Fixing the energy market

The Institute for Paternalism, Protectionism and Regulation today published a report on Energy Security. It is, in the most part, a rehashing of received wisdom, without understanding or insight, but one phrase in the Executive Summary stood out for being more than just vacuous. It is symbolic of the way that this sort of organization, and their friends on the centre-left and centre-right, view the role of government:

"Clearly there is no one-size-fits-all solution to these challenges and undoubtedly a mix of policy measures will be required."

Sounds innocent enough, but consider if you applied the logic in other fields. What about the field from which the phrase is drawn? There is no one-size-fits-all solution for clothing, so the Government needs a mix of policy measures to ensure that the correct balance of sizes is supplied. There tends to be less demand for the smallest and largest sizes, so to reduce the risk that the market may not provide equal choice to these consumers, we will have a policy to encourage or require production of extra-small and extra-large sizes. The larger sizes use more fabric and therefore cost more to produce, so we will have a policy to subsidize outsize clothing, to avoid people being "discriminated" against for their size. There are a range of collar, bust/chest, waste, hip, inside leg and thigh sizes, so we will have policies to ensure that sufficient quantities of each size is produced. And these different measurements occur in a range of combinations. Shall we have policies to try to calculate the incidence of the various combinations, and mandate that production match these calculations? Or shall we mandate the mean or median combinations, as government is fond of doing in other fields (people's deviation from the mean being a "second-order" issue)? How shall we allocate responsibility for production of different sizes and shapes to the various design houses? Should every range have to comply with all these policies, so that no one is deprived of a choice that someone else has, in accordance with the principles of equity? How will small lines survive when they have to satisfy rules that compel them to service the whole market? How much variety will be on offer? And how will new styles, designs, and innovations occur when designers are bound tightly by rules that determine the sizes and shapes that they must offer?

It's ridiculous, of course, but it is no less ridiculous to apply this approach to the many fields, such as energy, where the Government and bodies like the IPPR believe that it is essential to intervene with a wide range of targeted measures. The truth is exactly the opposite. It is precisely because there is no one-size-fits-all solution that it is important for the Government to intervene as little as possible. We need to allow the market to function without skewing it, so we can discover the optimal balance of options.

Intervention is needed only to correct market failure. Market failure is very much less common than those who think they can compensate for every instance of human fallibility would like to believe. Failure to deliver the predicted or desired quantity of a particular solution is unlikely to be evidence of market failure. It is much more likely to be evidence of failure of the analysis that resulted in the prediction or desire.

Failure to prevent there being winners and losers is not evidence of market failure. There should be winners and losers amongst competitors in functioning markets. The absence of winners and losers would be greater evidence of market failure (probably market-fixing by the participants or by government). We should only try to prevent the creation of winners and losers when they are created by government intervention - and the appropriate action is to remove the intervention, not to compensate for it with another intervention.

There are only a few categories of real market failure, such as externalities, public goods, or insufficient competition. Many of the things that are claimed to fall into one of these categories are not genuine market failures, but are termed as such to justify intervention. Government interventions should address only the limited number of real market failures, and do so directly. They should not try to deal with them indirectly by guesstimating what the outcome would be in the absence of market failure and introducing policies intended to deliver that outcome. It doesn't matter whether it's shirts or energy, all the government should do is tackle the market failure without preference to outcome, and leave the rest to the market.