Democracy in America, Volume 2, Part I, Chapters 1-12

Richard Caton Woodinville, Politics in an Oyster House, 1848, Walters Art Museum, Baltimore, Maryland

Five years separate the first volume of Democracy in America (1835) from the second (1840). The first volume was concrete and focused on formal institutions: constitutions, local government, federalism, courts, parties. The second turns from democratic institutions toward democratic human beings, organized around an question that runs through nearly every chapter: how do people come to know what they know, once equality dissolves the old sources of authority?

Tocqueville is neither indicting nor endorsing democracy categorically. He believes the movement toward equality is irresistible and has no wish to reverse it, yet he spends most of his attention on its dangers. “It is because I was not an adversary of democracy that I have wanted to be candid about it, ...” (p. 399) a friend of democracy telling it honestly what its downsides are.

That candor grows from a temperament that identifies tensions and relishes contradictions: equality liberates the mind even as it exposes that mind to conformity, and teaches self-reliance while leaving the individual defenseless before the opinion of everyone else. After reading these chapters I see them as a study of that tension, worked out as an epistemology of democratic life—how people form beliefs, decide whom to trust, and determine what counts as knowledge once birth and rank no longer decide it for them.

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Thinking for oneself, and with everyone else

Tocqueville opens with an apparent paradox: Americans show little interest in formal philosophy yet live by a recognizable philosophical method. “America is therefore the one country in the world where the precepts of Descartes are least studied and best followed” (p. 403). They need not read him to act like Cartesians. Distrustful of inherited formulas and class authority, they “take the rule of their judgment only from themselves” and “customarily rely on their own witness” (p. 404): as fixed social distinctions weaken, individuals grow less willing to accept a proposition merely because a particular person or class asserts it.

But Tocqueville immediately complicates this intellectual emancipation. The democratic individual wants to judge for himself, yet no individual can judge everything for himself. We lack the time and capacity to investigate every proposition we depend on, so we have to accept much of what we believe from others. “For without common ideas there is no common action, and without common action men still exist, but a social body does not” (p. 407). Every society requires beliefs individuals do not independently reconstruct from first principles: “every man who receives an opinion on the word of others puts his mind into slavery; but it is a salutary servitude that allows making a good use of liberty” (p. 408). Intellectual authority is not optional — “its place is variable, but it necessarily has a place” (p. 408).

Democracy changes the answer without eliminating the need, replacing inherited authority with public opinion itself. “Not only is common opinion the sole guide that remains for individual reason among democratic peoples,” Tocqueville writes, “but also it has among these peoples an infinitely greater power than among any other” (p. 409). Individuals see one another as fundamentally similar and so resist the authority of any one person, despite the fact that same similarity makes the judgment of the many enormously impressive. “This same equality that makes him independent of each one of his fellow citizens in particular,” Tocqueville observes, “delivers him isolated and defenseless to the action of the greatest number” (p. 409).

The tension sharpens into warning. Equality produces “two tendencies”: one pushes each person toward new thoughts, the other “readily reduces him to thinking no more” (p. 410). Tocqueville has no patience for the idea that oppression becomes freedom once enough people share in dispensing it: “I am no more inclined to put my head in the yoke, because a million arms present it to me” (p. 410). The democratic problem of knowledge runs deeper, then, than “think for yourself”. We have to trust others, but the harder problem is learning whom, why, and when. Tocqueville distinguishes this gradual, structural erosion from revolutionary rupture: “The independence of mind that equality suggests is never so great and never appears so excessive as at the moment when equality begins to become established” (pp. 406–407). Tocqueville identifies this as one reason Americans, who inherited a democratic social state without first overthrowing an aristocratic one, never faced the anarchic interval France did.

General ideas and learning by doing

Chapters 3 and 4 extend the epistemology into what Tocqueville calls “general ideas” — abstractions that compress many particular cases into a common proposition. Democratic people crave them: aristocratic societies train people to perceive distinctions among ranks and orders, equality trains them to perceive similarities instead. General ideas economize on scarce attention, letting busy people reason about a category collectively rather than working through a thousand particular cases. The danger is that the abstraction becomes more satisfying than the reality it claims to explain.

Political liberty supplies the corrective. Americans resist sweeping political theories because they actually practice politics: a merchant may accept elegant theories about subjects he knows little about while growing skeptical of generalizations about commerce, where experience shows him how many contingencies theory leaves out. Citizens who administer towns, serve on juries, and live with the consequences of political choices learn the same respect for particulars. Political participation does more than disperse power; it teaches people how to discipline reason. Note how reliant this argument is on participation in local politics.

Religion as democratic counterweight

Chapters 5 through 7 turn to religion, Tocqueville’s principal counterweight to equality’s epistemic weaknesses. Equality breeds individualism and materialism: it “tends to isolate [men] from one another and to lead each one of them to be interested only in himself alone,” and “opens their souls excessively to love of material enjoyments” (p. 419). Religion pushes the other way, directing attention beyond material existence and imposing obligations that extend beyond the self; “Religious peoples are naturally strong precisely in the places where democratic peoples are weak,” (p. 419).

Religion succeeds in America partly by adapting to democracy rather than opposing it. “By respecting all the democratic instincts that are not contrary to it and by using several of those instincts to help itself,” religion resists the individual independence that threatens it most (p. 424). This point is an instance of a broader Tocquevillean principle: an institution hoping to restrain democracy cannot just oppose it. It has to use some democratic habits to moderate others, as a system of counterweights.

Perfectibility and democratic restlessness

Chapter 8 turns to one of democracy’s most productive tendencies: the belief in human perfectibility. Self-improvement is practical and incremental — working, experimenting, adjusting to circumstance. The idea of indefinite perfectibility goes further: aristocratic societies make the limits of improvement appear fixed and visible, while democratic societies continually reveal supposedly permanent limits to be provisional. Equality thus encourages people to imagine not just that they can improve their condition, but that neither human capacities nor social arrangements have any clearly foreseeable endpoint. Psychologically and culturally, the two habits of mind are quite different, even though equality produces both. [Note: I have a lot more to say about this chapter, but I’ll leave it for later.]

