The market economy promotes diversification when the future is uncertain and there are differences of view. This is one of its fundamental strengths. But the market economy does not achieve enough diversification when the future is uncertain and there is commonality of view. This is one of its fundamental weaknesses.
The potato, native to South America, was brought to Europe by Spanish colonists. When English settlers displaced Irish peasants from pasture to marginal land, the potato proved the ideal crop, so ideal that it was almost universally adopted. But potato blight spread through the country in the 1840s. The scale of the damage to Irish food production led to mass starvation and emigration.
Ireland then, like many poor agricultural areas today, would have benefited from a more diverse agriculture. But the best course for each individual farmer was to grow potatoes.
Similarly, each individual European energy supplier may see Russia as the cheapest source of gas. But Europe as a whole would be better off with a wider range of suppliers. Diversification would have benefited the Irish subsistence economy and would now benefit the European energy economy, in two ways. The economy would have been more robust in the face of any particular disruption of supply, natural or political. And the probability of such disruption would be lower: monocultures are vulnerable to disease; users dependent on a single supplier are open to blackmail.
Security is the archetype of the public good and more effectively pursued collectively than individually. There are efficiencies in pooling resources to achieve physical security in policing and in military defence. There are similar efficiencies in pooling resources to achieve economic security by maintaining reserves of spare capacity and securing diversification of supply.
With both physical and economic security, competitive action by individuals to provide security for themselves may reduce the security of all. Societies with more than one police force, such as Somalia, are not safe places to be and the simplest way of reducing personal economic risk is to transfer it to a weaker party. The process of transferring commercial risks to more naive or vulnerable holders makes an economy more vulnerable to downturns, as we are soon likely to learn.
The market economy promotes diversification when the future is uncertain and there are differences of view. This is one of its fundamental strengths. But the market economy does not achieve enough diversification when the future is uncertain and there is commonality of view. This is one of its fundamental weaknesses.
The Wall Street Journal, never outdone in its admiration for the heroes of Redmond, expressed the paradox well when it notoriously claimed that: “Microsoft should have argued that we have a monopoly because our customers want us to have one.” It is possible, indeed likely, that consumers want to buy Microsoft products but do not want there to be only a single supplier of software. However, there is no way to register that choice in the marketplace. When buyers choose a PC over a Macintosh they are choosing the most suitable product for their needs, not voting between Bill Gates and Steve Jobs for the post of software commissar. No doubt Mr Gates would be a better commissar of software than a communist functionary but it is better that there be no commissar of software at all.
Energy policy demonstrates both parts of the paradox. The market economy depends on pluralism, but pluralism can be maintained only through political action. Yet, more often, political action is deployed in support of centralisation. Longing for an energy commissar is strong even among people who know how unsuccessful economic development planned by commissars has been. The good argument for energy policy is that reliability of supply benefits from a degree of central direction. The bad argument for energy policy is that co-ordination enables those who mistakenly think they can predict the future of energy supplies to impose their views on the industry and the community.
The result is ineffectual policy and confused outcome. The summit of the Group of Eight leading industrial countries this week will illustrate both. I shall return to that issue in next week’s column.
