Invisible Energy: Government Oversight Makes Markets Work

Washington Post columnist E. J. Dionne wrote today that

This week's Group of 20 meeting in London will arise from the death of one system of ideas even as another struggles to be born.

He discusses the concepts of government oversight of markets in terms of socialism and capitalism (as in "one system of ideas/another") and suggests that the common wisdom is that unregulated markets are capitalistic and regulation is related to socialism or at least European style social democracy.

Many policy makers act as if free markets are the result of an absence of government regulation and assume that such markets always automatically produce the best results for everyone. I call this belief "economic fundamentalism" (and describe it in Saving Energy Growing Jobs) because its believers treat it as revealed truth that need not be subject to empirical verification.

The global recession and its direct cause -- the financial sector meltdown -- offer dramatic empirical evidence that unregulated (or even weakly regulated) markets can fail.

What has not been recognized is how regulation is always necessary to make markets work in the first place. Government regulation is not a move from capitalism to some form of socialism, instead, regulation is a necessary condition for capitalism and free markets to work.

Incongruous as this may seem, I actually saw how unregulated markets can fail during a recent vacation trip to Morocco.

As I wandered through the narrow medieval streets of Fes, I saw shop after shop displaying "18th Century Berber tribal silver jewelry" or "50-year-old rugs made without chemical dyes."

An economic fundamentalist would say that such shops, where prices were set by bargaining, should produce the best deals. But in fact, they will usually produce a bad deal for tourists, who don't know exactly what they are bargaining for, while the store owners do.

How do you know if an article is antique hand made silver? Of what kind of dyes were used in a rug? You only know if there are standard-regulations-on how products are labeled and represented. This is usually a function of government. I describe this problem in more detail in Chapter 4 of Saving Energy Growing Jobs on pages 126-34.

The problem of needing government regulation of markets -- the establishment of standards for what a product really is, whether it is an oriental rug or a variable-rate home mortgage -- is a key to the solution of climate problems.

For example, when you buy a new television, you have no idea what its carbon footprint will be, even though apparently identical televisions differ in the their carbon footprint by as much as 2 to 1. (They have the same 2:1 difference in their effect on your electric bill: the difference could cost you $150 a year.)

But television manufacturers can't advertise the difference today because U.S. law (wisely) requires that such representations be made using government-produced standards. But the standards for energy measurement were designed for black and white televisions of the 1970s! California has petitioned the Department of Energy to substitute a new international standard written just last year, but as of today is still waiting for a response.

A favorable response could empower consumers to cut residential carbon emissions by over 1 percent while saving money. It is one of a long, long list of actions where government intervention into dysfunctional markets for energy efficiency technologies could help get us out of the recession while reducing pollution and creating jobs.

These issues will be discussed in detail in my forthcoming book from Bay Tree Publishing called Invisible Energy.