Tocqueville illustrates the psychology with an American sailor. Asked why American ships are built not to last, the sailor answers that navigation improves so quickly that even “the most beautiful ship would soon become nearly useless if it lasted beyond a few years” (p. 428). That sounds remarkably modern: progress changes the expected value of durability, and knowledge itself becomes a moving target rather than a fixed inheritance. The belief fuels innovation but also creates permanent dissatisfaction; if improvement has no obvious endpoint, every certainty becomes temporary, an epistemological condition as much as a psychological one.

Science, usefulness, and democratic abundance

Chapters 9 through 11 apply the same logic to science and production. “The situation of the Americans is therefore entirely exceptional” (p. 430), Tocqueville cautions, since Americans enjoy unusual opportunities for industry and commerce while drawing on theoretical science produced elsewhere. Still, he identifies a democratic tendency: enlightened people discover that “nothing limits or fixes them and forces them to content themselves with their present fortune” (p. 431), and knowledge becomes a means of advancement rather than an end in itself. Americans favor practical science over theory because democratic society keeps everyone in motion; Tocqueville asks where, amid this “universal tumult,” anyone will find “the calm necessary for profound intellectual syntheses” (p. 434).

Here lies a political economy of knowledge production: democratic society rewards useful discoveries visibly and quickly, while the payoff to theoretical inquiry stays distant and uncertain, so talent flows toward application. Application produces extraordinary innovation but a long-run problem too, since applied knowledge rests on theory someone still has to sustain. The same dynamic reshapes production, trading some exquisiteness for volume and access — a small aristocratic audience willing to pay for perfection giving way to a mass one that prizes usefulness instead.

Democratic self-government

The first twelve chapters of Volume II range widely, but two threads hold them together. One is epistemological: equality changes not just what democratic people believe but how they come to believe anything — whom they trust, how they weigh abstraction against experience, theory against usefulness. The other is temperamental: Tocqueville refuses to resolve the tensions equality creates. It encourages independent judgment and delivers people defenseless to majority opinion. It weakens inherited authority while creating a need for new authority. It stimulates self-improvement while indefinite perfectibility breeds restlessness.

None of these tensions resolve neatly, and Tocqueville does not want them to — that is the project the foreword announces, a friend of democracy who refuses to flatter it. The task is democratic self-government in the broadest sense: not simply governing through elections, but learning how to govern democracy’s own habits of mind. Tocqueville asks a difficult question about democracy: what does it make easier for human beings, what does it make harder, and what institutions and habits let us gain more of the first without succumbing to the second?

Source: After ChatGPT surveyed my archives for RTP posts and read the Yglesias and Schein essays I asked it to generate this image to communicate my work.

Matt Yglesias recently defended “a great idea that everyone hates“: charging residential customers prices that track conditions in wholesale power markets. The argument is straightforward and well established in electricity economics. Flat retail rates conceal the cost of serving demand during scarce, congested hours, weakening incentives to shift flexible consumption and forcing utilities to build generation, transmission, and distribution capacity that sits idle most of the year. Real-time prices would reveal those costs, letting consumers decide which uses of electricity are worth maintaining when the system strains.

Andrew Schein of Octopus Energy Group’s Centre for Net Zero responded on LinkedIn that Yglesias is “nearly right”. A virtual power plant, or VPP, is a software-coordinated aggregation of distributed energy resources—smart thermostats, batteries, EVs, rooftop solar, flexible building loads—managed as a single portfolio to provide energy and grid services. Schein agrees about the value of real-time pricing but argues that Yglesias draws too sharp a contrast between prices and VPPs, which he sees as different, often complementary, ways to make electricity demand more flexible alongside time-of-use tariffs, critical-peak pricing, and automation. VPPs can automate household responses, pool the uncertainty across individual customers, participate in wholesale markets, and provide services to transmission and distribution systems.

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Both essays make important points. Yglesias is right that prices do something administrative appeals and uniform commands cannot: they communicate scarcity while letting people with different circumstances and preferences respond differently. Schein is right that price volatility, consumer inattention, automation, aggregation, and local network constraints complicate any simple prescription to place every household on an unhedged wholesale spot price.

But they both enter a long-running conversation somewhere near its end. Real-time pricing is not an idea invented for smart thermostats, electric vehicles, or renewable-heavy grids; its intellectual pedigree reaches back at least to Marcel Boiteux’s work on marginal-cost and peak-load pricing in the 1940s. Fred Schweppe and his collaborators later developed a much richer spot-price-based vision of electricity markets, work that helped shape modern wholesale market design and anticipated many of today’s questions about automation, customer choice, risk, network constraints, and distributed resources.

Recovering that history clarifies the institutional question at the center of the current debate. A virtual power plant may respond to a price and aggregate devices to sell their flexibility into a market, but the command sent to an individual thermostat, water heater, battery, or vehicle is not necessarily an economic price, much less one discovered through a market process.

A market-generated price and an engineering control signal can both change electricity consumption. They do not perform the same function (unless a market-clearing price is used as an engineering control signal, a distinction I return to below).

Before real-time pricing, there was marginal-cost pricing

Marcel Boiteux’s foundational paper on peak-load pricing appeared in French in 1949 and in English in the Journal of Business in 1960, becoming one of the central contributions to the economics of pricing services whose demand varies over time and whose capacity must be built before it is used. Electricity is the canonical case. Demand shifts hour to hour and season to season, and the cost of serving another kilowatt-hour depends on which generators are running, how close the system sits to its capacity limits, and whether transmission or distribution equipment is congested. A system built to serve the hottest afternoon or coldest morning of the year carries substantial excess capacity during ordinary hours.

Boiteux’s question went beyond whether peak customers should pay more: how should prices relate short-run operating decisions to long-run capacity investment? An additional unit of electricity during off-peak periods may require little more than fuel or operating expense; during peak periods, additional demand may also drive the need for more generating and network capacity.

The vocabulary has evolved from marginal-cost pricing and peak-load pricing to time-of-use rates, critical-peak pricing, dynamic pricing, and real-time pricing. These concepts differ in mechanics—time-of-use prices are set in advance for broad blocks of time, while real-time prices vary with actual or anticipated system conditions—but they share an underlying proposition: the price of electricity should reflect meaningful variation in the opportunity cost of producing and delivering it.

That proposition long predates the technologies that now make granular pricing technically feasible.

