Tuesday, November 1, 2011

Free market contradictions

The basic tenet of free market capitalism is that trade should be free, unencumbered with state controls and intervention. In reality there is nowhere that complete market freedom actually exists- even the most rapacious capitalists have come to terms with regulation, taxes and so on to reflect wider longer-term social and environmental concerns. But free market enthusiasts do usually draw the line at the state trying to overstep the mark by intervening to support selected technologies via subsidies. That’s almost as bad a state socialism!

You can hear complaints along these lines emerging from the likes of the increasingly oddly named Renewable Energy Foundation in its new Green Mirage report and also from climate contrarian Lord (Nigel) Lawson’s Global Warming Policy Foundation. A bit more surprisingly (although see my previous Blog), a new University of Califonia Berkeley study seems to adopt a similar stance.

The basic argument is that free markets are undermined by subsides and government intervention, leading to less then optimal economic development. But they go further and attack some of the usual economic justifications for intervention - e.g. that countries who get into an area first have a competitive advantages over those who follow. Instead they say, ‘first mover’ advantages are overstated, and it can be better to wait until new technologies are developed by others before buying into them- if they succeed.

This is a form of risk aversion- it says leave the risks of innovation to others. Capitalise instead on less risky market activities e.g. building and controlling markets for exsting products and (especially) services. To some extent this is what the UK has done in recent years. You could see it as a ‘losers’ approach- abandoning involvement with the cutting edge of new developments. That’s sometimes what leftists say we have done- but they tend to link it with claim that the UK has also abandoned industrial production. However it’s more complicated than that. Business school theory argues, with some justification, that the most lucrative parts of the ‘value chain’ are at the front and the back- product innovation /R&D can be cheap but yield huge profits if it works, and there can be huge gains by adding value to products via clever marketing. By contrast production itself is a mugs game, with small profit margins: leave that to others. In the case of the UK we seem to have limited our engagement in R&D and focused most on services and marketing.

For free market enthusiasts that’s presumably fine. It may have come a bit unstuck with the collapse of financial sector confidence, but the remedy is more of the same- not Keynesian reboots of the economy via state programmes and subsidies, green new deals and the like. And so we have REF, GWPF et al sounding off about the horrors of subsidies and specifically saying that we should not privilege renewables, for example, over other low carbon options. Which these days seems to include nuclear, with, for the UK, the technology being bought in from France!

So REF take the ‘One Million Jobs’ report by the Campaign for Climate Change apart- claiming that there will be no significant jobs from subsidised investment in green energy, while GWPF argue that this is partly since it is , and will remain, more expensive than other energy options: ‘there is little evidence that there are large additional economies of scale or learning to be gained, except perhaps for solar thermal equipment. Indeed, US figures suggest that the average cost in real terms of both wind and solar power installations stabilised and/or has been increasing since the middle part of the decade 2000-09. It is unlikely that there is some large reduction in the costs of renewable energy which can be achieved without a major shift in technology’.

So how does this view square with reality?

Solar PV is one new emergent technology - and it’s being progressed rapidly by China, using huge loans from the Chinese Development Bank, which are helping Chinese solar companies push American solar firms out of the market. As Stephen Lacey reported for Grist (part of the Guardian Environment Network) last Sept. ‘In 2010 alone, the bank handed out $30 bn in low-cost loans to the top five manufacturers in the country. This has enabled China's solar producers to grow to GW scale in a very short period of time, turning the country into a leading exporter of solar and pushing down prices dramatically’.

Aggressive, but good to see prices falling - and surely fair under free trade rules. But with some spectacular US company failures (including Solyndra and Evergreen), the US solar industry has been pressing the government for protection against ‘dumping’. An alternative, more progressive, approach would be to compete on technological innovation. GTM Research has noted that ‘It will be difficult for the U.S. to compete with China at its own game - namely, high-volume manufacturing of a commoditized product -given the cost advantages available for Chinese manufacturing. However, the U.S. can and should continue to develop and commercialize innovative technologies that offer lower costs than traditional panels. These new technologies are generally proprietary, require a more skilled labor force, and are difficult to duplicate’.

That could be risky - and may need government support. But that can be justified economically- as well as more generally, in terms of protecting jobs and the planet!

However the University of California Berkeley report is unmoved by ‘common arguments for subsidizing renewable power – green jobs, energy security and driving down fossil energy prices’ . But it does admit that ‘the role of intellectual property spillovers is a strong argument for subsidizing basic science research’, although it still insists that it is ‘less persuasive as an enhancement to the value of installing current renewable energy technologies’.

Oh dear. With negative views like this becoming common in the reaction to Obama’s already watered down intervention polices, it looks like the US could end up trying to rely mainly on shale gas...
• REF report: www.amazon.co.uk/Green-Mirage-Low-carbon-Economy-Further/dp/1906837309
• GWPF report :www.thegwpf.org/images/stories/gwpf reports/hughes-green_jobs.pdf
• University of California Berkeley study http://ei.haas.berkeley.edu/pdf/working_papers/WP221.pdf