Socialists of all parties and the Miliband energy proposals

It is nearly seventy years since Friedrich Hayek dedicated The Road to Serfdom to ‘the socialists of all parties’. Sadly, socialism remains alive and well, and nowhere more so than in the energy policies of all the UK's major parties.

Mr Miliband's proposals to freeze energy prices for homes and businesses for twenty months if Labour is elected, to replace Ofgem with a ‘tougher’ regulator and perhaps to break up the big energy companies are merely the latest in a series of misguided ideas that are leading back to centralised planning of the energy sector.

As explained in the October issue of Economic Affairs, the origin of these ideas lies in the final years of the last Labour administration when, influenced principally by an apparent consensus in the scientific and economics establishments about future climate change and its dire consequences, government began once again to intrude, as it had done under nationalisation, into major energy investment decisions. In particular, it reverted to a regime, unsuccessful under state ownership, of interfering in electricity generators' choices of which fuels to use. In a policy subsequently followed and indeed reinforced by the present coalition, it promoted ‘renewable’ forms of energy such as wind and biomass and subsidised energy ‘conservation’. Support for a new nuclear power programme may soon be on the way as well. In sum, energy companies have in recent years been instructed by governments of all major parties to use more expensive fuels than they would freely have chosen and consumers have had to bear the (considerable) costs.     

Further upward pressure on energy prices has occurred because the liberalised UK energy market, completed around the turn of the century long after privatisation, could not co-exist with such a degree of government intervention. It has been replaced by a market highly regulated from the centre. Whatever one thinks of the prospects of damaging climate change, it is clear that this government, following its predecessor, has chosen the worst possible approach: in a very uncertain situation the last thing required is Soviet-style central planning with its attendant rigid state-sponsored investment programmes.

Mr Miliband's proposals stand out as particularly crude and irrelevant measures, which do nothing to address the principal upward pressures on prices. Why price controls should have been announced is difficult to understand since his advisers must be aware of the long history of failed attempts to apply such controls by politicians unaware of the functions of the price mechanism, of the potentially severe unintended consequences, especially for the supply of energy, and of the possibility of pre-emptive action by energy companies before the proposals could come into effect. As for Mr Miliband's plan to abolish Ofgem, the regulator has hardly distinguished itself since it gave up trying to promote competition and settled instead for acting as the government's agent in the energy market. However, abolition is not the answer. There is a place for some energy market regulation, for instance of the networks, but it needs to be tempered by vigorous promotion of competition so that energy companies do not believe, as they do now, that they can raise prices secure in the knowledge that their ‘competitors’ will follow.  

A fundamental problem in UK energy is that the coalition and the previous government have raised energy prices both directly by promoting uneconomic forms of energy, and indirectly by suppressing competition, substituting a highly regulated, centrally controlled energy market for the previous liberalised regime. Mr Miliband has seen only the symptoms of this failed approach and, like price fixers before him, would make matters worse if his ideas were ever applied. All the major parties should seek the underlying causes of the malaise in the energy market. The model is there to see. Anyone who really wants to protect consumers would reinstitute a competitive energy market rather than try to fix prices and impose yet more central regulation.

 

Update (December 2013): Colin Robinson explores these issues in more detail in From Nationalisation to State Control - The Return of Centralised Energy Planning.

Your last paragraph sums things up perfectly. Unless and until we get the State out of almost all day-to-day activities, we'll continue to live in USSR-lite, rather than in the genuinely capitalistic nation which gave us the Empire, build virtually all our infrastructure and, above all, planned wisely for the future. We lack Biologists in senior positions, that's the fundamental flaw with our society. For biologists recognise, even worship, at the altar of competition and diversity - for without those two key elements you can never have evolution and adaptation to an ever-changing environment. Biologists also understand statistics and the basic mind-set underpinning their use: 'What, exactly, do you want the calculations to prove?' and the concept of evolutionary time, rather than the (grossly over-stated) demands of a 24/7 news cycle. So the correct response to the energy market - indeed ALL markets - the the UK is for the government to get the heck out of them and stop trying to pick 'winners' and 'favourites'. It should stop over-taxing road transport to subsidise rail and bus transport It should meet demands, not just now, but for 2050 and beyond for London's airports (which means 10-12 runways, not the absurdity of 'a 3rd runway at LHR would meet demand until 2040' - unless they mean until twenty to nine tonight!)# It should stop rationing houses by ending planning laws and allowing builders to build what people want to live in, where people want to live. If a modern 16+/acre Prescott-approved slum costs £180,000, then what price a 1930's era 2/acre tree-lined road home? £350,000? More? Yet that pre-planning laws house cost the equivalent of around £65,000 today - and the secret of 'affordable housing' is NOT to build modern slums (small, dark, cramped, over-crowded and without parking) at extortionate prices, but rather to build 1-2 million homes at low density of 'Green Belt' land, so that we can have homes and garden of which we can all be proud, as a nation, and which are affordable to one and all. On a single salary, what's more. Which is ANOTHER thing the State should get right out of - forcing 'wimmin' back to work (ie so they can pay more taxes to the State) is the antithesis of what is required to ensure the next generation is brought up well in stable, happy, contented families. Rather, try raising the Personal Allowance to Minimum Wage levels, scrap Child Benefits and tell all those paying higher-rate Income Tax that they have to pay the full (tax-deductible) cost of their children's education, the school setting the fees (and awarding scholarships, obviously!). The principle can then be extended to basic-rate taxpayers - raise the threshold to £20k, BUT you pay (directly) for your child's education. So no children and your ££££'s better off (which is good news for the UK too, in the longer term) The repeat the process for health too and you have no-one under median earnings paying ANY Income (or NI) taxes, BUT they pay directly for the education and health insurance of their families. Costs to be tax-deductible and the grotesquely inefficient State provision ends. Then we can move on to other areas of State monopoly failures - road capacity being the most obvious, but there are many more besides............
The Robinson critique/demolition (above) of the Miliband proposals ruthlessly exposes the economic incoherence/vacuity that underlies them. It is worrying to note in this regard, that Ed Miliband obtained an M.Sc in Economics at the LSE...but seemingly eschews economic analysis in favour of some hodge-podge of ideas that, perhaps, owe more to his father's devotion to Marxian /central planning mythology?

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