Schweppe’s spot-price-based marketplace

Fred Schweppe and his collaborators—Michael Caramanis, Richard Tabors, and Roger Bohn—carried this logic much further in their 1988 book Spot Pricing of Electricity, arguing that electricity should be understood as a commodity whose value and cost vary over time and space. Their proposed marketplace used spot prices to coordinate generation, transmission, distribution, consumption, and investment.

Schweppe’s framework paired spot prices with longer-term contracts: spot prices provided the economic foundation, while buyers and sellers used contracts to allocate risk, stabilize payments, and accommodate differing preferences. That distinction has been lost in some modern discussions, which frame the choice as a regulated flat rate versus full exposure to every five-minute fluctuation. A market grounded in spot prices can also support fixed-price contracts, caps, hedges, subscriptions, critical-peak provisions, bill protection, and combinations of fixed and variable charges.

Schweppe’s work is also an important intellectual precursor of security-constrained economic dispatch (SCED) and locational marginal pricing (LMP) in organized wholesale markets, which use optimization models to select a feasible, low-cost dispatch while accounting for generation offers, transmission constraints, reserve requirements, and other operating conditions. The marginal values associated with that dispatch become prices varying by time and location.

Schweppe’s framework established many of the essential ideas behind today’s wholesale-market architecture: electricity carries time- and location-specific marginal values, network constraints belong in price formation, and prices can coordinate decentralized decisions within a tightly constrained physical system.

Wholesale markets have incorporated much of this logic. Retail electricity has not.

The missing retail market

Translating marginal wholesale prices into retail prices has proved difficult, especially for residential customers.

Some obstacles were once technological. Conventional meters recorded cumulative monthly consumption but not when it occurred; communications were expensive; appliances could not respond automatically; and settlement at short intervals would have been cumbersome.

Those constraints have weakened, dramatically. Smart meters, broadband connections, cloud computing, smart thermostats, electric vehicles, batteries, heat pumps, and connected appliances now make it possible to measure and automate electricity use at increasingly fine intervals.

The remaining barriers are largely institutional and contractual. Who bears the risk of price volatility? Who recovers distribution-system fixed costs? Who controls the customer relationship? May competing retailers offer differentiated contracts? Who owns and may access meter and device data? Can a customer delegate decisions to software while retaining meaningful control? How do regulators respond when a small number of customers receive conspicuously high bills even if most save money over time?

Yglesias uses Griddy’s collapse during Winter Storm Uri to illustrate the political problem. Griddy offered Texas customers essentially uncapped exposure to the real-time wholesale price, and when prices remained at the market’s legal maximum during the crisis, some customers received bills of thousands of dollars. Yglesias acknowledges that broader price-responsive demand might have softened the spike, but he also recognizes that few consumers will accept a contract capable of producing such an outcome.

That episode revealed the hazards of one particular retail contract. It did not settle the case against real-time pricing as a family of institutions.

Yglesias eventually imagines consumers facing spot prices buying “price insurance”—paying a premium for predictable bills, exactly the contractual variety such a market should produce. I’ve long been arguing for pairing retail spot pricing with a contract similar to the kind that we have access to for travel insurance, to buy as a hedge on top of the primary transaction. Indeed, Griddy had announced exactly such a product for its customers, and it was due to launch on March 1, 2021. They didn’t make it.

The economically relevant question is whether marginal prices should inform retail contracts and automated decisions, and whether consumers should be free to choose how much price risk, automation, and delegated control they want.

Twenty-four years of thinking in public

I began working on electricity technology and regulation in 2000 and started writing Knowledge Problem in 2002. Real-time and dynamic pricing became recurring subjects because they sit at the intersection of questions that have animated my work ever since: How do prices communicate knowledge? How does technology change the feasible set of institutions? How can electricity demand become an active part of system coordination? Why does regulation so often block technically possible forms of experimentation?

The original Knowledge Problem archive contains 4,690 posts published between 2002 and 2020, followed by my continuing work at the Knowledge Problem Substack.

A post-by-post audit of the combined archive identified 44 posts substantively discussing retail real-time pricing or closely related dynamic electricity pricing; I wrote 39 of them and Mike Giberson wrote 5. Twenty-one placed RTP or dynamic pricing at the center of the article, while 23 treated it as part of a broader analysis of smart grids, demand response, retail competition, rate design, distributed resources, reliability, or regulation. Nearly 60 percent appeared between 2008 and 2014, during the most active period of early smart-grid and transactive-energy experimentation.

Several themes recur across those posts.

The first is that prices convey knowledge. A dynamic price is a compact signal of the relative scarcity of electricity at a particular time and place, not just an inducement to use less of it (Marginal Revolution University fans will recognize “a price is a signal wrapped in an incentive“). No system operator, utility regulator, aggregator, or household possesses all the information needed to determine electricity’s best use, and prices let that dispersed knowledge enter decisions without first being assembled in one mind or organization. As I wrote in 2012 and many more times since, prices act as knowledge surrogates, communicating diffuse information about scarcity.

The second theme is that demand can contribute to reliability. Electricity policy usually treats supply as active and demand as a quantity to forecast and serve, but both can be flexible. When demand responds to prices, the system can reduce peaks, relieve congestion, use existing infrastructure more intensively, and avoid or defer generation and network investment. A market process reveals whether the lowest-cost adjustment at a given moment is another unit of production, a battery discharge, delayed vehicle charging, or a small change in temperature.

The third is that technology and prices are complements. A smart meter attached to a flat tariff mainly makes the old regulated service easier to measure and administer, whereas a smart thermostat, battery, or EV becomes far more valuable when it can respond to changing economic conditions. I argued during the early smart-grid rollout that, forced to choose, I would prefer intelligent prices paired with relatively simple technology over intelligent technology with no meaningful price signal.

Fourth, consumers differ in comfort preferences, schedules, technologies, incomes, abilities to shift consumption, and tolerances for risk. Efficient retail design should therefore offer a menu of contracts rather than impose one uniform arrangement: flat rates, time-of-use rates, critical-peak rates, real-time rates, caps, and hedges can coexist.

Fifth, retail competition matters. Competing retailers and service providers can bundle electricity with automation, risk management, batteries, EV charging, home-energy management, renewable preferences, and other services. Regulation often blocks this experimentation by continuing to assign the incumbent utility both the customer relationship and the authority to define the standard product.

