2012 Feb 6 |
 |
http://www.theatlanticright.com/2008/12/12/the-wisdom-of-markets/
0
0
Posted by marc moore   |   18 comments

Crowd-sourcing, capturing the "wisdom" of the mob, was what the cool kids were doing not so long ago.  Witness the rise of the Daily Kos and other such web sites.  One thing they failed to espouse in their almost universal progressive liberal dogma is that the idea of mining – and manipulating – the minds of the masses is not a new idea.  Free markets do that very same thing, efficiently causing desired products and services to spring into existence and eliminating the unwanted.  How could progressives have overlooked the most important example of their new idea?

The answer is that when free markets don’t produce the outcomes that progressives want, all too often their reaction seems to be denial of the truth – that the masses don’t agree with their agenda – and they blame the market for some unnamed failure.

For example, imagine 1000 Ford Rangers sitting side-by-side at the dealership.  The vehicles are identical except for one minor detail:  half of the small trucks has a new anti-pollution device that costs an additional $2000 and will reduce gas mileage by 2 MPG.  Which vehicles will leave the lot first?  (Tell the truth.)

The fact that the cheaper, better-performing vehicle will sell – and has sold – better is, according to liberal values, a failure of the market.  Unfortunately that’s not true.  Consumers simply don’t value the reduction of air pollution as much as the left-wing of the American populace.  The failure, if there is one, is our own.

The New Yorker recent ran a piece by Elizabeth Kolbert in which she used improvements in refrigeration technology as an example of how government regulation "created" improvements in consumer products.  Certainly advances in efficiency have been made and Kolbert may be correct in giving credit to California’s efficiency mandate.

Then again, rising fuel prices in the 1970s made consumers aware of electricity costs; that fact alone would have spurred industry to respond in the same way – to the extent that consumers cared about such products.  But I think she’s correct in saying that the regulation helped.

Where Kolbert falls down is in her call for Congress to require large improvements in automobiles’ MPG ratings.  The parallel with the refrigeration technology is solid, so what’s the problem?

The fact that another of liberals’ key agenda items – reduction of air pollution – is directly responsible for reductions in automobile efficiency.  Their demands are effectively equivalent to saying, "Do more work with less energy while working with 1 arm tied behind your back."

That’s the wisdom of social and environmental interventionists and not at all the result a crowd-sourced movement would have come up with.

