Energy Economics with Eyes Open

Article excerpt

Energy is a scarce resource. No one was ever able to have all the energy he wanted. It is neither free nor a gift of nature. Someone must spend labor, wealth, and time to find, produce, and use it. In short, energy is an economic problem.

Of course, energy is a vital economic resource. It is needed for power, transportation, industry, and almost every other human endeavor. It is the lifeblood not only of a modern society, but of any society. This importance, however, does not remove energy from the scope of economics; it only makes economic analysis all the more essential.

The many dimensions of the energy problem can be illustrated by asking a few questions. How much energy do we want and what are we willing to give up for it? Do we want to work longer hours or divert capital from other uses to get more energy? From which sources should our energy come? We can obtain it from coal, oil, natural gas, nuclear reactors, electric batteries, windmills, horses and mules, or from any combination of these sources. But which combination and in what proportions? Where do we want to use our energy? We can use it in industry, transportation, or heating, or we can have some of each. But how much? And which specific industries, modes of transportation, and methods of heating should we use?

These questions present us with a problem, because there are an infinite number of answers to each question. The best answer can only be found when we are able to compare the costs and benefits of each alternative available to us. And since we are dealing with heterogeneous resources, costs and benefits can only be compared with the aid of a common denominator-a price. With this in mind, let us examine alternate social systems to find the one best equipped to economize our energy.

First, there is complete socialism. Its defining characteristic is the public ownership of all the means and resources of production. In light of the collapse of the Soviet Union and its satellites, the suggestion of a pure socialist economy seems foolish. But why must socialism fail? Did the Soviet planners merely suffer from poor judgment or is there a systemic flaw in a publicly owned economy? About 80 years ago, Ludwig von Mises, in his great work Socialism, explained why totalitarian central planning cannot economize resources. By examining a system that fails, perhaps we can find the necessary ingredient for a successful economic system.

Under a system of only one voice, no buying or selling among resource owners is possible. Buying and selling presuppose more than one voice, more than one man or group, seeking gain. Without the buying and selling of resources there can be no resource prices under socialism, except for meaningless arbitrary ones used for bookkeeping. Because there can be no resource prices, the relative values of heterogeneous raw materials, assortments of capital goods, and different types of labor cannot be found. Costs and benefits cannot be compared between resources. The socialist directors would not know if they are profiting or losing. They would not know by performing an action if they were serving consumers better or worse. Hence, socialism does not provide a method for economizing our energy.

To illustrate the dilemma of a socialist, I shall recall the childhood game "pin the tail on the donkey." Each participant was blindfolded and told to pin a donkey tail on a donkey's picture. The one coming closest to the place where the tail should go-the optimal spot-won the contest.

Without prices a socialist is blindfolded also. If you were a socialist director, how would you direct the economy? You have every economic resource at your disposal, but you cannot know which ones are more expensive and by how much. You are blindfolded to price-to the cost of attaining your objectives.

Copying the Market

You can use as a gauge the prices of other nations that have markets. But that is cheating-do not look under the blindfold. …