Energy

Bureaucratic Conspiracy and the Energy Crisis

|

The story is told in the Old Testament of the Bible how the Pharoh in Egypt had a dream wherein 7 lean calves consumed 7 fat calves. This dream was followed by another in which 7 blighted ears of grain ate 7 succulent ears of grain. A young Hebrew named Joseph explained to the Pharaoh that these dreams foretold 7 bountiful crop years to be followed by 7 years of famine. The Pharaoh accepted Joseph's interpretation and made him a bureaucrat whose function was to store grain during the years of plenty so that food would be available in the years of famine.

By providing extra grain for the bad years, Joseph caused the price of grain in those years to be lower than it would have been. However, by providing for the future Joseph caused the price of grain in the bountiful years to be higher than it would have been had he not been buying for future use a portion of the crop in each of the good years. Thus, Joseph's actions of providing for the future by allocating the grain through time reduced the amount of fluctuation in the price of grain. Joseph performed for the Pharaoh the function of a speculator.

Today there are many Josephs prophesying an energy famine and calling for the state to assume the function of a speculator by setting aside energy today for use in the future. In today's prophecy it is "greed" and "private property" that play the roles of the lean calves and blighted grain in endangering the future. But the analogy has been misplaced. In fact, greed and private property play the role of Joseph, assuring a proper allocation of energy supplies through time.

In the 18th century the social function of greed in a modern society—a society based on individual liberty and private property—was well understood. In 1714 Bernard Mandeville wrote about Private Vices, Public Benefits, and in 1776 Adam Smith enshrined the concept in The Wealth of Nations. But these books are not read today and their wisdom is lost. Increasingly people look back to the social system of ancient Egypt and believe that only state bureaucrats can provide public benefits. If we repeal not only the 20th century but the 19th, the 18th, and all the centuries since Joseph's time and return to a system in which only state bureaucrats can provide public benefits, we will have transformed our form of social system into that of ancient Egypt. The bureaucracy is eager for this transformation, and their spokesmen say that it is necessary if there are to be adequate supplies for the future. Before we subordinate, in the name of the "public interest," our private interests to those of a Pharaoh and his bureaucracy, let us hear anew how private interests produce public benefits.

PRIVATE GREED

If energy resources become increasingly scarce, their prices will rise relative to other prices. This means that the selling of energy resources will become increasingly profitable as time proceeds. The greedy private owners will find that it is in their own interests to space out through time the extraction and sale of the energy resources. Thus does private greed play the role of Joseph, and thus do private interests coincide with public interests.

Those who claim that greed and private property threaten our future energy supplies frequently cite as examples the near extinction of the buffalo and whale by "unbridled capitalism," the implication being that the future holds more of the same for our energy resources unless something is done by the state. The fact is, however, that the buffalo became nearly extinct because the herds were not private property, and the whale is threatened for the same reason today. Whales are (and buffalo were) what is called a common property resource, which means that no one has enforceable private ownership rights. Thus, no one has any economic motivation to insure the future availability of common property resources, and present profits become the only criterion that determines the rate at which such resources are harvested. If whales were private property, future profits would be considered, and whales would no more face extinction than do cattle, pigs, and sheep.

To the extent that ownership rights in oil are similar to those in buffalos and whales—that is, governed by "the rule of capture"—different landowners extracting oil from a common pool will behave as did buffalo hunters. But this is not because the oil pool itself is privately owned, but because it is not. Under "the rule of capture," the oil becomes private property only when it is extracted—that is, captured like the buffalo. Thus to the extent that future oil supply is threatened, it is a reflection of defective rules of ownership as defined by the state.

Even with a defective rule of ownership, if the price of oil were expected to rise through time relative to other prices, it would be profitable for either adjoining landowners over a common pool to form a single company or for someone to buy up all the land over the oil pool, thus transforming the pool into private property. Once the oil is private property, the greedy private owner can be expected to maximize his income over time. That is, he will not extract all the oil in the present if he expects the price of oil to be higher in the future. Nor will he live in penury in the present for the sake of larger profits in the future. Even if the private owner prefers present income to future income, he would maximize his income by selling his rights to the oil rather than by increasing the rate of extraction. By selling the pool he can capture some of the higher future profits that are expected to result from a rising price of oil, but by increasing the rate of extraction, he may drive down the present price, thus lowering his income.

"Very well," someone might say, "but private greed is nevertheless unpleasant, and you have shown that it does only as good as Joseph. Is it not better to serve the public interest directly rather than as an indirect consequence of serving private interests?"

There are two assumptions implicit in this question that are false. Joseph was looked on with favor by God, who helped him, so presumably Joseph was serving God's interest directly and the public interest indirectly as a consequence. There is no evidence that God helps present-day bureaucrats or that they further the public interest as a consequence of serving God. Thus, we can neither expect present-day bureaucrats to perform as well as Joseph nor expect their interests to coincide with the public interest.

BUREAUCRATIC GREED

Indeed, not only have the bureaucrats performed badly, they have performed so badly that the energy famine and their proposals for dealing with it can only be understood in terms of the self-interest of bureaucrats. Reasoned books have been written about "private vices, public benefits," so there is a rational basis for assuming a coincidence between private and public interests. But no book has ever been written about "bureaucratic vices, public benefits." The basis for assuming that the interests of bureaucrats coincide with the public interest is an act of faith.

It is possible to test for coincidence between bureaucratic and public interests by examining the implications of the bureaucrats' proposals for dealing with the energy famine. Bureaucrats have proposed price controls, "excess-profit" taxes, rationing, increased regulation, and nationalization. Such proposals are blighted grain and lean calves, and do not insure the future availability of energy. Since price controls hold down the price at which consumers can buy, people have no economic incentive to economize on their use of energy. Thus, the demand for energy is greater than it would be in the absence of price controls. Economic science is based on the law of demand which states unequivocally that the lower the price, the greater the quantity demanded. Similarly, price controls have pernicious effects on the supply side. The lower the price, the lower the profits, and the lower the incentive to supply energy and develop new sources.