  1. Posted by redfish
    | Quote | Trackback | Link #80763
    redfish marc, If you assume that the cost of clean vehicles would go down after demand for them increased, but that people would only buy them if the cost went down--then it is a failure of the market. As long as the supply side is waiting for demand in order to decrease the price, it will never happen. The problem though is when corporations are put to solely to blame for this, while there may be a host of reasons. Progressives are implicitly blaming consumers when they oppose more drilling for oil under the argument that high oil prices will increase demand for cleaner vehicles--they understand supply and demand. And a libertarian might argue we would have better clean vehicles sooner if there were less government involvement or less dependence on contracts with unions, because there would be more competition on the market or that regulative boards like CARB have stalled transition towards alternative fuels. Overall though progressives are second guessing the market, putting the sole blame on decisions by corporations, and think they can force adoption of clean technology through government.
  2. Posted by Jason, Managing Editor
    | Quote | Trackback | Link #80767
    Jason, Managing Editor That also assumes that cost is the only thing suppressing demand for so-called "green" vehicles. Lack of capability and robustness are also reasons that some people don't really like so-called "green" vehicles. (For example, the much-vaunted Chevy Volt has (gasp) 40-mile range. That might sound wonderful to a bunch of urban bike-riders living in NYC, but it is completely useless for those of us who live and travel in the midwest.)
  3. Posted by redfish
    | Quote | Trackback | Link #80770
    redfish Jason, I think companies have to make 'green' vehicles attractive to consumers, or else they'll fail. Progressives blame the failure of the electric car in the 90s on a lot of institutional interests, but won't admit most people just didn't like the idea of charging their vehicle. But there also has to be pressure to move in that direction, like we've seen lately with high gas prices. Most people like the -concept- of clean fuel cars, at least, and are disappointed that innovation and getting these things to the market has been so slow.
  4. Posted by marc
    | Quote | Trackback | Link #80789
    marc Redfish, no product is introduced without the presence of actual or perceived demand. The absence of demand doesn't indicate market failure but rather the lack of a market. That said, there certainly is a market size that must be reached before products, particularly those requiring large capital investments, will be introduced. But the success of the Toyota Prius and others indicates that point is passed. Now the question is exactly how many more people value the additional cost of those vehicles? And what of the auto-emissions vs. MPG contradiction? Anti-pollution devices severely hamper vehicles' mileage, as California drivers can attest.
  5. Posted by Steve Krome
    | Quote | Trackback | Link #80790
    Steve Krome
    Redfish said: "Progressives blame the failure of the electric car in the 90s on a lot of institutional interests, but won’t admit most people just didn’t like the idea of charging their vehicle."
    Actually Redfish the electric car of the 90s did not fail. General Motors (along with local law enforcement) repossessed each and every one of their "EV1 Electric Car" and demolished all but a few disabled bodies that went to museums... The problem? They were too successful. The movie "Who Killed the Electric Car?" offers a different perspective than yours and a Wikipedia article on the movie (and the subject in general) attempts to cover all sides of the story.
    marc said: "And what of the auto-emissions vs. MPG contradiction? Anti-pollution devices severely hamper vehicles’ mileage, as California drivers can attest."
    marc, this is just not true or at least an article at ScienceDirect.com says just the opposite is true. Fuel Economy and Motor Vehicle Emissions by Winston Harrington
    Abstract The conventional wisdom is that there is no relationship between fuel economy and motor vehicle emissions, at least for new cars. The requirement that all vehicles meet a common emission standard in terms of grams per mile effectively breaks whatever link there might have been between fuel economy and emissions in uncontrolled (preregulatory) vehicles. As cars age, however, the emission control equipment tends to break down, providing reason to think that the conventional wisdom might do the same. This paper reports on an empirical examination of this proposition, by linking EPA fuel economy certification data to a large database of motor vehicle emission measurements collected by remote sensing. IT IS FOUND THAT BETTER FUEL ECONOMY IS STRONGLY ASSOCIATED WITH LOWER EMISSIONS of CO and HC and that THE EFFECT GETS STRONGER AS VEHICLES AGE.
  6. Posted by Interested
    | Quote | Trackback | Link #80792
    Interested
    redfish : marc, If you assume that the cost of clean vehicles would go down after demand for them increased, but that people would only buy them if the cost went down–then it is a failure of the market. As long as the supply side is waiting for demand in order to decrease the price, it will never happen.
    It'd have to be assumed - but that's only where it would live. Demand based on price alone is non-existent. As such it is not a failure of the market. The market will and has proceeded based on actual demand from consumers.
