures do not increase equality, they increase disparity in earnings and reduce productivity. Hence the widening wage gap and reduction in social mobility under a Labour government that has been genuinely motivated by the desire to improve the lot of disadvantaged members of society, but has gone about it through a myriad of egalitarian interventions.

The socialist points to the fact that our current system, perceived to be a free-market system, is not producing egalitarian outcomes, and is not necessarily reflecting the scarcity of the resource very well.

We don't have a free-market system at the moment. But putting that aside for the moment, it is nevertheless true that a free-market system will not produce egalitarian results. But neither will any other system. Communist and socialist states certainly do not. The difference is that privilege is obtained in the socialist system by pleasing those in positions of authority in the government hierarchy, whereas in the free-market system privilege is obtained by pleasing ordinary members of society in their roles as purchasers (and in fact the greatest rewards are to be found in pleasing the broadest section of society).

As for misallocation and misvaluation under our current system, that is largely the product of government ineffectiveness. Some of it is caused by inefficiencies resulting from badly-designed interventions. And some is caused by failure to ensure that markets are competitive and transparent. In the case of pricing of oil, lack of transparency and significant asymmetries of information allowed a dominant group (the oil companies and their associates) to preserve an illusion of plenty for longer than was wise. In practice, the information has been available for quite some time to allow people to identify the forthcoming imbalance between supply of and demand for cheap oil. But as this is highly inconvenient, the myth of plenty was preserved not only by the misdirection of the oil companies, but by a subconscious conspiracy of silence (don't ask, don't tell) amongst politicians, journalists, and other intellectuals, who would have received little thanks for telling their constituencies that their way of life is unsustainable. The lie is given to socialists who call now for politicians to correct "market failures", not only because they are relying on those who were part of the problem to be part of the solution, but also because these calls are prompted particularly by last year's brutal spike in oil prices. Markets have already started to do what markets are supposed to do once they have good information. If the cries had been equally strong for government intervention before markets showed there was a problem, then socialists might have more grounds to claim the superiority of omniscient government allocation over market allocation.