"Excess-profit" taxes allow the bureaucracy to appropriate the profits that rise through time as energy resources become increasingly scarce. Such an expropriation of the profits of the producers confiscates their private property and eliminates the incentive that insures the future availability of energy. Talk about nationalization has the same negative effect of discouraging oil companies from investing now in anticipation of future profits.

It is difficult to argue that such proposals serve the public interest and assure a proper allocation of energy resources through time. But it is apparent that the bureaucrats' proposals coincide with the self-interest of the bureaucracy. Put simply, allowing market forces to determine the allocation of a commodity at a point in time and through time does not increase the demand for bureaucrats. However, the proposals of the bureaucrats—price controls, "excess-profit" taxes, additional regulation, nationalization—all serve to increase the demand for bureaucrats.

The bureaucracy must grow if price controls are to be enforced. When shortages result from price controls, the bureaucracy must grow further to ration the commodities for which there are excess demands at the fixed prices. When the incentives that lead to a proper allocation of resources through time are damaged, it is the bureaucracy that provides the production schedules that are forced on suppliers. When the incentives for further exploration for energy resources are destroyed, it is the bureaucracy that staffs a nationalized oil industry.

The lack of coincidence between bureaucratic and public interests is further illustrated by the fact that bureaucratic nests are so heavily feathered by an energy famine that the bureaucracy has a great incentive to cause one. And indeed it did, whether consciously or inadvertently. The Federal Government pushed us every step into the famine.

WHAT HAPPENED

It began in 1938, with a law regulating gas pipeline companies, a law that the Supreme Court reinterpreted in 1954 to apply also to natural gas producers. Thus the price of natural gas was held down by regulation. This caused known supplies to be used at a greater rate and reduced the profit incentive for suppliers to look for future supplies. Exploration for natural gas declined and less was found. This meant oil had to supply a larger percentage of the total demand for energy. In 1969 the depletion allowances were reduced which reduced the accustomed profitability of the oil industry. All of this time the demand for oil was increasing as more people heated more homes and drove more cars further distances. All of this time the oil industry managed to increase supply to match the rising demand and maintain a constant price. Then the bureaucrats in the Environmental Protection Agency struck with interventions that caused an increase in the rate at which demand was rising through time and a decrease in the rate at which supply was increasing. At the same time that more gasoline was required to travel the same miles as a result of exhaust emission controls on cars, the construction of new oil refineries was delayed and blocked. With demands rising more rapidly than supplies, an upward pressure was put on price, but with price controls in effect, price could not adjust upward, so an excess demand at the controlled price—a shortage—resulted.

To top it off—according to recent testimony by G.E. Schuler, vice president of Bunker-Hunt Oil Company, before a Senate subcommittee—in 1971 State Department bureaucrats weakened the bargaining power of U.S. oil companies in their negotiations with the Arabs by letting it be known that the oil companies were without the support of the U.S. Government. Perhaps these particular bureaucrats were educated at Harvard, or some other prestigious university, where they learned that the U.S. was a neo-colonialist power which exploited the undeveloped "Third World," and perhaps they felt morally compelled to side with Arab interests against American interests. Whatever their motives, the effect of their actions was to further the energy famine, and that, as we have seen, is in the interest of bureaucrats.

There are two conclusions that could be drawn. One is that the bureaucracy is economically illiterate and incompetent, and therefore its attempts to further the public interest are so destructive of the public interest that it should be prevented from doing anything. The other is that the bureaucracy consistently acts in its own interest, an interest that does not coincide with the public interest, and for this reason it should be prevented from doing anything. We should note that the bureaucracy's performance seems incompetent only if we assume that it is striving to act in the public interest. Once we assume it is acting in its own interest, its actions appear rational.

The January 10, 1974, press conference at which Secretary of State Kissinger and (then) Federal Energy Administrator Simon discussed the energy crisis supports the interpretation that the crisis, whether consciously or inadvertently induced by the bureaucracy, is being consciously used by the bureaucracy to further its expansion. Simon speaks of the need for a new agency in government that brings together all aspects of energy "under one roof, so that we can more effectively deal with the problem." "A new government relationship must be forged with the energy industries." "We have to get about a Manhattan-type project." "We are going to have to take a brand new look at what the government role is to be in our energy industry."

The final cat is let out of the bag by Kissinger, and it is indeed ominous: "We have started, within our government, a study of what may happen with respect to other commodities over the next ten years. And if our conclusions should lead us to the view that [other shortages] could arise, we hope to make proposals at an early time."

There is a conspiracy, but it is a conspiracy of bureaucrats, a conspiracy that is unwittingly protected by the naive world-view of liberals who believe that all good follows from public actions and all evil from private actions. The liberal is an easy dupe of the bureaucrat, because the liberal's outlook is highly simplified: on the one hand he sees the public interest, identified with big government, self-evident and beyond questioning by an upright person; on the other hand he sees private interests, selfish, sinister and illegitimate. As a result of the pervasiveness of this outlook, the public learns in schools, colleges, universities, and from the news media to be suspicious of the private businessman and to look with favor upon government interventions as acts in the public interest. We expect that the informal inculcation of this attitude will soon become official educational policy in the U.S., just as it is today in Sweden—a country totally ruled by bureaucracy.

Dr. Roberts is Professor of Economics at West Georgia College and Research Fellow at the Hoover Institution, Stanford University. Dr. Van Cott is Assistant Professor of Economics at West Georgia College.

Advertisement