  7. Posted by Jason, Managing Editor
    | Quote | Trackback | Link #80793
    Jason, Managing Editor
    Actually Redfish the electric car of the 90s did not fail. General Motors (along with local law enforcement) repossessed each and every one of their “EV1 Electric Car” and demolished all but a few disabled bodies that went to museums… The problem? They were too successful.
    Ah, the conspiracy theories presented as proven fact (based on a Wikipedia article even!). How amusing. Car companies have no incentive to destroy a car for being "too successful". And anything that only gets 40 miles on a charge is useless to most drivers.
  8. Posted by Steve Krome
    | Quote | Trackback | Link #80795
    Steve Krome Jason said: "Ah, the conspiracy theories presented as proven fact (based on a Wikipedia article even!). How amusing." I'm glad you're amused Jason. That's what weekends should be for.
  9. Posted by redfish
    | Quote | Trackback | Link #80798
    redfish marc, And the success of cars like the Prius is helped by things like high gas prices. My point is that market forces by themselves can only do so much to bring the consumer what they'd like. Companies have to make judgments which decide if the amount of money in research and development is worth the risk, versus the safety of sticking with the market that's already developed. If there are few enough barriers to entry, startups which need new investors can always take on those risks by promising investors rewards. Development of modern computers and spaceflight began in the government because the amount of money needed to invest was too much for the risk of too little profit. Even in the cases where there are startups willing to do more risky ventures, investors don't always throw money after the ideas that are right, they throw money after ideas that seem worth the risk for them as investors. So my only point is market forces don't always give consumers what they want, for many reasons. They give what firms are willing to produce and what consumers are willing to buy.
  10. Posted by Interested
    | Quote | Trackback | Link #80804
    Interested
    redfish : My point is that market forces by themselves can only do so much to bring the consumer what they’d like.
    That is not accurate. You're stuck on a price = market which simply is not true. The consumer is market forces. If consumer's demand only a Natural Gas vehicle you can bet that the supply side will produce that Natural Gas vehicle and will cease producing whatever is not being purchased.
  11. Posted by redfish
    | Quote | Trackback | Link #80811
    redfish Interested, The consumer is half of market forces. Price is also an important component also because a company might be able to lower the price to a point at which its attractive to consumers, but would first have to make costly or risky investments. This DOES happen sometimes. This is what Microsoft did with XBox and Zune--it was content to lose money so it could get presence on the market--only to later build profit. But it doesn't always happen, because the company isn't ready to do it or the risks/costs are too great. In the case of alternative fuel cars or electric cars, there are hurdles like this also. You need to build infrastructure to support the different cars, so consumers will be confident in buying them. One reason a lot of consumers wouldn't buy diesel now in the US is because there are more petrol gas stations. Potentially, if the government invested money in infrastructure, that hurdle can be jumped, and would be a 'sunk cost' on the government's part. Part of my point was also that the market requires judgments and will on the part of firms and investors. It requires them to guess what consumers want, and guess what the best way to deliver them are. Sometimes they're wrong, and sometimes they have no idea. There's a development cycle. Sometimes products don't exist, and have to be invented, and companies have to develop the product through research. The development cycle is also part of commercial production, and requires the right judgment and will on the part of investors.
  12. Posted by c3
    | Quote | Trackback | Link #80866
    c3 price = market The obvious counter to that assumption is Starbucks.
  13. Posted by Mike
    | Quote | Trackback | Link #81010
    Mike "40 miles on a charge is useless to most drivers." Actually, the Volt will then begin to use gas after 40-miles. I actually think this is genius, since the vast majority of trips will be electric, while the car still supports long-range trips using gas. I live in a relatively rural mid-west community, and the vast majority of my trips are less than 40-miles. While other companies are trying to come up with cars that are totally electric, Chevy realized (smartly, in my opinion), that if they can just deliver a car that is electric 95% of the time, that is a huge step forward. Getting it to 100% electric costs a lot more than it is worth. So I give them kudos. Back to the original post, the reason the cheaper cars that are not environmentally friendly would be sold faster is because the environmental impact of cars is an externality of the car-buying decision (see http://en.wikipedia.org/wiki/Externality). The cost of the environmental impact of a cheaper car is spread across the entire population of the world, and equally