Finally, automation should preserve rather than eliminate consumer agency. People should not have to stare at an app, adjusting every appliance manually; they should specify preferences—desired temperature, charging deadline, minimum battery level, maximum acceptable price to pay, minimum acceptable price to sell—and let devices or software agents act within those constraints.

What the history clarifies

This history puts the Yglesias-Schein disagreement in a different light. Yglesias is right that flat rates conceal scarcity and suppress demand response that prices could elicit more flexibly, and that prices accommodate differences in circumstances and preferences that a uniform conservation appeal cannot. But the relevant alternative to flat rates is not universal, unhedged exposure to wholesale fluctuations. The Boiteux-Schweppe tradition points toward a market grounded in marginal prices but rich in contractual variety—direct exposure, time-of-use rates, price caps, fixed-price insurance, automated response, or combinations of these—where the spot price provides the economic foundation without dictating a single retail product.

Schein is right that pricing, automation, aggregation, and risk management complement one another. VPPs can help households participate in markets, pool uncertainty, and turn dispersed flexibility into a usable resource. But calling a system a VPP does not explain how it coordinates that flexibility. An aggregator may respond to a market price upstream while sending a schedule, set point, or direct command downstream, leaving the device price-responsive only in the indirect sense that someone else translated a price into an instruction.

That distinction raises the next question: must intelligent devices be centrally dispatched by utilities or aggregators, or can they express their owners’ preferences through bids and offers, participate in a market-clearing process, and respond to prices reflecting both scarcity and physical network constraints? That capability is the promise of transactive energy—joining real-time pricing to automated individual agency, local price discovery, and consumer choice. My next article examines that architecture through the GridWise Olympic Peninsula Demonstration and the more recent TESS project, comparing it directly with the VPP model.

The future flexible grid will contain algorithms, aggregators, and automated devices regardless. The question is whether they follow commands or participate in markets on our behalf.

Robert Duncanson, View of Cincinnati, Ohio from Covington, Kentucky (c. 1851), Cincinnati Art Museum

Reminder: I am using multiple translations; my main reading is from the hardbound copy of the Mansfield translation. When I refer to page numbers it’s to the Mansfield translation, and when I want to pull quotes that are longer I’ll use the online Schleifer translation, so the text may not match exactly but they are close (and I also read French so I calibrated across the translations to get comfy with Tocqueville’s word choice).

Volume 1, Part II, Chapter 10, from “Position That the Black Race Occupies in the United States; Dangers Incurred by Whites from Its Presence” to end of chapter

The final sections of this chapter are challenging to read and write about. Tocqueville analyzes slavery, racial hierarchy, sectional conflict, the durability of the Union, republican institutions, and American commercial power, and the history between then and now inevitably presses upon the reader, as do the intervening changes in moral norms and language.

Still, these sections show Tocqueville’s consistent strengths as an acute observer, performing disciplined institutional analysis throughout by asking how laws, mores, incentives, beliefs, economic arrangements, and inherited practices interact over time. He treats institutions neither as formal rules that produce their intended conduct automatically nor as mere cover for material interest. Tocqueville is no determinist — the same structure can produce different outcomes as circumstances and conduct change. Structure constrains conduct without fully determining it.

His method is clearest in the analysis of slavery, which opens with one of the chapter’s most powerful passages: an evil that “enters into the world furtively,” beginning with an unnamed individual and “deposited like an accursed seed at some point in the soil” (p. 326), from which it feeds on itself and grows naturally with the society that receives it.

The image of the accursed seed captures the argument. Slavery begins in acts of domination, but once established it produces interests, expectations, habits, inequalities, and fears that help sustain it. The institution becomes embedded in property, labor, family organization, status, regional identity, and political power. Tocqueville is unequivocal about slavery’s evil, but he is equally interested in how it changes the society that receives it, narrowing the range of later choices and making reform increasingly difficult.

His comparison between ancient and modern slavery leads to one of the section’s central claims. In antiquity, slavery usually did not rest on a permanent and visible racial distinction; slave and master might belong to the same race, and once liberty was granted they could intermingle more easily. Modern slavery joined legal servitude to racial difference, so that where the ancients only had to change the law, “the real difficulty begins where in antiquity it ended” (p. 327): the moderns must also change mores, and mores move far more slowly.

This application of law-and-mores analysis to slavery is really an extension of Tocqueville’s analysis of democracy more broadly. Formal law and informal custom work together to structure political and social life, so abolishing slavery in law cannot by itself abolish the status hierarchy and prejudice slavery created. He catalogs the divergence between de jure rights and de facto exclusion: Black Americans may possess electoral rights in free states, but exercising them can be dangerous; the law may permit jury service, but prejudice excludes them; courts are formally open, but judges and jurors are white; schools, theaters, hospitals, and churches remain divided. His conclusion is paradoxical but shrewd: “inequality becomes imprinted in the mores as it fades in the laws” (p. 330). Legal change can remove an official barrier while leaving the wider structure of exclusion intact; indeed, as formal inequality disappears, custom may work harder to preserve social distance.

The institution of slavery freezes enslaved people in a static situation in which they cannot pursue their own paths for self-improvement. Slavery denies education, property, autonomy, and the opportunity to develop judgment and responsibility, and the results of that deprivation are then treated as evidence of incapacity and used to justify further exclusion — the vicious circle Tocqueville identifies, consistent with the importance he places elsewhere in the book on freedom as a condition for self-improvement.

His analysis also conveys compassion, both for the enslaved and for those who want to change the system but feel trapped within it. He acknowledges how difficult it is for those fortunate enough to have been born among people whom law recognizes as equals to understand the distance slavery creates — an expression of epistemic humility, an attempt to reason by analogy from outside an institution whose full human consequences he knows he cannot experience.

Tocqueville then turns to economics. His comparison of Kentucky and Ohio, separated by the Ohio River, operates as a sort of proto-natural experiment: Kentucky permits slavery, Ohio does not, and he finds a stark difference in population, prosperity, industry, and the meaning attached to labor — “there it is debased, here it is honored” (p. 332). He does not fully account for other causal factors, such as terrain or settlement patterns, but his institutional mechanism matters more than the experimental design: slavery changes not just the labor contract but the social meaning of work itself. Enslaved workers lack incentive to exert effort or improve method; masters grow idle; white laborers avoid work associated with servitude; free labor, by contrast, connects effort to advancement and dignity.

