Wednesday, August 12, 2009

Invisible Hands

Adam Smith's most memorable phrase may have been the "invisible hand" of free market economics. Free markets, he argued, allocate resources with maximal efficiency. The centuries since have provided ample evidence for his idea, and the current century in particular has clearly demonstrated the limitation and inefficiencis of centrally planned economies.

So what are the enemies of the free market? The most important one is government. As Smith recognized, merchants will do their best to recruit the government to suppress competition and guarantee them large profits. It's only slightly ironic that the most successful manipulators of government have been those who shout most loudly in favor of "free enterprise."

David Cay Johnston's Free Lunch is, as I have previously mentioned, a long catalog of such abuses. Enron was the pioneer in getting state utility regulations turned into direct pipelines from taxpayer's wallets to its own, but plenty of others followed where it led.

The scam depends upon the fact that utilities have natural monopolies. Very few people have any choice about whom they buy their power from, so the current owner of your electric power grid could potentially charge almost any fee it wants. States responded to this circumstance by regulating the prices such monopolies could charge. This resulted in a system where monopolistic utilities were effectively guaranteed a modest profit in return for providing their service. Obviously this falls somewhat short of free market ideals, and there are many of the expected impediments to innovation and efficiency.

Enron had the bright idea of separating the power distribution facilites from the power generation facilities and connecting them with an auction system, supposedly to increase competition. As Adam Smith could have predicted, Enron in fact had no such ambition. Instead it used the politicians it had bought (including much of the Texas legislature and the Federal Energy Regulatory Commission via George W Bush) to rig the rules of the auction in so as to promote collusion, decrease competition, and, especially to free the power generators from the grip of state regulators and their regulated profits. The result could have been predicted: any enormous run up in electrical rates, blackout and brownouts (orchestrated to justify the prices) and massive profits for those who could afford to buy a State legislature or two (Warren Buffet being perhaps the most prominent of these scam artists). The perpetrators do their best to keep their own hands invisible too. Their essential ally is government secrecy. So why should the actions and deliberations of state utility regulators be kept secret? Only to protect the crooks who are stealing us blind.

At one level, this is the result of government officials not doing their jobs, but at a more fundamental level it is the result of the enormous disparity in wealth that exists in this country. The enormous financial power of a Buffet or Walton makes State and federal legislators easy prey. An outraged citizenry is the only useful weapon against them, but with all major sources of news in the hands of the same oligarchs, they aren't easy to rouse from their slumber - or rather, they are easier to rouse to fight purely imaginary bogeymen than real dangers.