The sharing economy and the electricity industry

In a recent essay, the Rocky Mountain Institute’s Matthew Crosby asks “will there ever be an AirBnB or Uber for the electricity grid?” It’s a good question, a complicated question, and one that I have pondered myself a few times. He correctly identifies the characteristics of such platforms that have made them attractive and successful, and relates them to distributed energy resources (DERs):

What’s been missing so far is a trusted, open peer-to-peer (P2P) platform that will allow DERs to “play” in a shared economy. An independent platform underlies the success of many shared economy businesses. At its core, the platform monetizes trust and interconnection among market actors — a driver and a passenger, a homeowner and a visitor, and soon, a power producer and consumer — and allows users to both bypass the central incumbent (such as a taxi service, hotel, or electric utility) and go through a new service provider (Uber, Airbnb, or in the power sector, Google).

Now, as millions gain experience and trust with Airbnb, Uber and Lyft, they may likely begin to ask, “Why couldn’t I share, sell or buy the energy services of consumer-owned and -sited DERs like rooftop solar panels or smart thermostats?” The answer may lie in emerging business models that enable both peer-to-peer sharing of the benefits of DERs and the increased utilization of the electric system and DERs.

A P2P platform very explicitly reduces transaction costs that prevent exchanges between buyer and seller, earning revenue via a commission per transaction (and this is why Uber has in its sights such things as running your errands for you (video)). That reduction allows owners of underutilized assets (cars, apartments, solar panels, and who knows what else will evolve) to make someone else better off by selling them the use of that asset. Saying it that way makes the static welfare gain to the two parties obvious, but think also about the dynamic welfare gain — you are more likely, all other things equal, to invest in such an asset or to invest in a bigger/nicer asset if you can increase its capacity utilization. Deregulation catalyzed this process in the airline industry, and digital technology is catalyzing it now in rides and rooms. This prospect is exciting for those interested in accelerating the growth of DERs.

Note also that Crosby makes an insightful observation when he says that such P2P networks are more beneficial if they have access to a central backbone, which in this case would be the existing electricity distribution grid. Technologically, the edge of the network (where all of the cool distributed stuff is getting created) and the core of the network are complements, not substitutes. That is not and has not been the case in the electricity network, in large part because regulation has largely prevented “innovation at the edge of the network” since approximately the early 20th century and the creation of a standard plug for lights and appliances!

The standard static and dynamic welfare gain arguments, though, are not a deep enough analysis — we need to layer on the political economy analysis of the process of getting from here to there. As the controversies over Uber have shown, this process is often contentious and not straightforward, particularly in industries like rides and electricity, the incumbents in which have had regulatory entry barriers to create and protect regulatory rents. The incumbents may be in a transitional gains trap, where the rents are capitalized into their asset values, and thus to avoid economic losses to themselves and/or their shareholders, they must argue for the maintenance of the regulatory entry barrier even if overall social welfare is higher without it (i.e., if a Kaldor-Hicks improvement is possible). The concentration of benefits from maintaining the entry barrier may make this regulation persist, even if in aggregate the diffuse benefits across the non-incumbents is larger than the costs.

That’s one way to frame the current institutional design challenge in electricity. Given that the incumbent utility business model is a regulatory construct, what’s a useful and feasible way to adapt the regulatory environment to the new value propositions that new digital and distributed energy technologies have made possible? If it is likely that the diffuse economic and environmental benefits of P2P electricity exchange are larger than the costs, what does a regulatory environment look like that would enable P2P networks and the distribution grid to be complements and not substitutes? And how would we transfer the resources to the incumbents to get them out of the transitional gains trap, to get them to agree that they will serve as the intelligent digital platform for such innovation?

I think this is the question at the guts of all of the debate over the utility “death spiral”, the future utility business model, and other such innovation-induced dynamism in this industry. I’ve long argued that my vision of a technology-enabled value-creating electricity industry would have such P2P characteristics, with plug-level sensors that enable transactive automated control within the home, and with meshed connections that enable neighbors with electric vehicles and/or rooftop solar to exchange with each other (one place I made that argument was in my 2009 Beesley lecture at the IEA, captured in this 2010 Economic Affairs article). Crosby’s analysis here is consistent with that vision, and that future.

