Assume that Russian czar Vladimir Putin has an ounce of ideology in him, that is, he is not in the job only for his own selfish interest, but he genuinely thinks that “the West” is decadent and evil, and that the Russian civilization can save mankind. In that case, he has a good reason to believe that he cannot really lose the war he started in Ukraine.
The reason is that even if his armies lose on the battlefield, as may very well happen, the Russian czar will have, in the meantime, pushed many Western governments to dramatically increase their own Caesarean powers. The European Commission has just put together a plan for redistributing the energy industry’s “excess profits” to consumers and intermediate users of (natural) gas—as Russian state crony Gasprom has cut nearly all its sales of that product to Europe. The plan will probably be adopted on September 30 when the Energy ministers meet. (See “How the EU Intends to Collect ‘Windfall Profits’ from Energy Firms,” The Economist, September 15, 2022; “EU Seeks to Raise $140 Billion Clawing Back Energy Profits,” Wall Street Journal, September 14, 2022; and “EU Targets €140bn from Windfall Taxes on Energy Companies,” Financial Times, September 14, 2022.)
As the plan now stands, the government would seize part of the profits whose pursuit normally lead energy companies to risk investment losses in the hope of making excess profits in the future. It is as if the government capped the “excess prices” paid to producers, disincentivizing them from producing more. On the other hand, by using the confiscated profits to cap the consumers’ energy expenditures at what they now spend, it will encourages them to consume more than they would otherwise do. What is needed given the increased scarcity is exactly the contrary: more production now and in the future, and less consumption now. Furthermore, price caps on gas and electricity are already in force in some countries and may be tightened. A real planning mess! (Even the United Kingdom government, which some hoped had left the EU to pursue free-market policies, announced price controls on energy.)
The economic consequences will probably prove disastrous. Governments (the EU government and the national governments) will need correcting interventions in cascades, becoming more dirigiste as they try to solve problems they themselves created. The phenomenon is well known: as central planning fails, arguments are made that more central planning is needed. “Energy czars,” clean or dirty, will gain power in the bowels of Western Leviathans. Energy markets will be blamed as ripe with “market failures.”
All these are temporary emergency measures, the EU governments will say. But as usual, once the emergency is over, state power is very unlikely to retreat to its pre-emergency level. It will continue to grow, one emergency after another. (See Robert Higgs, Crisis and Leviathan [Oxford University Press, 1987].)
It is an error to think that the rule of law, individual rights, and “political rights” can long survive the demise of economic freedom. Milton Friedman’s classic Capitalism and Freedom (University of Chicago Press, 1962), published 60 years ago, remains required reading on this issue. In order to protect their subjects from excess prices, politicians and bureaucrats will accumulate excess power over them. The West will go farther down “the road to serfdom.” It would be surprising if the US government did not follow. The West will be really decadent and evil. Whether by then the old Russian tyrant is still alive or not does not matter from our viewpoint.
I am not arguing that nothing should be done. I am arguing against central planning. The least bad solution in the circumstances (thus, the best one) would be to subsidize those households whose misery is deemed unacceptable or would break the European public’s resistance to Putin’s imperial tyranny; and to let prices and profits play their signaling role of coordination without coercion, like in a free society. (See my recent EconLog post “Efficient and Inefficient Rationing.”)
(See Robert Hicks, Crisis and Leviathan [Oxford University Press, 1987].)
I’m sure Dr. Higgs would appreciate a correction to this reference. 😀
Roundtree: Thanks for noticing the typo, which I just corrected. I must have been thinking of the Hicks bosom. (And my apologies to Bob!)
Pierre: My reading of Friedman and attending a seminar he conducted when I was a grad student at Chicago, his statement, one cannot be economically free if they are not politically free. His first requirement for a free society was a free press. I believe Hayek influenced him in that regard.
While I agree with him, China might suggest something different. At the end of the day for many the right of free speech is esoteric because, like myself, nobody is interested in listening to me anyway, including my own wife!
But for real, I live in an HOA with no free speech by contract (and I want that because the last thing I need is a neighbor flying a swastika, Biden sign OR Trump sign), I work at a job with, and I signed this actually, with no free speech, I shop at stores on private property and again I can’t say anything. Living in FL, I suppose I could wade into the Everglades and have a chat with the gators?
I guess I’ll have to settle posting occasional missives here on econlib and I might add some of those have been censored too!
Craig: Two points. First, free speech is essential to criticism; and criticism is essential to efficiency–even for a the dictator, hence his dilemma. More on this in: “The Autocrat and the Free Press: A Model“; and “Putin: The Difficult Life of a Dictator.”
Second: One distinction is essential to a free society. There is no free speech on private property, except with the permission of the owner, because this would contradict the concept of private property (and there would be externalities everywhere). I don’t have free speech in your living room. Free speech is only applicable to the public domain; in other words, censorship is only forbidden to governments. Friedman’s Capitalism and Freedom was for many a first step to understand this.
