The free market lets the best come out on top
To Replace Oil, U.S. Experts See Amber Waves of Plastic
Not a very good headline at all. It implies plastic replacing oil, when actually the article is about Cargill Inc. converting raw corn (instead of petroleum) into plastic. That's the beauty of the free market: if a popular commodity becomes too expensive, substitutes that were previously too expensive will become practical.
The Energy Department should stay completely out of this, however. It should scrap any of these goals, like "25% of chemical manufacturing to an agricultural base by 2030." These goals invariably necessitate subsidies and/or specialized tax breaks to promote new technology. Let the free market work its magic. I've said a few times, even just yesterday, how Hayek reminded us that knowledge is dispersed throughout society. It's impossible for a relative few government bureaucrats to know how society will change over 25 years; how can they predict all the market shifts and technological advancements? Corn-to-plastic could be completely obsolete by then.
Just 25 years ago, a VCR was a luxury item that people still bought on payments. Today, even low-income families can save a few dollars a week for a few months, then pay cash for a DVD player. How would things have developed if the Department of Commerce decided, "VCRs are the way to go, and we should subsidize them so that by the year 2000, every family that wants one can afford one"? Simply, future competitors like laser discs and DVDs would have been too costly to develop, because VCRs would always have a head start.
Imagine how the computer industry would be today if, instead of letting competition shape things, the Department of Commerce decided in 1977 to promote the Apple II. Again, competitors would have found it too expensive to develop rival technologies. Apple would have also found it very comfortable to keep producing Apple IIs, so curiously enough, they'd have found it too expensive to compete against themselves by developing new technology.
The best solution is the free market and its raw competition. If converting corn into plastic is practical and efficient, entrepreneurs like Cargill Inc. will seize upon it. Meanwhile, those who doubt the potential can rely on petroleum, or seek their own substitute technology.
Not a very good headline at all. It implies plastic replacing oil, when actually the article is about Cargill Inc. converting raw corn (instead of petroleum) into plastic. That's the beauty of the free market: if a popular commodity becomes too expensive, substitutes that were previously too expensive will become practical.
The Energy Department should stay completely out of this, however. It should scrap any of these goals, like "25% of chemical manufacturing to an agricultural base by 2030." These goals invariably necessitate subsidies and/or specialized tax breaks to promote new technology. Let the free market work its magic. I've said a few times, even just yesterday, how Hayek reminded us that knowledge is dispersed throughout society. It's impossible for a relative few government bureaucrats to know how society will change over 25 years; how can they predict all the market shifts and technological advancements? Corn-to-plastic could be completely obsolete by then.
Just 25 years ago, a VCR was a luxury item that people still bought on payments. Today, even low-income families can save a few dollars a week for a few months, then pay cash for a DVD player. How would things have developed if the Department of Commerce decided, "VCRs are the way to go, and we should subsidize them so that by the year 2000, every family that wants one can afford one"? Simply, future competitors like laser discs and DVDs would have been too costly to develop, because VCRs would always have a head start.
Imagine how the computer industry would be today if, instead of letting competition shape things, the Department of Commerce decided in 1977 to promote the Apple II. Again, competitors would have found it too expensive to develop rival technologies. Apple would have also found it very comfortable to keep producing Apple IIs, so curiously enough, they'd have found it too expensive to compete against themselves by developing new technology.
The best solution is the free market and its raw competition. If converting corn into plastic is practical and efficient, entrepreneurs like Cargill Inc. will seize upon it. Meanwhile, those who doubt the potential can rely on petroleum, or seek their own substitute technology.
posted by Perry Eidelbus at
11:56 PM
6 Comments:
There are a couple of problems with maintaining that this or that industry needs a subsidy. First, big oil receives subsidies of its own (a tax cut aimed at a specific industry or business is a de facto subsidy). I said sarcastically here, "Subsidizing the wine industry makes as much sense as the state of Texas subsidizing oil wells."
Well, isn't it pretty illogical for government to subsidize two competitors? It's a sheer waste of taxpayers' money, but that's what happens with all the lobbying. The fundamental problem isn't with the lobbyists, but that our federal government has assumed so much unconstitutional power that it sustains the special interest groups. It's been this way for 170 years or so, since the first canals and other "internal improvement" plans.