His economic argument here anticipates the seminal analysis in Robert Fogel and Stanley Engerman’s Time on the Cross (1974). Tocqueville challenges the apparent cheapness of slavery: the wage paid to a free worker is visible and immediate, while the cost of maintaining an enslaved worker is dispersed across food, clothing, childhood, illness, old age, supervision, and coercion, easy to overlook because no single payment ever makes it legible. In the end, he concludes, “the slave has cost more than the free man” (p. 332). The claim is about productivity and incentive as much as morality — institutions cultivate characteristic forms of conduct, and slavery degrades labor, weakens initiative, and makes idleness honorable.

Tocqueville extends this analysis to inheritance law. He has already identified inheritance rules elsewhere in the book as a factor shaping American life, and here he claims that no great institutional change occurs “without discovering, among the causes of this change, the inheritance law” (p. 334). Primogeniture in the South had preserved concentrated fortunes, inherited leisure, and a stable ruling class that maintained the prejudices and habits of slave society; partible inheritance, instituted in the Constitution, fragmented estates and weakened that aristocratic structure by changing the institutional ecology surrounding slavery. The analysis here is characteristic of Tocqueville’s method throughout: he studies slavery not in isolation but in interaction with landholding, labor markets, social honor, family structure, and regional political power.

His discussion of the difficulty of abolishing slavery in the South is morally exacting and analytically patient at the same time. Tocqueville refuses to justify slavery — “God keep me from trying... to justify the principle of the servitude of Negroes” (p. 346) — while also explaining why those living within the institution might find it culturally, economically, and politically difficult to abandon. He keeps two thoughts in view: the moral principle is clear, and the transition problem is extraordinarily difficult, because past injustice has already built a structure in which every remaining course looks dangerous. Structure constrains conduct here, but it does not eliminate individual agency or responsibility.

The section on the durability of the Union extends the same institutional analysis to federalism. Tocqueville does not assume a well-designed Constitution preserves itself; the federal government is a weak government that “needs the free concurrence of the governed in order to subsist” (p. 353). The Union rests on more than law — on material interdependence, shared belief, common political principles, habits of cooperation, and continued willingness to remain associated, since, as he puts it, “there is a society only when men consider a great number of objects” (p. 358) in roughly the same way. Americans disagree about policies and means, but Tocqueville believes they share a common political grammar: popular sovereignty, liberty, equality, freedom of the press, association, juries, and public accountability.

Slavery threatens the Union not only through conflicting economic interests but by producing divergent regional mores; it attacks the confederation “indirectly by its mores” (p. 361) rather than directly by its interests. Different labor systems produce different social relations, habits, and political judgments. Rapid national growth compounds the danger: new states introduce new interests, coalitions, and claims to power; population and influence move westward; older states may prosper in absolute terms while losing relative power. Tocqueville reaches another paradox: “the greatest danger that threatens the United States arises from their very prosperity” (p. 368). Prosperity changes the distribution of power, breeding ambition among rising states and envy, distrust, and regret among those losing influence; aggregate growth does not guarantee political cohesion.

Yet Tocqueville distinguishes the Union from the republican institutions of democratic self-government grounded in popular sovereignty, local liberty, rights, mores, and restraint. The federal arrangement may be fragile while republicanism remains deeply rooted in equality of condition, local self-government, and habits of participation. The Union is a constitutional structure; republicanism is embedded in the social state.

His final discussion of American commercial greatness shows the productive side of democratic mores. Geography gives Americans rivers, ports, resources, and access to trade, but physical advantages alone are not sufficient for commercial success, which grows from practical intelligence, mobility, risk-taking, adaptability, and decentralized initiative.

These concluding sections display Tocqueville’s political science at its best. He explains why slavery survives in mores after disappearing from law, why coercive labor shapes an entire society, why federalism depends on more than constitutional text, why prosperity can destabilize political power, and why free institutions can generate productive energy. He doesn’t treat people as deterministic followers of institutions or imagine they can simply will institutional consequences away: people inherit structures they did not create, and those structures shape their interests, fears, beliefs, and available choices, but institutions remain products of human action and judgment. Structure constrains conduct without fully determining it.

Links to the essays thus far in the Reading Tocqueville at 250 series:

Source: I asked ChatGPT to update the image it generated two years ago and this is what it did. I love the technological diversity represented here, and I love a good, big transmission substation!

Two years ago today, I published “Data Center Electricity Use III: Make or Buy?,” applying transaction cost economics to a question then just emerging: how would data-center developers respond if electricity became more expensive, less reliable, or too slow to obtain through ordinary utility processes?

AI and cloud computing were driving electricity-demand forecasts upward. Grid operators and utilities were warning of generation shortages, transmission constraints, and long interconnection queues. Data centers could keep buying electricity conventionally, or pursue alternatives: long-term contracts with individual generators, co-location with nuclear plants, or on-site generation of their own.

The question was where firms would draw the boundary between purchasing electricity through markets and tariffs and exerting direct control over its production.

My conclusion was deliberately Coasean: “the answer to the make or buy question is ‘it depends.’” The choice would turn on price, but also on uncertainty, contracting costs, asset specificity, the value of reliability, and the managerial difficulty of producing power internally.

A great deal has happened since then. Microsoft has backed the restart of a retired nuclear plant. Meta has signed a twenty-year agreement to keep another running. Google and Amazon have become sponsors of advanced nuclear technology. Developers have proposed gigawatts of dedicated natural gas generation. Federal regulators have spent two years working out how data centers may connect directly to power plants without shifting costs unfairly onto other customers.

The evidence supports my original hypothesis and refines it. Data centers are not simply choosing between buying from a utility and owning power plants. They are building a spectrum of organizational forms on a continuum between those poles. The decision may be better described as make, buy, or ally.

The cost of electricity now includes the opportunity cost of waiting

Data centers carry an unusual economic feature: an enormous opportunity cost of delayed service.

A completed data center embodies billions of dollars in land, buildings, cooling systems, and servers. Until it receives electricity, that capital produces no revenue. A two- or three-year delay is more than an inconvenience; it can be the largest cost in the entire project. The relative magnitude of opportunity cost changes what counts as economical power.