“Free speech is only applicable to the public domain; in other words, censorship is only forbidden to governments.”
I understand what you mean, but isn’t it confusing to talk about private parties exercising censorship? As the Oxford English Dictionary makes clear, the word censorship derives from the Latin censor, which was the title of two magistrates in ancient Rome, who drew up the register or census of the citizens, etc., and had the supervision of public morals. And it is almost entirely with reference to government officials that the words censorship and censor have been used historically and are employed today. One exception is that these words can refer to certain university or college offices, but that is a very particular use.
David: Friedman’s main argument is that you cannot have what he calls “political freedom” (roughly: individual rights) without economic freedom. He writes (in chapter 1):
I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity. … History suggests that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.
This is consistent with Hayek’s argument in The Road to Serfdom. Remember Friedman’s example: if the state controls the paper industry, to which publications is it going to sell paper? To the dissidents’?
Where do you find that claim the West is supposed to be decadent because of its economic freedom?
In my understanding, the claim if decadence rather relates to the social aspects such as LGBT.
Mactoul: Whether or not one agrees with some of its forms, moral decadence (meaning the undermining of traditional or religious morals) requires economic freedom. Morally decadent books cannot be published if the state controls the publishing or paper industry. Gay saunas can’t exist if people can’t do what they want in their buildings. And so forth. It’s a different form of moral decadence when the state tries to impose its own moral decadence (even if the majority agrees, of course), for example when the state pushes some sexual deviance or allies itself with senior punks like patriarch Kirill.
The West will be really decadent and evil. Whether by then the old Russian tyrant is still alive or not does not matter from our viewpoint.
I read your texts here from time to time an although I agree less and less often, I have the impression that your moral stance has rarely been formulated as compactly as in the two sentences.
Jens: Like we do when reading poetry, you may read too much is my statement. Expressed otherwise, it means: The generally accepted morals will really be as decadent and evil in the West as it is now in Russia–that is, against the natural equality of individuals (Buchanan) or against a spontaneous order allowing individual liberty (Hayek). Whether or not, by that time, Putin is already in heaven with patriarch Kirill [sorry for the poetic slip here] will not change the great loss for mankind that the demise of individual liberty will represent. (I think my more concise formulation was better!)
The usage of terms decadent and evil to describe conditions that do not conform to some libertarian ideals is confusing. In particular, decadent is not an apt word in context.
This leads to odd conclusions such as economic freedom being necessary for moral decadence. Roman Empire was plenty decadent without being a paragon of economic freedom.
Mactoul: Perhaps you are right, but I am in good company. Raymond Aron (a very mainstream French liberal-conservative) published in 1972 his Plaidoyer pour l’Europe décadente (Robert Laffont), translated in English as In Defense of Decadent Europe (Regnery/Gateway, 1979). Alas I can’t put my hand on the book on my bookshelves, so I can’t elaborate.
Note also that the first meaning of “decadent” given by the online Merriam-Webster is:
characterized by or appealing to self-indulgence a rich and decadent dessert the hotel’s decadent luxury
Unfortunately these “markets” are so far from free that interventions are required. The gas and power markets have been structured for decades to specifically NOT provide short term price signals to a large percentage of participants and to not allow incentives for long term reliability. The technological and regulatory upgrade required is so vast it cannot be done for this winter.
That being said, in the long run more liberalization of the market is the “first best” policy. Specifically ensuring that everyone faces true marginal cost/pricing decisions.
An important take-away from this event should be the way governments handle their green energy policies. Put aside the warranted debate on whether to intervene or not and at least acknowledge that if the govt provides government subsidies and/or price floors to “green” energy producers then the govt ought in exchange own a high struck “call” on the energy also. This way “excessive” profits will accrue to the govt, but will be know a prior instead of an ad hoc method as we see now.
Why are these markets (gas and generation) far from free?
Why do you say they don’t provide short term price signals when the whole debate/reaction has got sparked, precisely, by the short-term price signals?
I don’t think this is the case, but if it were how is this intervention going to help to achieve more free markets and more useful price signals?
“to subsidize those households whose misery is deemed unacceptable”
Why? “deemed unacceptable” by who?
Misery deemed unacceptable, profits deemed unfair … the “deeming committee” of the EU is going to be extremely busy (very likely too busy to function properly taking into account that is going to be staffed with bureaucrats).
What if the very decent and admirable people that care about these situations use their own money, instead of mine, to help “deemed (now clearly by them) unacceptable miseries”
If you are a European family, your education cost has been fully subsidized, and your health care has been fully subsidized. So, if you cannot pay your electrical bill, which represents (after the increase) around 3% of the average household expenses, no intervention is going to solve your problem. Maybe is time to give a chance to “no intervention whatsoever”: it is, very unlikely, going to be worse for you than the actual “full of interventions” model.