The other oil giants can try to shape the market all they wants, but they cannot change the laws of supply and demand. When supply is constrained and prices rise, substitutes will become cheaper. Eventually consumers will demand ethanol simply because it's cheaper than regular petroleum. But as you point out, the oil giants are extremely dominant. That's because they're abusing the power of government. A government subsidy for ethanol would counteract something that the government created anyway.
Second, the money for subsidies has to come from somewhere. Bastiat reminds us that if government spends a dollar, that deprives society of a dollar. We all pay into subsidies, meaning that potential competitors are hindered even more. It's better to eliminate all subsidies and give consumers the choice. A company or an entire industry can put out study after study, but the free market as a whole will eventually discover the truth.
I highly recommend what Hayek wrote on the "knowledge problem," which is that in the real world, government has such little information on which to make such big decisions. Most of our problems with government is all because it thinks it knows better than the people (look at the constant blunders with Social Security), when in fact its bureaucrats have such a small fraction of total knowledge. Knowlege, Hayek said, is not just scientific, but also of time and place.
Libertarians like me see no need for a national energy policy of any kind, or a a "Department of Energy" for that matter. Civilization, especially throughout the Industrial Revolution when we really started to harness energy, survived quite well without government's attempt to plan our energy use. The free market worked perfectly well for thousands of years, because while we may not have consciously thought about it, society overall knew what was best. We learned that wood burns, then that charcoal is better. After that, we discovered that coal is worth digging out of the ground. Then we found a use for petroleum and natural gas, which require a lot of investment but are so versatile and efficient. At each stage, the difficulty of refining the fuel increases, but total benefits increases faster than total costs. We haven't yet switched to nuclear energy because its total cost is still higher than fossil fuels.
Free market forces are admittedly not perfect. There's lag time in acquiring information, and economies don't always grow (though Austrian economics explains downturns as necessary corrections to an overextended economy, brought about by an increase in supply versus demand). But the power of the free market is beyond anything Shell, Exxon-Mobil and other oil giants have. Again, there is nothing they can when supply is constrained. If they become dinosaurs, the free market will take care of them in the proper time -- and without having to spend taxpayer's dollars to promote a new technology that may not have been the way to go. The hundreds of thousands of federal employees together still can't predict if ethanol is the way to go. It's foolish as a matter of political economy to let them try to shape our destiny, but more importantly, it's wholly unconstitutional. They have no authority to do that, and wisely so.
Other things to consider: what if the federal government had decided laser discs should be the successor to VHS? Subsidizing them would have hindered DVDs; enough subsidies would have prevented DVDs. What if government supported Betamax instead of VHS, declaring that consumers are better off with quality instead of longer tapes? The federal government decided that cars needed better gas mileage, so they mandated a certain average mpg. It was too expensive for automakers to improve engine efficiency, so they focused on selling more smaller cars. The Libertarian Party (of which I'm not a member) has done studies on how smaller cars have led to more people getting injured and killed in auto accidents. There's always a tradeoff, economics teaches us. The federal government wants us to consume less fuel, but it's willing to sacrifice a life here and there.
That's why the free market, unhindered and unpromoted by government, is so much better. It's the direct manifestation of consumer choice, and who knows what's best for the consumer, the consumer or government?
Besides, if big oil uses its powers to keep oil cheaper than ethanol and other substitutes, that's actually a good thing. A very good thing indeed: that's competition, and I definitely want no federal intervention at all. Big oil wants to stay in business, so the companies will accept lower profits (which by definition means the consumer surplus increases), and/or they'll increase their efficiency as much as possible. Ultimately, what matters to the consumer is the economic axiom that people seek to maximize their happiness for the least cost. All else being equal, they will seek the lowest price; that's what promotes efficiency.
When big oil feels threatened and improves its business model, ethanol producers must match the move. They're already trying to improve their processes until they someday can compete with big oil, and now they must work harder. Once more, that's a good thing, because it's competition. But if ethanol producers receive subsidies, they're encouraged to be lazy; they don't have to attain as high a degree of efficiency.
Think of a subsidy like you're playing Tiger Woods, except he'll beat you by a fairly consistent 30 strokes each round. The official wants to even things out, so you're spotted 30 strokes every round. Tiger then has to work even harder for any chance at beating you; meanwhile you aren't as encouraged to improve yourself, because you can keep playing at your level and still have a decent chance of winning. Now, if you can't compete against Tiger without help, the thing to do is acknowledge Tyler is better, and go find your own comparative advantage.