born by those who buy environmentally friendly cars or not. Therefore, the obvious market-based decision would be to buy the cheaper car, regardless of the environmental impact (even if it is quite large, since buying the more expensive car would not significantly reduce that cost for me). So yes, this is a failure of the market. A market will only work perfectly if the decision maker bears the entire benefit and cost of the decisions he or she makes. There are ways to artificially mitigate externalities (ie. increase the gas tax to account for the environmental impact of burning fossil fuels), but by definition those would not be "free market" solutions. Contrary to ideology, the free market is not a fundamentally perfect concept, for this reason and others: http://sovereignmind.wordpress.com/2008/10/11/freedom-vs-fairness/. It is true that it is a very good system in terms of economic growth, but we should not ignore its weaknesses and we should seek to balance the benefits of the free market with the mitigation of its negative consequences.
  14. Posted by Jason, Managing Editor
    | Quote | Trackback | Link #81043
    Jason, Managing Editor I would withhold the kudos until it becomes apparent whether there is really a market for this car or whether it will only be produced and forced on the public as a result of government mandates and subsidies. (I guess I could even live with some consumer directed subsidies -- but the mandates and diktats proposed by many on the environmentalist left are right out with me.) And before you get all preachy about the externalities of traditional gasoline engines (and the Wikipedia link is a bonus to plagiarizing college freshmen everywhere, btw), you might want to consider the externalities of battery manufacturing and recycling also. Greenies tend to develop a bit of a blind spot about those during their fetish of the Prius, etc. I am not a free market purist, BTW. For example, I have noted in relation to the financial bailout that "capitalism is a theory, not a religion -- and every theory encounters conditions where it becomes inoperative". But I also recognize that government chooses winners often more for political than for pragmatic reasons. The choice of winners in the automotive market is being done more to pay off union supporters of the Democratic Party who have negotiated contracts that render the companies fundamentally non-competitive as well as environmentalist activists who pretty much hate everything invented after the dawn of the industrial age than to actually build a viable and efficient automotive industry for the long term. So let's not pretend it is all flowers and teddy bears with the Volt or other government-propped interventions.
  15. Posted by Dave T
    | Quote | Trackback | Link #81052
    Dave T Mike wrote: "I actually think this is genius, since the vast majority of trips will be electric..." Mike, have you ever considered how much the car's electricity is going to cost? As an engineer, I can do that. Let's say our super-duper electric car uses 35 horsepower on level ground. At 25 MPH (lets go slow to save electricity), it will take 1.6 hours to go 40 miles (the range of our super electric car). Each horsepower requires 746 electrical watts. So, 35 horsepower x 746 watts for each horsepower equals 26.11 continuous kilowatts. So, over a period of 1.6 hours, the electric vehicle would use 41.77 kilowatt-hours (KWH). At a typical cost of $0.10 per KWH, you would pay $4.18 to travel 40 miles. DO THE MATH: that's more than it would cost to use gasoline! [yes, yes I know that the super-duper car will generate electricity when it goes downhill, but it usually has to GO UPHILL to GET to where it can coast downhill, and this will use far more electricity than going on level ground. Also, the efficiency of electric motor-generators used in electric cars is noticibly short of 100% So, the benefit is even less than what I am discussing here] However, this cost of your car's electricity is just the tip of the iceberg. Where does the car's electricity come from? Your local utility company, which burns natural gas and OIL to generate it, also at an efficiency of far less than 100% (the US has hardly any nuclear). So, here is the process: we BURN CONSUMABLES, then convert the heat to electricity, then transmit the electricity to your home, where it charges your car's batteries. Then the electric vehicle turns the electricity into mechanical energy. At each step of the above process, energy is LOST through converting to other forms and transmission to remote locations. Unfortunately, the math is too complex to present here: but you end up using MORE OIL than you would have if you just used a regular gasoline engine. AND THIS IS WHY electric cars are just a fad--and will remain so until engineers can develop genuine ways to make them cheaper to operate than gasoline.
  16. Posted by Mike
    | Quote | Trackback | Link #81061