A sabbatical note

Modern life is full of bustle and inattention, with too many activities and tasks and opportunities competing for our limited cognitive bandwidth. Even in the relatively staid academic life this is true; my regular teaching requirements and other campus commitments have meant that my mind is stretched, particularly over the past few years as some of the aspects of my job have shifted around. I have to fit in research when and where I can, and for the past few years it’s felt like the space for it is in the interstitial bits between my other responsibilities. Combine that with my natural inclination towards short attention, encouraged by the Internet, and I haven’t made the time or mental space to work on new ideas. But for the next few months, that will change.

One of the most appealing aspects of an academic job is the opportunity to take a sabbatical, and I am taking one now. I am thrilled and honored to be visiting in the Department of Political Economy at King’s College London, where I’ll be working with my good friends Mark Pennington and Paul Lewis. I’ll be here for six months, and am planning to work on a couple of different papers on the effects of regulation on experimentation by producers and consumers,alternative regulatory frameworks that could move us toward permissionless innovation in the electricity industry, and regulation and innovation in the residential rooftop solar market.

The KP Spouse (who will work in his regular job from London) and I left Chicago last Monday, laden with luggage and bicycles. After a week of grocery shopping, exploration, and a trip to Edinburgh to celebrate our godson’s birthday, I have been welcomed enthusiastically by my colleagues at King’s this week. It’s a diverse department, full of economists and political scientists working at the intersection of various theoretical strands, and I’m looking forward to the exchange of ideas and cross-pollination. And to living in London, of course, one of my favorite places in the world.

Please stay tuned …

Should regulated utilities participate in the residential solar market?

I recently argued that the regulated utility is not likely to enter a “death spiral”, but that the regulated utility business model is indeed under pressure, and the conversation about the future of that business model is a valuable one.

One area of pressure on the regulated utility business model is the market for residential solar power. Even two years hence, this New York Times Magazine article on the residential solar market is fresh and relevant, and even more so given the declining production costs of solar technologies: “Thanks to increased Chinese production of photovoltaic panels, innovative financing techniques, investment from large institutional investors and a patchwork of semi-effective public-policy efforts, residential solar power has never been more affordable.” In states like California, a combination of plentiful sun and state policies designed to induce more use of renewables brought growth in the residential solar market starting in the 1980s. This growth was also grounded in the PURPA (1978) federal legislation (“conservation by decree”) that required regulated utilities to buy some of their generated energy from renewable and cogeneration providers at a price determined by the state public utility commission.

Since then, a small but growing independent solar industry has developed in California and elsewhere, and the NYT Magazine article ably summarizes that development as well as the historical disinterest of regulated utilities in getting involved in renewables themselves. Why generate using a fuel and enabling technology that is intermittent, for which economical storage does not exist, and that does not have the economies of scale that drive the economics of the regulated vertically-integrated cost-recovery-based business model? Why indeed.

Over the ensuing decades, though, policy priorities have changed, and environmental quality now joins energy security and the social objectives of utility regulation. Air quality and global warming concerns joined the mix, and at the margin shifted the policy balance, leading several states to adopt renewable portfolio standards (RPSs) and net metering regulations. California, always a pioneer, has a portfolio of residential renewables policies, including net metering, although it does not have a state RPS. Note, in particular, the recent changes in California policy regarding residential renewables:

The CPUC’s California Solar Initiative (CPUC ruling – R.04-03-017) moved the consumer renewable energy rebate program for existing homes from the Energy Commission to the utility companies under the direction of the CPUC. This incentive program also provides cash back for solar energy systems of less than one megawatt to existing and new commercial, industrial, government, nonprofit, and agricultural properties. The CSI has a budget of $2 billion over 10 years, and the goal is to reach 1,940 MW of installed solar capacity by 2016.

The CSI provides rebates to residential customers installing solar technologies who are retail customers of one of the state’s investor-owned utilities. Each IOU has a cap on the number of its residential customers who can receive these subsidies, and PG&E has already reached that cap.

Whether the policy is rebates to induce the renewables switch, allowing net metering, or a state RPS (or feed-in tariffs such as used in Spain and Germany), these policies reflect a new objective in the portfolio of utility regulation, and at the margin they have changed the incentives of regulated utilities. Starting in 2012 when residential solar installations increased, regulated utilities increased their objections to solar power both on reliability grounds and based on the inequities and existing cross-subsidization built in to regulated retail rates (in a state like California, the smallest monthly users of electricity pay much less than their proportional share of the fixed costs of what they consume). My reading has also left me with the impression that if the regulated utilities are going to be subject to renewables mandates to achieve environmental objectives, they would prefer not to have to compete with the existing, and growing, independent producers operating in the residential solar market. The way a regulated monopolist benefits from environmental mandates is by owning assets to meet the mandates.