Bastiat, whose birthday was Wednesday, laid out perfect reasoning why all government subsidies are immoral. Look at the USPS, which can't recover its operating costs through its business. Tax dollars must make up the difference, so we taxpayers are hurt once. On the other hand, FedEx, UPS, et al, are hurt twice. Not only is the USPS artificially competitive, but FedEx, UPS, et al, are paying for part of the subsidies. It's like being extorted into donating money to your opponent's campaign.
Sugar is a great example of subsidies' evil. We could import Brazilian sugar, which is much cheaper than our own. American consumers would benefit a bit in their sugar purchases, but they'd benefit more because American companies that use sugar would spend less on it. But the sugar lobby is quite powerful and convinced Congress to save a few jobs at the cost of many more jobs elsewhere. George Will wrote about American candy manufacturers that moved operations to Canada or Mexico, partly because of cheap labor, but in large part because they can buy sugar for much cheaper outside the U.S. and Europe. Also, soft drink manufacturers switched from sugar to high fructose corn syrup simply because sugar is too costly.
If Brazilians could sell us more sugar, they'd have enough earnings to buy things from John Deere, Caterpillar, Boeing, Microsoft, Dell, and other things that will raise their standard of living. We'd lose our domestic sugar jobs but gain better jobs in other industries (I've noted before on Larry's blog that the U.S. does best when sticking to its comparative advantage in capital-intensive industry). Free markets and free trade enable both sides to win, and that's not something subsidies (and any other form of protectionism) can do.
Actually, Bastiat fought huge industries during his time, including when he was a member of the French legislature. The agricultural interests of his time were as powerful as oil is today, with their own lobbyists that advanced argument after argument for protection.
There's no constitutional provision for the FTC, or the FCC for that matter. The Constitution does give powers to Congress in regulating interstate trade, but you can't tell me that meant sprawling bureaucracies that attack Hooked on Phonics, ice cream, and of course, Microsoft. Under the guise of "ensuring competition," the FTC has far more often than not hindered competition.
We do not have government to determine what is best for us. The Declaration of Independence, whose birthday we're about to celebrate, makes that abundantly clear:
We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.
We're the ones who are supposed to determine what is best for us. Government's job is strictly to ensure that we can. That's real freedom.
Securing our rights to life, liberty and property is hardly a carte blanche for government to say, "This is good for you, this is bad for you." Why should you trust some bureaucrat thousands of miles away to make decisions for millions of people? I don't recall ever reading that God or the Constitution gave him such authority. Aren't YOU more knowledgeable of your own circumstances than government? Or should government start banning fatty foods and mandating daily exercise? Those are "better" for us.
Where does it end? There doesn't have to be a beginning, if government sticks to its mandate of protecting life, liberty and property. Let the people decide for themselves what's in their best interest. Look at the abuses over the last 170 years anytime government decided something was better for us. It built canals that were already obsolete by the last dirt dug, railroads that were so mismanaged that they were bankrupt by the time the last rail was laid (while privately built railroads were built for less AND made profits), and it continues today with things like Amtrak.
You assume a lot about what Bastiat would have never said. Instead, focus on what he's written. He doesn't have to explain at all why people aren't using ethanol. Bastiat would say that, despite what you may think, there is a reason for this particular outcome.
Basic economics already tells us why ethanol is cheaper: there's less demand for it. What Bastiat is renowned for saying is that when you consider what is seen, you must also consider what is not seen. If ethanol were demanded as much as gasoline, it would be considerably more expensive -- and gasoline would be cheaper since it's demanded less. It's as simple as that. So when you say "Ethanol costs x, gasoline costs y, so we should go for ethanol," you're forgetting about plain supply and demand.
You may or may not recall that ethanol hasn't always been cheaper than gasoline. Only five years ago, gasoline prices were frequently higher in the Midwest, and that was blamed on the use of ethanol. It's stayed fairly stable in price simply because of stable demand, while oil prices have surged because of demand.
Why do you think crude oil has become so expensive? It's because of an increase in global marginal demand, and fears of future supplies, mainly because of China and India. Now imagine what would happen if the U.S. suddenly switched to ethanol: it would no longer be as "cheap," because we just don't have the corn supply. The federal government would have to subsidize more production, and more, and more.
