The California Energy Crisis: Once Again Capitalism Takes The Fall For Statism

by | May 27, 2001

Politicians and pundits claim that the free market has had its chance and failed, calling for a government takeover of the electric utilities and power plants as the solution. The tragic irony is that California’s energy nightmare would have been absolutely impossible in a properly functioning free market. Capitalism has historically served as the scapegoat […]

Politicians and pundits claim that the free market has had its chance and failed, calling for a government takeover of the electric utilities and power plants as the solution. The tragic irony is that California’s energy nightmare would have been absolutely impossible in a properly functioning free market.

Capitalism has historically served as the scapegoat for all of America’s economic problems. Capitalism has been maligned as the cause of unemployment, inflation, the Great Depression, poverty, “over-consumption,” and the mismanagement of the environment, just to name a few.

A repeat of this phenomenon has occurred in California’s recent energy crisis, which has brought the wealthiest state in the most civilized country in the world to a sorry condition that is reminiscent of backward third world nations.

The crisis is blamed on the “deregulation” that allegedly occurred in 1996. Politicians and pundits claim that the free market has had its chance and failed, calling for a government takeover of the electric utilities and power plants as the solution.

The tragic irony is that California’s energy nightmare would have been absolutely impossible in a free market. As in all the other economic problems America has experienced in the course of its history, capitalism is wrongfully blamed for the failures, to be more precise, for the SUCCESS of its antipode, statism.

California’s problem is essentially a power shortage, a situation where the available supply of electric power is insufficient to cover the needs of the demand. Even the most elementary knowledge of sound economics is sufficient to show that this could never happen in a free market, because the unhampered market mechanism functions in a way that averts such situations.

Whenever the demand for a product or service exceeds its supply, this means that the price of this commodity is lower than the equilibrium price under the existing market conditions. This lower price is responsible for expanding the demand and limiting the supply, thus causing a discrepancy between them.

However, this situation is easily corrected in a free market. Since the consumers’ needs are not fully satisfied, they would be willing to pay a higher price, which naturally enables the companies selling the product to raise the price till demand and supply are equalized. Without such an equilibrium mechanism in place, the claims that the failure of the free market caused California’s energy crisis are exposed as nothing more than reckless demagoguery.

The reason why this simple process couldn’t have worked in California is precisely because the energy market was never free. What California introduced in 1996 was not deregulation, but “reregulation”. The most devastating aspect of that “reregulation”; was the shackling of the price mechanism, as utilities were not allowed to sell electricity at a price higher than 14 cents a kilowatt-hour. This price control by governmental decree HAD to bring about precisely the result it did; A POWER SHORTAGE.

With the price of electric power rising to 50 cents per kilowatt-hour elsewhere in the country due to increases in oil and natural gas costs, the price set by California law was vastly below equilibrium and created such a severe shortage. The attempt of the California utilities to satisfy the excess demand for power at the decreed price naturally led them to amass huge losses in recent months, bringing them to the verge of bankruptcy.

The crisis was intensified by other governmental regulations, most notably environmental ones. In its perverse quest to “preserve the environment,” the government placed severe restrictions in the number of power plants, thus further reducing the supply of electricity available and exacerbating the shortage. Just peal off the layer of prevailing expert opinion on this issue and the identity of the culprit is revealed in California’s energy crisis in the simplest terms: The villain is not capitalism, but socialism.

In view of this, the governmental takeover of utilities and power plants proposed by California governor Gray Davis is truly grotesque. When this mess was brought about by government interference in the first place, establishing total government control of the supply of electric power would create the kind of chaos that would go beyond our wildest imaginations, an energy calamity that would make a mockery of the free and prosperous commonwealth set up by the Founding Fathers.

Davis and other statists are pouring gasoline on the fire and getting away with it by cashing in on the prevailing economic and philosophical trends. The last two generations of economists have sadly been weaned on the theories of John Maynard Keynes, who in the 1930s undercut capitalism in the same way that Kant had undercut reason in the eighteenth century.

Keynesian economics holds that the free market is inherently unstable and thus subject to serious economic problems. Keynes’ proposed cure-all for those problems is the government, which is responsible for achieving equilibrium in output and employment, stabilizing the economy, and overseeing all economic activities. Such a mentality always views the free market as the problem and government as the solution, unthinkingly calling for more government controls in response to economic problems without ever examining how these problems came to being in the first place. With the economics profession thoroughly steeped in this mindset, there is always a chorus of alleged “experts” to second the unscrupulous demands of power-seeking politicians.

As important as the influence of bad economic thinking may be, economics is never the fundamental driving force of human actions, be they private or governmental. Since man needs to be guided by moral principles, all human choices and actions can be traced back to morality.

Through the greatest part of history, but especially during the last two centuries, humanity has been dominated by the morality of sacrifice. This moral code views the actions of businessmen as inherently evil because they are motivated by profits rather than sacrificial service to society. On the other hand, the government is hailed as the representative of the good, since it is endowed with the power to compel individuals to sacrifice their private interests for the sake of promoting the “social welfare.” It is this morality that led the mass of twentieth-century intellectuals to uphold and defend Soviet Russia as good, while condemning America as evil.

Although Soviet Russia has thankfully collapsed, the morality that spawned it is more dominant than ever. Denigrating businessmen as “selfish materialists” and extolling bureaucrats as “public spirited civil servants,” the ethics of sacrifice leads people to automatically view the free market as the problem and government as the solution. As long as this morality continues to prevail, it will be impossible to effectively defend capitalism and discredit statism.

This is why the government has kept expanding at the expense of individual liberty and private property, although the efficacy of the free market and the disruptive impact of government regulations have been clearly and repeatedly demonstrated.

The battle to resolve California’s power crisis has to be fought primarily in the moral realm and the main combatants need to be the utility executives themselves. They ought to stand on a morality upholding self-interest as the supreme value and defending their right to freely do business in an unhampered market. They should unequivocally and on moral grounds condemn their proposed nationalization.

Instead of driving themselves to bankruptcy by providing power at the rates mandated by the government, utilities ought to protest the infringement of their rights by refusing to produce under coercion, thus teaching power-hungry politicians that they cannot expect to get the benefits of business by enslaving businessmen. With California plunging in total darkness, Davis and his statist cronies will reap the end results of their policies, demonstrating in the most concrete terms that statism can only beget destruction.

The only way of avoiding this grim scenario and solving the energy crisis is by making the case that this situation has been caused by government regulations precisely because those controls are inherently irrational and evil. Since the moral is the practical, immoral policies that violate the rights of businessmen will inevitably undermine their ability to provide the goods, thus creating problems like California’s energy crisis.

Capitalism has been taking the fall for statism far too many times and for far too long to the detriment of prosperity and liberty of man. The only way of correcting this situation and averting its repeat in the future is by abolishing all government controls and letting utilities do business as they see fit in a free marketplace.

The case for capitalism needs to be made loud and clear, not only on the grounds of economic efficiency, but above all on the morality of self-interest and the principle of man’s rights as declared by America’s Founding Fathers.

Dr. Emmanuel Foroglou runs a web site at www.foroglou.org.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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