While this case requires much deeper analysis, as a first pass I want to step back and ask why the regulated distribution utility should be involved in the residential solar market at all. The growth of producers in the residential solar market (Sungevity, SunEdison, Solar City, etc.) suggests that this is a competitive or potentially competitive market.

I remember asking that question back when this NYT Magazine article first came out, and I stand by my observation then:

Consider an alternative scenario in which regulated distribution monopolists like PG&E are precluded from offering retail services, including rooftop solar, and the competing firms that Himmelman profiled can compete both in how they structure the transactions (equipment purchase, lease, PPA, etc.) and in the prices they offer. One of Rubin’s complaints is that the regulated net metering rate reimburses the rooftop solar homeowner at the full regulated retail price per kilowatt hour, which over-compensates the homeowner for the market value of the electricity product. In a rivalrous market, competing solar services firms would experiment with different prices, perhaps, say, reimbursing the homeowner a fixed price based on a long-term contract, or a varying price based on the wholesale market spot price in the hours in which the homeowner puts power back into the grid. Then it’s up to the retailer to contract with the wires company for the wires charge for those customers — that’s the source of the regulated monopolist’s revenue stream, the wires charge, and it can and should be separated from the net metering transaction and contract.

The presence of the regulated monopolist in that retail market for rooftop solar services is a distortion in and of itself, in addition to the regulation-induced distortions that Rubin identified.

The regulated distribution utility’s main objective is, and should be, reliable delivery of energy. The existing regulatory structure gives regulated utilities incentives to increase their asset base to increase their rate base, and thus when a new environmental policy objective joins the exiting ones, if regulated utilities can acquire new solar assets to meet that objective, then they have an incentive to do so. Cost recovery and a guaranteed rate of return is a powerful motivator. But why should they even be a participant in that market, given the demonstrable degree of competition that already exists?

Energy poverty and clean technology

For the past three years, I’ve team-taught a class that’s part of our Institute for Energy and Sustainability at Northwestern (ISEN) curriculum. It’s an introductory class, primarily focused on ethics and philosophy. One of my earth science colleagues kicks us off with the carbon cycle, the evidence for anthropogenic global warming, and interpretations of that evidence. Then one of my philosophy colleagues presents moral theories that we can use to think about the morality of our relationship with nature, environmental ethics, moral obligations to future generations, and so on. Consequentialism, Kantian ethics, virtue ethics. I learn so much from my colleagues every time!

Then I, the social scientist, come in and throw cold water on everyone’s utopias and dystopias — “no, really, this is how people really are going to behave, and the likely outcomes we’ll see from political processes.” Basic economic principles (scarcity, opportunity cost, tradeoffs, incentives, property rights, intertemporal substitution, discounting), tied in with the philosophical foundations of these principles, and then used to generate an economic analysis of politics (i.e., public choice). We finish up with a discussion of technological dynamism and the role that human creativity and innovation can play in making the balance of economic well-being and environmental sustainability more aligned and harmonious.

Energy poverty emerges as an overarching theme in the course — long-term environmental sustainability is an important issue to bear in mind when we think about consumption, investment, and innovation actions we take in the near term … but so are living standards, human health, and longevity. If people in developing countries have the basic human right to the liberty to flourish and to improve their living standards, then energy use is part of that process.

Thus when I saw this post from Bill Gates on the Gates Foundation blog it caught my attention, particularly where he says succinctly that

But even as we push to get serious about confronting climate change, we should not try to solve the problem on the backs of the poor. For one thing, poor countries represent a small part of the carbon-emissions problem. And they desperately need cheap sources of energy now to fuel the economic growth that lifts families out of poverty. They can’t afford today’s expensive clean energy solutions, and we can’t expect them wait for the technology to get cheaper.

Instead of putting constraints on poor countries that will hold back their ability to fight poverty, we should be investing dramatically more money in R&D to make fossil fuels cleaner and make clean energy cheaper than any fossil fuel.

 

In it Gates highlights two short videos from Bjorn Lomborg that emphasize two things: enabling people in poverty to get out of poverty using inexpensive natural gas rather than expensive renewables will improve the lives of many millions more people, and innovation and new ideas are the processes through which we will drive down the costs of currently-expensive clean energy. The first video makes the R&D claim and offers some useful data for contextualizing the extent of energy poverty in Africa. The second video points out that 3 billion people burn dung and twigs inside their homes as fuel sources, and that access to modern energy (i.e., electricity) would improve their health conditions.