That's irrational in every sense, not just as a matter of economics: you're paying a cheap price at the pump, but you make up the difference with your tax dollars. You talk about efficiency, but true efficiency is when a company produces something (without a need for subsidies) because it can provide it at a price people can pay, at a price sufficient for the company to stay in business.
And then you're taking corn away from other uses. By definition, there are far better uses for it than to produce ethanol. Ironically the subsidies you support are what discourage farmers from turning more corn into ethanol. Subsidies encourage production, which keep prices down, and that means other farmers won't bother. It's more profitable for them to sell corn in other forms, especially food.
How about subsidies simply to grow more corn? Sure, but consider what is not seen: that takes away from growing other things. We'll have cheaper corn, but more expensive wheat, barley, rice and even beef and milk. Subsidies for directly growing corn will cause farmers to grow less of other crops, and some ranchers could switch from cattle to corn.
It's extremely easy for government to be "certain" when subsidizing various industries. After all, it's not its money. On the other hand, we're talking about business. Who would know better about profitability, government that doesn't care about profits, or businessmen who do?
If ethanol were the way to go, Bill Gates, Warren Buffet and venture capital groups would have already dropped billions into developing a transportation system for it. For all their influence, the oil companies can never hope to stop those supply lines. Why haven't these people and groups with hundreds of billions of dollars not invested heavily in ethanol? Simply because they're uncertain. There isn't even enough information for them to consider it risky. (Schumpeter, who Kudlow references every so often, distinguished between risk and uncertainty.)
The bottom line is that wholesale prices aren't the entire story. Gasoline is still cheaper for the American consumer, because "cheaper ethanol" doesn't have the supply nor the scale to be an effective substitute. Our aggregate consumer preference shows that. Real economics is all about explaining why consumer preferences are so, and why things develop the way they do.
You're not familiar with Austrian economics, are you? It's not a geographical reference. And the school of economic thought founded by Menger, Mises and Hayek is still the only one that can fully explain the business cycle. Keynesians and neo-Keynesians can't. Monetarists and supply-siders have had some success. I don't completely agree with Austrian economics, but its theories on the business cycle have held for every boom and downturn.
1. Don't resort to name-calling. I will lock the comments if you persist. Kudlow tolerates pissing contests, but I do not.
2. You're not an economist, which is evident because you don't understand basic microeconomics. You completely were off the mark on Austrian economics, which I guess you had never heard of. You really should have looked it up first; there's probably a Wikipedia entry or something.
3. I really have a tough time considering the opinion of someone who accuses me of "naivette" but can't spell it properly ("naivete").
4. It's easy to claim someone's providing "mis-information" (there's no hypen required, btw), but you don't actually cite it.
5. Alcohol and aspirin are not a good combination, whether or not you are leaving a comment.
6. Writing is one of my strengths.
7. You're pulling the same rubbish Scalia did, which is to extend "interstate commerce" to every purely intrastate activity. When I fill up my car's gas tank down the block, that is not interstate commerce. Am I crossing state lines?
8. Big oil is hardly a monopoly. You clearly don't know what one is, if you think that Exxon-Mobil, Shell and the rest are a "monopoly."
9. What gives you or government the right to force a company to distribute a different product than they want? What gives you the right to determine what is best for me? That's complete arrogance.
10. If you think that ethanol is cheaper and so much better, then start up your own company. Nothing is preventing you.
11. Don't be so foolish to think that big oil could ever starve you or your children. If they withheld supplies, one of two things would happen: a few oil companies would still ship, because they'd make money while the other oil companies stockpiled and made ZERO, and people would find substitute methods of transportation.
12. You're operating under the fallacy that consumer choice cannot affect businesses, so government must intervene. That is not the case at all. If businesses controlled consumers, we'd be drinking New Coke. The reality is that businesses are beholden to consumer choice, not the other way around.
13. People can't do things for themselves, so that means the government should force oil companies to sell products that they don't want? That's illogical, immoral and completely unconstitutional.
14. How are oil companies denying you life, liberty or property? They're not committing fraud. They're not forcing you to buy their product. You're acting like the crybabies who think Microsoft is a monopoly that overcharges people. If you don't like what a business is doing, then don't have any more dealings with it.