Putting things in perspective (I will use Spanish figures but, very likely, the situation is pretty similar in other European countries):
a) the average consumption per household is 9kwh which represents around 1.8 euros per day (and these are September 14th, 2022, figures, energy cost for the PVPC tariff, very likely the one for the households you seem to be worried about).
The problem of the electricity is not that it is expensive, it is that it is too cheap!
b) There is already plenty of subsidies to the electricity consumption of poor families. 25% of the cost if your household income is less than 45-60% (no dependents-two or more dependents) of the average household income and 40% if is less than 22.5-30% of that average.
c) the household electrical consumption represents around 25% of the total consumption. Household consumption is not the driving force behind electricity markets. And even less so the “vulnerable households” consumption which is around 10-15% of that figure (3% of the total consumption).
If there is something that electricity markets (and European households!) don’t need for sure is EVEN MORE subsidies. On the other hand European politicians in Brussels, guilty as they feel for their lack of legitimacy, are desperate for handing more of them.
Jose: Your attack against the “deeming committee” is interesting and the following is a good and well-put argument:
If you are a European family, your education cost has been fully subsidized, and your health care has been fully subsidized. So, if you cannot pay your electrical bill, which represents (after the increase) around 3% of the average household expenses, no intervention is going to solve your problem. Maybe is time to give a chance to “no intervention whatsoever”: it is, very unlikely, going to be worse for you than the actual “full of interventions” model.
Two points, though. (1) I suspect that the 3% does not includes the current sky-high prices. You mention 25% later, which is another ball game. (2) In a warlike situation, subsidies are more efficient than price controls and central planning.
3% was in September last year 2021
https://www.eleconomista.es/economia/noticias/11397483/09/21/El-gasto-de-la-luz-acapara-ya-el-3-del-presupuesto-de-las-familias-espanolas.html
(Sorry it is in Spanish).
Interestingly enough the electricity prices in September 21 were, just, 20% lower than in September 22. With the PCI at 10.5% is not so “sky high” as the central planners pretend (remember that they need us feeling that we need them to do something).
https://www.home-assistant.io/integrations/pvpc_hourly_pricing/
Granted, this is after some (weird) price intervention in the generation market in June, with an effect not easy to estimate but in the ballpark of 10-20%.
[Another relevant fact is that the highest prices seen so far were in December 2021: 50% higher than in September 2022 and still a record. Some European electricity markets did not need the war in Ukraine to be seriously affected by the nuclear and coal power plants decommissioning already taking place before the Russian invasion]
But let’s say that today’s electricity prices are 30% higher (in nominal terms). Assuming the average household income stays the same (it does not, that’s why inflation), that would make it around 4% of expenses. So, a 1% increase. These same families spend 35-40% of their income in housing rents, normally under 5-year contracts with yearly increases linked to the PCI. That means, under the current situation, an increase of around 4% in the household expenses coming from rents: 4 times the increase in the electricity costs!! … and yet …
It seems that Mrs Von der Leyen (with her love for central stage) is more interesting in solving relatively minor problems that can be linked to the Russian war that real ones caused by the inflation engineered by another European institution.
The problem with electricity for households (with energy in general) is that the “value” of the product is much (very much) higher than the price (a huge consumer surplus), making it the perfect price for politicians to tamper with.
Evoking the image of children freezing to dead and then pretending to do something about it is politically useful even in end of summer childless European households.
I was rather surprised to read that you do not make any mention of EU sanctions against Russia in your post. It is this particular set of interventions that is a principal reason for high energy prices in the EU. Are there any classical liberals/libertarians who are prepared to condemn those sanctions (and the conscription of all men between 18 and 60 by the Ukrainian state)? Or are these proper exceptions to the general rules? And if so, why?
Mark: Your objections are a whole program. On your first and second sentence, my opinion is that the cause of all this is emphatically not EU sanctions but the naked violent invasion of Ukraine by the Russian tyrant and his breaking a contract signed by his crony Gasprom (and which was probably precisely and fraudulently meant as as a future means of coercion). On your third sentence, most classical liberals, from Adam Smith to Hayek made exceptions for emergency situations, although I would still condemn conscription; taxes and sanctions are much preferable.
Classical liberals would indeed make exceptions for emergency but I wonder would libertarians?
Mactool: It depends on what you include in “libertarian.” Defining the term to cover the extreme on a liberal-libertarian axis, the answer would be no because anarcho-capitalists and some minarchists would reject exceptions.
This seems to assume a zero-sum model. Why can’t the choices of EU regulators harm the west without the result being a win for Russia? Maybe in some sense Russia gains to some degree from economic harms to the west but it seems plausible, indeed very likely, that he’s lost more as a result of the economic sanctions and increased solidarity of NATO than he could ever recover because of some minor economic inefficencies in western gas regulation.
The west is rich, it’s not great that we may end up having a less efficient gas distribution system but it’s not really a significant thing in the big picture. Especially given that we are migrating away from the use of fossil fuels so even if the regulations stick it seems like they will naturally cease mattering in the relatively near future.
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