November 2011

Continuing with excerpts from great books on environmental and energy issues (see last week’s posts here), below is an excerpt from Mark Pennington’s brilliant new book Robust Political Economy. “Robust” political institutions are, according to Pennington, those “institutions that perform best given that people 1) have limited knowledge and  2) are prone to self-interested behavior.” He argues the case that market institutions are better suited to deal with these realities than governments. In this passage, he applies these two criteria to environmental protection.

Robust Political Economy was released in 2011

Classical liberalism does not question the view that environmental problems arise when private actors are unaccountable for their actions. What it does question is the supposition that political intervention, whether of the ‘command and control’ or ‘price-based’ variety, is the best way of ‘internalising’ the relevant externalities. There are two dimensions to this account which reflect the focus on the conditions required for a robust political economy of institutions and decisions.

The first line of analysis draws on the Hayekian understanding of the knowledge problem. Seen from this perspective, neo-classical approaches to environmental policy repeat the socialist calculation error by assuming that the knowledge necessary to correct for ‘market failures’ is somehow ‘given’ to policy-makers. In an environmental context the assumption is that trade-offs between environmental and other objectives are known and fixed.

Viewed through the Hayekian lens both command and control and price-based policy mechanisms are variations of central planning and may be inappropriate because the primary environmental problem is typically not one of giving people the right incentives to act on the basis of known environmental values, but of discovering what the relevant values are. Knowledge of these values is fundamentally dispersed throughout society and evolves in light of the changing ideas of individuals and organisations as they interact with each other and the natural world.

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House Republicans, led by Speaker John Boehner, announced today that they will soon be introducing the American Energy & Infrastructure Jobs Act. A summary is available on Rep. Boehner’s website. The bill would expand domestic American oil and natural gas production offshore and on federal lands, something I believe is very positive. However, I am not enthusiastic about depositing royalty revenues into the Highway Trust Fund, which would spell an end to the mechanism’s “user-pays/user-benefits” principle that has long enjoyed broad bipartisan support. The other day at CEI’s OpenMarket.org, I briefly explained why this is a shortsighted move that will likely do great harm to long-term surface transportation policy in the United States by opening the door for increased politicization.

The first three excerpts this week argued that the quantity of natural resources are 1) not as limited as experts have believed (Daniel Yergin), 2) not as important as our technological and political ability to access them (Peter Huber/Mark Mills), and 3) not “natural,” in that their usefulness is not an  inherent feature, but rather an artificial human innovation (Robert Bradley).  This excerpt from Matt Ridley’s brilliant 2010 book The Rational Optimist: How Prosperity Evolves explains how non-renewable, finite energy sources paradoxically made economic growth sustainable. With inanimate objects doing the work instead of slaves, we can, as he says, all “live the life of a Sun King.” 

 In 1807, as Parliament in London was preparing to pass at last William Wilberforce’s bill to abolish the slave trade, the largest factory complex in the world had just opened at Ancoats in Manchester. Powered by steam and lit by gas, both generated by coal, Murrays’ Mills drew curious visitors from all over the country and beyond to marvel at their modern machinery. There is a connection between these two events. The Lancashire cotton industry was rapidly converting from water power to coal. The world would follow suit and by the late twentieth century, 85 percent of all energy used by humankind would come from fossil fuels. It was fossil fuels that eventually made slavery–along with animal power, and wood, wind and water–uneconomic. Wilberforce’s ambition would have been harder to obtain without fossil fuels. ‘History supports this truth,” writes the economist Don Boudreaux. ‘Capitalism exterminated slavery.’

The story of energy is simple. Once upon a time all work was done by people for themselves using their own muscles. Then there came a time when some people got other people to do the work for them, and the result was pyramids and leisure for a few, drudgery and exhaustion for the many. Then there was a gradual progression from one source of energy to another: human to animal to wind to fossil fuel. In each case, the amount of work one man could do for another was amplified by the animal or the machine. The Roman empire was built largely on human muscle power, in the shape of slaves. It was Spartacus and his friends who built the roads and houses, who tilled the ground and trampled the grapes. There were horses, forges and sailing ships as well, but the chief source of watts in Rome was people.

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There was a telling juxtaposition in the news yesterday. On the one hand, Energy Conversion Devices became the latest green energy company to flirt with bankruptcy, after benefiting from stimulus spending. On the other, oil and gas giant Anadarko announced that it would invest $1 billion annually to tap the Wattenberg field, part of the Niobrara shale formation in Colorado.

Such investments are fuel to the engine of job creation. A decade ago, the Niobrara shale deposits would have been worthless, because we couldn’t get the oil and gas out of the ground. But that changed thanks to two technological breakthroughs—horizontal drilling and hydraulic fracturing.

In fact, these two innovations are allowing for the recovery of big oil and gas plays across the country, which is why the industry is a leading job creator. Earlier this month, Reuters reported on a new analysis from the U.S. Bureau of Labor Statistics showing that jobs related to oil and gas drilling account for one in five of all net new private sector jobs in the United States since 2003. And according to a recent report by economics consulting firm EMSI, nine of the top eleven fast-growing jobs in the nation are in the oil and gas sector.

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