    Mike Jason, before I respond, let me be clear that I am not a "greenie". I am debating a particular point in the post, but I absolutely agree with you that sometimes the solutions that environmentalists come up with are worse than the problem they are trying to solve, and that government doesn't always have the best motives. Batteries in electric cars might be a good example of that, as you note. However, besides the Volt issue, I was particularly responding to this point made by marc in the post, which I interpreted as not understanding the concept of externalities, which is a perfectly logical concept, regardless of the reputation of wikipedia: "For example, imagine 1000 Ford Rangers sitting side-by-side at the dealership. The vehicles are identical except for one minor detail: half of the small trucks has a new anti-pollution device that costs an additional $2000 and will reduce gas mileage by 2 MPG. Which vehicles will leave the lot first? (Tell the truth.) "The fact that the cheaper, better-performing vehicle will sell - and has sold - better is, according to liberal values, a failure of the market. Unfortunately that’s not true. Consumers simply don’t value the reduction of air pollution as much as the left-wing of the American populace. The failure, if there is one, is our own." The fact that most people would opt for the cheaper car does not mean the cheaper car is the one that is best for the world in general, because the cheaper car might have costs that aren't born only by the purchaser (which I believe is rightly called a failure of the market). Jason, I understand now that you understand this concept, and have applied it rightly to batteries in electric cars. However, it's not clear to me that marc understood it, which is why I posted what I did. Again, I am not a greenie, and often I fall of the side of conservatives on environmentalist issues, but I just don't like seeing flawed arguments go unchallenged, even when I tend to agree with the ultimate conclusion. It could be that I just didn't understand the point marc was trying to make with that example, in which case I apologize and ask for clarification. But if we agree that externalities are real and that they do represent a "failure" (to some degree) of the free market, than it makes sense that we would need to mitigate those failures by some outside (non free market) force, which is what the environmentalists are trying to do my imposing more government control. So their approach is valid. But whether the specific policies they are advocating are good is debatable.
  17. Posted by Mike
    | Quote | Trackback | Link #81063
    Mike Dave T, The cost and environmental impact of electricity is something I have thought about. A few weeks ago I tried to look up some information on that, but was unsuccessful (probably due to my lack of expertise in the area). The general feeling I got from the things I read was that electric cars would be more efficient because the energy is being generated in a centralized location. It's probably an oversimplification, but it made sense to me that a lot of energy being generated in one place is more efficient that little individual energy generators driving around. However, I neglected to consider the loss of energy in transferring it. (For what it's worth, I support nuclear power.) I defer to your expert opinion, and I appreciate the information. Do you have any links that explain this that I can use as a reference? (Not that I don't trust you, it's just that if I have to explain this to someone else, linking to a comment on a blog post would not be very authoritative). So I admit that my endorsement of the Volt is perhaps premature. I guess my point is that if an electric car is the goal, I like the idea of creating a car that gets us most of the way there faster, rather than spending too much time trying to get 100% of the way there. (It's the 80/20 rule). But you and Jason might be right that an electric car might not be the right end goal anyway.
  18. Posted by Dave T
    | Quote | Trackback | Link #81065
    Dave T Mike, You are correct in stating that large scale generation of energy usually is more efficient than small scale stuff. However, the advantage just mentioned does not make up for the losses in energy conversion along the "burn oil or natural gas, generate electricity, transmit electricity to consumer charging site, charge the car batteries, discharge the car batteries, operate car's electric motor" path. The core issue of all this efficiency stuff is cost: for until the cost of using alternative energy is at least as low as using gasoline, I (and I imagine most other people) simply are not going to embrace the technology. I have a good friend with a Toyota Prius. He proudly told me he gets over 40 MPG with his new car. But I have a Buick that cost less than half of what my friend paid for his Toyota--and I get 32 MPH. So when I do the math, my friend is spending a LOT more on transportation than I am. However, I guess he goes to bed every night feeling he is helping the environment, which I have to assume is worth an expense of about $20,000 to him :-) As far as gasoline vs electric pollution in vehicles, there are lots of statistics to read: I wonder how many of them are true? I remember standing on 15th floor of the main office building for a large American city's utility company (I worked as an engineer there). It was a very smoggy day and I commented another engineer, "Boy, our cars sure do create a lot of pollution, don't they!" The other engineer, who worked in oil/gas electrical generation, just smiled and said, "Dave, it's not the cars; it's us." Was this guy right? I'm not sure. But I do know the exhaust of modern fuel-injected cars is almost breathable--but our cities are still smoggy...why is that? As far as web sites to visit, I recommend just Googling "electric car efficiency." Most of the sites deal with politics and "environmental religion," but I noticed there were a few factual sites.