A generation arrangement that looks expensive in dollars per megawatt-hour may prove attractive if it brings a facility online years earlier. Conversely, nominally cheap grid power may prove extremely costly if it requires waiting through successive rounds of transmission upgrades, substation construction, and regulatory approval.

This is why “time to power” has become central to data-center development, and why comparing grid service to self-supply cannot reduce to levelized cost alone.

In the original article, I wrote: “Technological change will shift the margin between buy and make.” Institutional change shifts that margin too, alongside interconnection delays, permitting risk, transmission shortages, rate uncertainty, and disputes over who pays for grid expansion. As the cost of waiting rises, firms pay more to control the timing of their supply.

Nuclear contracts moved data centers toward quasi-integration

One visible response has been a new set of long-term nuclear agreements.

In September 2024, Microsoft and Constellation announced a twenty-year power purchase agreement supporting the restart of Three Mile Island Unit 1, now the Crane Clean Energy Center. The 837-megawatt reactor closed in 2019 for economic reasons; Constellation now expects to return it to service, subject to federal approval, with Microsoft purchasing power for its PJM-region data centers. Constellation’s announcement is here.

Microsoft did not buy the plant, and it will not operate the reactor, so it’s not vertical integration. Yet this is no ordinary arm’s-length purchase. The commitment of a large, creditworthy customer makes restoring the plant financeable, giving Microsoft the economic role of anchor investor while leaving nuclear operations to a company with the requisite expertise. It gains predictability and control without becoming a regulated utility.

Meta adopted a related arrangement in June 2025, signing a twenty-year agreement with Constellation for the output of the 1,121-megawatt Clinton Clean Energy Center in Illinois. The contract supports the plant’s continued operation after state subsidies expire, its relicensing, and a planned increase in output. Constellation describes the agreement here.

The two transactions differ in detail—one restarts a retired plant, the other retains an operating one—but share an organizational logic. The technology company makes a long-duration commitment tied to a specific asset; the generator gains the revenue certainty needed for a highly specific investment; ownership and operation stay with the energy company, while the data-center company gains a more dependable claim on future output.

Oliver Williamson called arrangements of this kind hybrid governance structures, lying between anonymous market exchange and complete vertical integration and retaining specialized capabilities while using long-term contracts to coordinate investment and limit opportunism. That characterization describes the nuclear agreements well: data centers have not integrated upstream by acquiring plants, but they have integrated contractually in the way that Klein, Crawford, and Alchian (1978) theorized.

Co-location exposed the regulatory complexity of “buying” directly

Co-location offers a still closer relationship between computing and generation.

Amazon’s arrangement involving the Susquehanna nuclear plant in Pennsylvania became the most prominent example. The appeal was clear: place a large data center beside an existing generator and serve much of the load directly, avoiding the wait for new grid infrastructure.

But transactions that look physically simple can be institutionally complicated. A data center beside a power plant may still depend on the regional transmission system during outages; the generator remains synchronized to the wider grid; the arrangement may draw on grid services for frequency control, reserves, and black start. Regulators must therefore determine how much transmission service the data center actually uses, which costs it avoids, and whether those avoided charges shift onto other customers.

FERC rejected the amended interconnection agreement tied to the proposed expansion in November 2024, then opened a broader proceeding in February 2025 to examine whether PJM’s rules adequately addressed co-located loads. In December 2025, FERC ordered PJM to develop transparent rates and rules for data centers and other large loads sited beside generators. FERC’s summary of the December order is here.

The resulting framework recognizes that a controllable co-located load may need less transmission service than a conventional customer. A 1,000-megawatt data center served by a 900-megawatt adjacent generator, for example, might contract for only 100 megawatts of firm transmission service; PJM would plan and procure capacity for that smaller grid withdrawal rather than the facility’s full load, with the data center bearing curtailment risk if it draws more than it purchased. FERC Commissioner David Rosner explains the framework here.

This hybrid contractual arrangement is a promising attempt to align charges with actual use while still letting data centers bring their own generation. Yet the dispute confirms the transaction-cost argument: connecting a private wire between a reactor and a server farm is the easy part. Defining withdrawal rights, outage obligations, reliability-service responsibility, and transmission cost allocation is the hard part.

FERC Commissioner Judy Chang raised another important point: a co-located generator and data center are not truly independent of the grid unless electrically islanded. Even facilities drawing little energy from the transmission system benefit from being synchronized with it, which is why she argued for a minimum charge reflecting that dependence. Her concurrence is here. “Behind the meter” is not the same as “outside the system”.

Hyperscalers became sponsors of advanced nuclear technology

The past two years have also moved small modular reactors from the margins of discussion toward commercial contracting.

In October 2024, Google announced an agreement with Kairos Power to support multiple advanced reactors, the first intended for service around 2030, with additional projects through 2035 totaling as much as 500 megawatts. Google’s announcement is here.

Amazon announced several advanced nuclear agreements that same month. Its arrangement with Energy Northwest contemplates an initial four-reactor project of roughly 320 megawatts, expandable to 960, and Amazon also invested in X-energy, whose reactor design the project would use, describing a broader ambition to support more than five gigawatts of new SMR capacity by 2039. Amazon’s project description is here.

These projects remain prospective; they do not show that every data center will arrive with a reactor in the parking lot. They do show that large technology firms are becoming active participants in generation innovation, acting not only as future consumers but as technology sponsors, project enablers, equity investors, and anchor customers—a role economically significant even when the hyperscaler never owns or operates the completed reactor.

Advanced energy technologies face a familiar commercialization problem: early projects are expensive and uncertain, but costs may fall through repeated construction, learning, and supply-chain development, and a long-term commitment from a large buyer can bridge the gap between a promising technology and a financeable project. Here again, the arrangement sits between make and buy. The hyperscaler does not simply select a product from a competitive market; it helps create the future supply it expects to purchase.

Natural gas became the fastest near-term “make” option

Advanced nuclear power may matter during the 2030s. Data-center developers need electricity sooner, which makes natural gas an attractive near-term option despite its emissions and fuel-price risks.

In January 2025, Chevron, Engine No. 1, and GE Vernova announced plans for as much as four gigawatts of natural-gas generation for U.S. data centers. The initial projects were designed to operate outside the existing transmission grid, with the possibility of supplying surplus electricity to it later, targeting service by the end of 2027. Chevron’s announcement is here.