15. How are oil companies doing "harm" to the American economy? They're the ones who make your entire life possible, from transporting the groceries you eat to faciliating millions of people's commute to work. Petroleum is currently our lifeblood, as coal once was.
16. Show me empirical data substantiating your claim that gas stations switch to ethanol and charge that much more. I have never heard of a station charging 3x-4x for ethanol as they did for gasoline. The station would be foolish to, and do you know why? Because people would drive to the next station and fill up with regular gasoline.
That is basic economics. That's what happens when economics meets the real world: suddenly you can explain why things happen, and why they don't. Suddenly you realize that all the malarky about "evil oligarchical companies" is just bunk.
17. Ethanol continues to receive subsidies, and you cannot deny that. You still have not addressed the FACT that subsidizing a product means the people still pay the full price. You might buy something for $1 instead of $1.50, but by definition you will have to pay the 50 cents out of your taxes. You should stop listening to the likes of the National Corn Growers Association, which lies every time it omits all the subsidies given to ethanol producers. This site is a bit better, since it has actual data on prices -- meaning your quote of 70 cents is totally off. Notice what it says? Ethanol prices fell because of flat demand and increased supply. What do you think will happen with a huge demand for ethanol, but the same supply level? The price will surge.
So supply versus demand DOES affect prices -- did you think otherwise? You shouldn't have to study economics to realize that.
18. The public has shown nothing of the kind that it wants ethanol. The public wants what will give it the most benefit for the least cost. What you ignore is how the U.S. economy is still doing quite well despite higher fuel costs. That's because people adapt to higher prices.
19. If ethanol were such a breakthrough, if there's REALLY a demand for it, someone would have offered it by now. Why don't you and all your friends refuse to buy anything but ethanol-blended gasoline? Gas stations in your area that offer ethanol blends will get all your business. Those who don't will notice the demand, so they'll join in. You shouldn't need an economics degree to see how this works.
And I'm still waiting for you to explain why it's ok to take my money and give it to a company I don't do business with, so that its customers can buy things cheaper. Why do you say it's ok for government to force me to pay for other people?
It comes down to YOU wanting to force ME to live the way you think is best. There's a term for people like you: busybody socialist. You clearly don't believe in the principles of limited government, genuine individual freedom, and the free market and its voluntary trade. Everything you've suggested about "mandates" and forcing oil companies comes down to the ludicrous phrase "public good," which governments have invoked every time they establish a little more tyranny.
I suggest writing responses first in Notepad, then pasting them.
I'll repeat: subsidies are just wrong. The bottom line is that you're spending government money, which means taking my money to support a private business I wouldn't otherwise patronize. That's immoral, don't you see?
Congress can regulate interstate commerce, but "regulate" does not mean promoting one business over another. It doesn't mean that big government can decide what's best for the people. We should decide for ourselves. I can assure you, no oil company controls our destiny, no more than railroads and horse breeders in their time.
And you still can't get beyond the fact that ethanol doesn't have the supply base to support our economy. It would become so expensive that people would say, "I'll go back to gasoline, thanks." Increasing the supply is fine and dandy in and of itself, but again, that would take away from all our other agricultural production. Bastiat would say you're only considering what is seen, and not looking at what is not seen.
Things I am not seeing? You're the one touting government subsidies as the ultimate panacea, when you ignore the unseen effects.
I reference Bastiat because, over 150 years ago, he laid out clear lessons that people today still ignore. You really need to read "What Is Seen and What Is Not Seen" and understand that every dollar government spends -- regardless of how it's spent -- means that we lose a dollar elsewhere.
I feel like I'm talking to a wall. How can you continue to claim that ethanol (or that matter, anything subsidized) is cheaper for the consumer? We pay taxes to make it cheaper.
I still can't get over how you think ethanol will remain cheap. Increased demand will drive up its price, forcing additional subsidies to main a low price; so in the end, we pay higher and higher taxes for the illusion of a low retail price. You can't avoid the laws of basic microeconomics.
You mock economic theory and claim to deal with reality, but you've clearly never studied economics to much extent: you'd have found that these theories are based on the real world, on thousands of years of human history. Economics isn't fundamentally about trade deficits, unemployment or other statistics: it's the science of human action and its consequences.
Learn your Bastiat: look at what is not seen. If someone buys a more expensive product, by definition there's a reason for it.
By the way, do you still think Austrian economics is still geography-derived nomenclature?
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