The post and videos are worth your time. I would add one logical step in the chain, to make the economics-sustainability alignment point even more explicit — the argument that environmental quality is a normal good, and that as people leave poverty and their incomes rise, at the margin they will shift toward consumption bundles that include more environmental quality. At lower income increases there may still be incrementally more emissions (offset by the reduction in emissions from dung fires in the home), but if environmental quality is a normal good, as incomes continue to rise, consumption bundles will shift. If you know the economics literature on the environmental Kuznets curve, this argument sounds familiar. One of the best summary articles on the EKC is David Stern (2004), and he shows that there is little statistical evidence for a simple EKC, although better models have been developed and if we tell a more nuanced story and use better statistical techniques we may be able to decompose all of the effects.

Gates is paying more attention to energy because he thinks the anti-poverty agenda should include a focus on affordable energy, and energy that’s cleaner than what’s currently being used indoors for cooking in many places.

“Grid defection” and the regulated utility business model

The conversations about the “utility death spiral” to which I alluded in my recent post have included discussion of the potential for “grid defection”. Grid defection is an important phenomenon in any network industry — what if you use scarce resources to build a network that provides value for consumers, and then over time, with innovation and dynamism, what if they can find alternative ways of capturing that value (and/or more or different value)? Whether it’s a public transportation network, a wired telecommunications network, a water and sewer network, or a wired electricity distribution network, consumers can and do exit when they perceive the alternatives available to them as being more valuable than the network alternative. Of course, those four cases differ because of differences in transaction costs and regulatory institutions — making exit from a public transportation network illegal (i.e., making private transportation illegal) is much less likely, and less valuable, than making private water supply in a municipality illegal. But two of the common elements across these four infrastructure industries are interesting: the high fixed costs nature of the network infrastructure and the resulting economies of scale, and the potential for innovation and technological change to change the relative value of the network.

The first common element in network industries is the high fixed costs associated with constructing and maintaining the network, and the associated economies of scale typically found in such industries. This cost structure has long been the justification for either economic regulation or municipal supply in the industry — the cheapest per-unit way to provide large quantities is to have one provider and not to build duplicate networks, and to stipulate product quality and degrees of infrastructure redundancy to provide reliable service at the lowest feasible cost.

What does that entail? Cost-based regulation. Spreading those fixed costs out over as many consumers as possible to keep the product’s regulated price as low as feasible. If there are different consumers that can be categorized into different customer classes, and if for economic or political reasons the utility and/or the regulator have an incentive to keep prices low for one class (say, residential customers), then other types of consumers may bear a larger share of the fixed costs than they would if, for example, the fixed costs were allocated according to share of the volume of network use (this is called cross-subsidization). Cost-based regulation has been the typical regulatory approach in these industries, and cross-subsidization has been a characteristic of regulated rate structures. The classic reference for this analysis is Faulhaber American Economic Review (1975).

Both in theory and in practice these institutions can work as long as the technological environment is static. But the technological environment is anything but static; it has had periods of stability but has always been dynamic, the dynamism of which is the foundation of increased living standards over the past three centuries. Technological dynamism creates new alternatives to the existing network industry. We have seen this happen in the past two decades with mobile communications eroding the value of wired communications at a rapid rate, and that history animates the concern in electricity that distributed generation will make the distribution network less valuable and will disintermediate the regulated distribution utility, the wires owner, which relies on the distribution transaction for its revenue. It also traditionally relies on the ability to cross-subsidize across different types of customers, by charging different portions of that fixed costs to different types of customers, and that’s a pricing practice that mobile telephony also made obsolete in the communications market.

Alternatives to the network grid may have higher value to consumers in their estimation (never forget that value is subjective), and they may be willing to pay more to achieve that value. This is why most of us now pay more per month for communications services than we did pre-1984 in our monthly phone bill. As customers leave the traditional network to capture that value, though, those network fixed costs are now spread over fewer network customers. That’s the Achilles heel of cost-based regulation. And that’s a big part of what drives the “death spiral” concern — if customers increasingly self-generate and leave the network, who will pay the fixed costs? This question has traditionally been the justification for regulators approving utility standby charges, so that if a customer self-generates and has a failure, that customer can connect to the grid and get electricity. Set those rates too high, and distributed generation’s economic value falls; set those rates too low, and the distribution utility may not cover the incremental costs of serving that customer. That range can be large.