The partnership illustrates the growing importance of alliances. Chevron contributes fuel and energy-market capabilities; GE Vernova supplies turbines and generation technology; Engine No. 1 contributes investment and project-development expertise; data-center customers provide concentrated, long-term demand. No single participant must build every capability internally, yet the arrangement coordinates fuel, equipment, capital, construction, and demand more tightly than conventional utility procurement would.

Some companies have gone further. xAI deployed mobile natural-gas turbines to speed development of its Colossus computing facility in Memphis, demonstrating how on-site generation can compress schedules—and demonstrating that self-supply does not eliminate regulation. The project generated disputes over air permits, emissions, and effects on surrounding communities.

This experience qualifies the make-or-buy framework in an essential way. Vertical integration can reduce dependence on utilities and transmission planners, but it moves other costs and risks inside the project boundary. A company producing its own electricity must confront fuel logistics, emissions regulation, equipment maintenance, land-use politics, and environmental liability. There is no regulatory-free electricity (not even Customer Regulated Electricity is fully regulatory free!).

Utilities are redesigning the “buy” option

The movement toward dedicated generation does not mean ordinary utility service will disappear. Utilities and state regulators are instead changing the terms under which large data centers can buy power.

Ohio offers a prominent example. In July 2025, the Public Utilities Commission of Ohio directed AEP Ohio to establish a data-center-specific tariff as part of lifting restrictions on new connections. The structure requires stronger financial commitments from large customers, reducing the risk that other ratepayers absorb the cost of infrastructure built for projects later delayed, downsized, or abandoned. The commission’s announcement is here.

These provisions respond to a genuine planning problem. A utility may field requests for several enormous connections, each requiring new substations, transmission upgrades, or generation, while developers apply at multiple sites intending to build only one, or revise plans as technology and capital markets shift. Treating every request as certain risks overbuilding; passing the cost of unused infrastructure automatically into ordinary rates shifts speculative risk onto residential and small-business customers.

Minimum bills, collateral requirements, exit fees, take-or-pay clauses, and enforceable ramp schedules place more of that risk on the customer requesting the investment. In transaction-cost terms, these tariffs redesign the buy option: utility service remains available, but it is becoming more contractual, giving the customer a path to large-scale service while giving the utility greater confidence that the investment will be used and paid for. This is not the disappearance of the regulated utility model—it is that model adapting to a new class of customer.

From make or buy to a continuum of contractually-defined control rights

The developments since August 2024 show that the make-or-buy choice is not binary. Data centers now obtain electricity through several increasingly integrated arrangements:

Ordinary utility service. The data center pays the applicable tariff and depends primarily on the utility and regional grid.

Specialized large-load service. The customer remains utility-supplied but accepts minimum bills, collateral requirements, exit charges, or other long-term obligations.

Long-term power contracts. The customer purchases electricity or environmental attributes under a multiyear agreement supporting a particular generator or portfolio.

Asset-specific nuclear agreements. A technology company’s commitment enables the restart, continued operation, uprating, or relicensing of a particular plant.

Co-location. A data center locates near a generator and contracts for much of its electricity directly while retaining limited grid access.

Joint development. Technology companies, utilities, equipment manufacturers, fuel suppliers, and investors coordinate the construction of new generation.

Behind-the-meter self-supply. The data center develops or controls generation on or near its site, using the grid only for supplementary or backup service.

These arrangements allocate control differently. Who decides which generation gets built? Who bears construction and fuel-price risk? Who operates the equipment and controls the schedule? Who pays if the data center never materializes, or when the generator is unavailable, or for the grid services that remain necessary regardless?

The clearest emerging pattern: data-center companies increasingly seek control over investment, financing, and timing without seeking operational control. Microsoft need not employ nuclear operators to influence whether a plant restarts. Google need not manufacture reactors to accelerate an advanced design. A hyperscaler can sponsor a dedicated gas plant without maintaining the turbines itself. This is quasi-vertical integration: control without complete ownership.

Transaction cost economics holds up well

Two years of evidence reinforce the transaction-cost framework I used in my original article.

Electricity supply for data centers carries several features that make simple spot-market procurement difficult. The investments are highly specific: a substation, transmission line, reactor restart, or dedicated gas plant built for one cluster of data centers has less value if those customers disappear. The environment is uncertain, with future loads, prices, fuel costs, and regulatory rules all hard to forecast. The contracts are complex, addressing construction delays, outages, curtailment, transmission service, environmental attributes, credit risk, and cost allocation. And the consequences of failure are large: a data center without power is an extraordinarily expensive building full of idle machines.

Williamson showed that greater asset specificity, complexity, and uncertainty would push firms toward more coordinated governance than simple market exchange—exactly what we now observe. But coordinated governance need not mean bringing every activity inside one corporation. It can take the form of a twenty-year contract, a joint venture, a co-location agreement, a dedicated tariff, or a strategic investment in new technology. The boundary of the firm has grown more permeable and more varied, not irrelevant.

Three qualifications

The evidence supports the original analysis, with three qualifications.

First, complete upstream vertical integration remains unusual. The largest technology companies generally prefer working with utilities, independent power producers, reactor developers, turbine manufacturers, and fuel suppliers rather than becoming fully integrated electricity companies; specialized energy firms retain valuable capabilities.

Second, natural gas currently holds a substantial timing advantage over advanced nuclear power. The nuclear announcements matter, but many target operation during the 2030s, while gas generation can often deploy sooner—though turbine shortages, pipeline constraints, and air permitting may narrow that advantage.

Third, dedicated generation does not necessarily reduce total system costs. It may lower costs for the individual developer while shifting or creating costs elsewhere, requiring regulators to distinguish legitimate reductions in grid use from arrangements that let large customers avoid paying for services on which they still depend. That is why cost causation has become central to the co-location debate: data centers should not be charged for transmission facilities they do not need, nor should they receive reliability and synchronization services without paying an appropriate share.

Good rate design has to avoid both errors, and this is why cost allocation is the burgeoning frontier of regulatory economics.

“It depends” has acquired more detail

The central conclusion of the 2024 essay still holds: there is no single efficient electricity model for data centers.

A facility in a region with available generation and transmission capacity may rationally use conventional utility service. Another may sign a specialized tariff and commit to paying for new infrastructure. A hyperscaler seeking round-the-clock carbon-free energy may support an existing nuclear plant or an advanced reactor. A developer facing an acute time-to-power constraint may install natural-gas generation despite the environmental and commodity risks.