This is not a new conversation in the industry or among policy makers and academics. In fact, here’s a 2003 Electricity Journal article arguing against standby charges by friend-of-KP Sean Casten, who works in recycled energy and combined heat and power (CHP). In 2002 I presented a paper at the International Association of Energy Economics annual meetings in which I argued that distributed generation and storage would make the distribution network contestable, and after the Northeast blackout in 2003 Reason released a version of the paper as a policy study. One typical static argument for a single, regulated wires network is to eliminate costly duplication of infrastructure in the presence of economies of scale. But my argument is dynamic: innovation and technological change that competes with the wires network need not be duplicative wires, and DG+storage is an example of innovation that makes a wires network contestable.

Another older conversation that is new again was the DISCO of the Future Forum, hosted over a year or so in 2001-2002 by the Center for the Advancement of Energy Markets. I participated in this forum, in which industry, regulators, and researchers worked together to “game out” different scenarios for the distribution company business model in the context of competitive wholesale and retail markets. This 2002 Electric Light & Power article summarizes the effort and the ultimate report; note in particular this description of the forum from Jamie Wimberly, then-CAEM president (and now CEO of EcoAlign):

“The primary purpose of the forum was to thoroughly examine the issues and challenges facing distribution companies and to make consensus-based recommendations that work to ensure healthy companies and happy customers in the future,” he said. “There is no question much more needs to be discussed and debated, particularly the role of the regulated utility in the provision of new product offerings and services.”

Technological dynamism is starting to make the distribution network contestable. Now what?

The “utility death spiral”: The utility as a regulatory creation

Unless you follow the electricity industry you may not be aware of the past year’s discussion of the impending “utility death spiral”, ably summarized in this Clean Energy Group post:

There have been several reports out recently predicting that solar + storage systems will soon reach cost parity with grid-purchased electricity, thus presenting the first serious challenge to the centralized utility model.  Customers, the theory goes, will soon be able to cut the cord that has bound them to traditional utilities, opting instead to self-generate using cheap PV, with batteries to regulate the intermittent output and carry them through cloudy spells.  The plummeting cost of solar panels, plus the imminent increased production and decreased cost of electric vehicle batteries that can be used in stationary applications, have combined to create a technological perfect storm. As grid power costs rise and self-generation costs fall, a tipping point will arrive – within a decade, some analysts are predicting – at which time, it will become economically advantageous for millions of Americans to generate their own power.  The “death spiral” for utilities occurs because the more people self-generate, the more utilities will be forced to seek rate increases on a shrinking rate base… thus driving even more customers off the grid.

A January 2013 analysis from the Edison Electric Institute, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business, precipitated this conversation. Focusing on the financial market implications for regulated utilities of distributed resources (DER) and technology-enabled demand-side management (an archaic term that I dislike intensely), or DSM, the report notes that:

The financial risks created by disruptive challenges include declining utility revenues, increasing costs, and lower profitability potential, particularly over the long term. As DER and DSM programs continue to capture “market share,” for example, utility revenues will be reduced. Adding the higher costs to integrate DER, increasing subsidies for DSM and direct metering of DER will result in the potential for a squeeze on profitability and, thus, credit metrics. While the regulatory process is expected to allow for recovery of lost revenues in future rate cases, tariff structures in most states call for non-DER customers to pay for (or absorb) lost revenues. As DER penetration increases, this is a cost recovery structure that will lead to political pressure to undo these cross subsidies and may result in utility stranded cost exposure.

I think the apocalyptic “death spiral” rhetoric is overblown and exaggerated, but this is a worthwhile, and perhaps overdue, conversation to have. As it has unfolded over the past year, though, I do think that some of the more essential questions on the topic are not being asked. Over the next few weeks I’m going to explore some of those questions, as I dive into a related new research project.

The theoretical argument for the possibility of death spiral is straightforward. The vertically-integrated, regulated distribution utility is a regulatory creation, intended to enable a financially sustainable business model for providing reliable basic electricity service to the largest possible number of customers for the least feasible cost, taking account of the economies of scale and scope resulting from the electro-mechanical generation and wires technologies implemented in the early 20th century. From a theoretical/benevolent social planner perspective, the objective is, given a market demand for a specific good/service, to minimize the total cost of providing that good/service subject to a zero economic profit constraint for the firm; this will lead to highest feasible output and total surplus combination (and lowest deadweight loss) consistent with the financial sustainability of the firm.

The regulatory mechanism for implementing this model to achieve this objective is to erect a legal entry barrier into the market for that specific good/service, and to assure the regulated monopolist cost recovery, including its opportunity cost of capital, otherwise known as rate-of-return regulation. In return, the regulated monopolist commits to serve all customers reliably through its vertically-integrated generation, transmission, distribution, and retail functions. The monopolist’s costs and opportunity cost of capital determine its revenue requirement, out of which we can derive flat, averaged retail prices that forecasts suggest will enable the monopolist to earn that amount of revenue.

That’s the regulatory model + business model that has existed with little substantive evolution since the early 20th century, and it did achieve the social policy objectives of the 20th century — widespread electrification and low, stable prices, which have enabled follow-on economic growth and well-distributed increased living standards. It’s a regulatory+business model, though, that is premised on a few things:

  1. Defining a market by defining the characteristics of the product/service sold in that market, in this case electricity with a particular physical (volts, amps, hertz) definition and a particular reliability level (paraphrasing Fred Kahn …)
  2. The economies of scale (those big central generators and big wires) and economies of scope (lower total cost when producing two or more products compared to producing those products separately) that exist due to large-scale electro-mechanical technologies
  3. The architectural implications of connecting large-scale electro-mechanical technologies together in a network via a set of centralized control nodes — technology -> architecture -> market environment, and in this case large-scale electro-mechanical technologies -> distributed wires network with centralized control points rather than distributed control points throughout the network, including the edge of the network (paraphrasing Larry Lessig …)
  4. The financial implications of having invested so many resources in long-lived physical assets to create that network and its control nodes — if demand is growing at a stable rate, and regulators can assure cost recovery, then the regulated monopolist can arrange financing for investments at attractive interest rates, as long as this arrangement is likely to be stable for the 30-to-40-year life of the assets

As long as those conditions are stable, regulatory cost recovery will sustain this business model. And that’s precisely the effect of smart grid technologies, distributed generation technologies, microgrid technologies — they violate one or more of those four premises, and can make it not just feasible, but actually beneficial for customers to change their behavior in ways that reduce the regulation-supported revenue of the regulated monopolist.

Digital technologies that enable greater consumer control and more choice of products and services break down the regulatory market boundaries that are required to regulate product quality. Generation innovations, from the combined-cycle gas turbine of the 1980s to small-scale Stirling engines, reduce the economies of scale that have driven the regulation of and investment in the industry for over a century. Wires networks with centralized control built to capitalize on those large-scale technologies may have less value in an environment with smaller-scale generation and digital, automated detection, response, and control. But those generation and wires assets are long-lived, and in a cost-recovery-based business model, have to be paid for even if they become the destruction in creative destruction. We saw that happen in the restructuring that occurred in the 1990s, with the liberalization of wholesale power markets and the unbundling of generation from the vertically-integrated monopolists in those states; part of the political bargain in restructuring was to compensate them for the “stranded costs” associated with having made those investments based on a regulatory commitment that they would receive cost recovery on them.

Thus the death spiral rhetoric, and the concern that the existing utility business model will not survive. But if my framing of the situation is accurate, then what we should be examining in more detail is the regulatory model, since the utility business model is itself a regulatory creation. This relationship between digital innovation (encompassing smart grid, distributed resources, and microgrids) and regulation is what I’m exploring. How should the regulatory model and the associated utility business model change in light of digital innovation?

Online Library of Liberty forum on McCloskey’s Bourgeois Era

At its Online Library of Liberty, Liberty Fund hosts a monthly “Liberty Matters” forum in which a set of scholars discusses a particular set of ideas. This month’s forum features Deirdre McCloskey‘s Bourgeois Era series of books, two of which have been published (Bourgeois Virtues, Bourgeois Dignity). McCloskey’s main argument is that the various material and institutional factors that we’ve hypothesized as the causes of industrialization and the dramatic increase in living standards are insufficient for explaining why it happened when, where, and how it did — in northern Europe, particularly Britain and the Netherlands, accelerating in the 18th century from previous foundations there. The most important factor, according to McCloskey, was ideas, particularly the cultural acceptance of commerce, trade, and mercantile activity as honorable.

The forum features a lead essay from Don Boudreaux, commentary essays from Joel Mokyr and John Nye, and responses from McCloskey and the other authors. The forum will continue for the rest of the month, with further commentary certain to follow.

If you want an opportunity to think about one of the most important intellectual questions of economics, here it is. The essays, responses, and interactions are an encapsulation of a lively and important debate in economic history over the past two decades. And if you want to dig more deeply, the bibliography and the references in each essay are a reading list for a solid course in economic history. These ideas affect not only our understanding of economic history and the history of industrialization, but also how ideas and attitudes affect economic activity and living standards today. Well worth your time and consideration.