What has changed is our understanding of the variables behind “it depends,” which now include not only the price and reliability of electricity but also the cost of delaying operation, the availability of utility and transmission capacity, the credibility of the load forecast, the ability to finance generation with long-term contracts, the allocation of grid and reliability costs, the availability of turbines, pipelines, and nuclear components, the regulatory treatment of co-location, and the value a company places on controlling its own development schedule.

The electricity input has become too important, too constrained, and too closely tied to the timing of data-center investment to remain a routine procurement decision. Data centers are becoming active designers of the institutions, contracts, and technologies through which their electricity gets produced. The make-or-buy boundary has shifted toward greater contractually-enabled control. It has not shifted toward a single organizational form for implementing that control.

Photo by Michael Pointner on Unsplash

In a recent article I told the story of a thorny coordination problem. Thomas Edison’s great achievement was not the light bulb but the system around it—generation, wires, meters, financing, and service—bound together because each piece was nearly worthless without the others. That tight coupling, paired with expensive, long-lived assets, made market coordination costly, so the industry coordinated through hierarchy instead. The vertically integrated, regulated utility was in part a Coasean response to an Edisonian machine.

After restructuring in the 1990s separated generation from wires in some states, separate firms provided generation while utilities continued to own and operate transmission and distribution. That change demonstrated that integration was not inevitable while teaching a second lesson: Unbundling succeeds only when its supporting institutions are strong. Today’s grid already looks different thanks to digital technology. This newsletter takes up the question left open: Which activities still belong inside the integrated utility, and which can move to markets, contracts, and platforms?

From Machine to Platform

Digital technology changes electricity because it changes what can be measured, communicated, automated, and controlled. For most of the 20^th century, the distribution grid was largely invisible to system operators, who knew aggregate load but little about local circuits, and customers stayed just as passive, flipping a switch and paying a bill each month. The grid edge was an opaque endpoint, a black box.

That world is disappearing. Advanced meters make consumption legible, while sensors and communications networks improve visibility into distribution systems. Smart inverters let solar panels and batteries participate in grid services, and power electronics govern the flow, conversion, and quality of electricity with far greater precision. On the demand side, electric vehicles add flexible load and storage, while thermostats, water heaters, and building energy systems (as well as EVs and batteries) can respond autonomously to prices and signals. Software platforms can aggregate thousands of these small devices into resources substantial enough to influence system conditions.

The physics of electricity remains difficult, but these technologies lower the transaction costs of using distributed resources—it becomes cheaper to know where they are, what they can do, and how to compensate their owners. This shift in cost changes a resource too small to coordinate into a resource that can participate in a market, a tariff, or a contract.

Take, for example, a household battery. In the old system, a device that small, behind a customer’s meter, was irrelevant to system operations because it was too dispersed, too hard to observe, and too costly to coordinate. In a digital system, that same battery can be monitored, aggregated, dispatched, and compensated, reducing peak demand, providing backup power, shifting solar production, supporting local reliability, or participating in wholesale markets through an aggregator, if market rules allow.

The physical device is necessary, but the institutional environment is just as important. A battery becomes a grid asset only when rules, prices, contracts, and performance measurement make its capabilities economically legible. The same logic extends to rooftop solar, electric vehicles, and microgrids, whose value depends on context; a kilowatt-hour at noon differs from one at 7 p.m., and a resource on a congested circuit differs from one on an unconstrained line. Digital systems make these distinctions observable, and observable resources can be measured, priced, and coordinated through markets.

The internet analogy, used carefully

Calling the digitizing grid “the next internet” is tempting but not quite accurate. The internet is built in layers, letting applications develop at the edge without permission from every infrastructure owner. Electricity does not work that way: Power flows according to the physics of the alternating current (AC) network, not the commercial intentions of the transacting parties, and congestion, voltage, frequency, and reliability constraints cannot be solved by simple two-party contracts.

Still, the analogy captures something true about modularity. A more digital electric system can support more innovation at the edge if it has the right interfaces, letting customers, aggregators, and device manufacturers build new combinations once they can connect under clear rules. That modularity is the institutional frontier of electricity. Coordination once ran almost entirely through utilities’ internal planning, but increasingly it also runs through markets, contracts, platforms, and automated devices. The system becomes less a single machine and more a layered architecture, not because physics has changed, but because the cost of coordination has changed.

What digitalization does to transaction costs

The relevant transaction-cost economics here can sound abstract, so consider the mechanism directly. Digital technologies cut six types of transaction costs: search costs by making resources visible, measurement costs by making performance observable, verification costs by creating records of performance, communication costs by letting devices receive and respond to signals automatically, adaptation costs by helping systems respond to changing conditions in near real time, and aggregation costs by making small resources meaningful in combination.

Those reductions add up. Without measurement, compensation is guesswork; with measurement, contracts and markets become possible. One thermostat is not a power plant, but 10,000 thermostats, coordinated well, provide a measurable system service. One EV charger is a household appliance, while a fleet of chargers is flexible load, storage, or a congestion-management tool.

This shrinking of transaction costs weakens the old case for vertical integration. If owning a resource was the only practical way to coordinate it, ownership made sense. If coordination can instead occur through standardized interfaces, contracts, market platforms, and automated controls, integrated ownership becomes less necessary.

None of this means vertical integration disappears from power systems. Distribution wires are still networks. Transmission planning still involves the collective-action problems of land use and permitting. Reliability still requires organizations that can see and manage system-wide constraints. But the boundary shifts, and the question becomes more granular: Which functions still require integrated control, and which can open to modular participation?

The utility as platform, or the utility as bottleneck?

The modular grid is creating a strategic and regulatory fork in the road. One path turns the utility into a platform: maintaining and operating the distribution network, managing interconnection, sharing useful system data, sending transparent price signals, and enabling third-party innovation. The utility remains important, perhaps even more so, but its role shifts from owning all relevant resources to orchestrating a complex local network. The other path turns the utility into a bottleneck: controlling data, slowing interconnection, resisting third-party access, and treating distributed resources mainly as threats to its traditional business model. The result may look like stability in the short run, but it is institutional sclerosis, with technology advancing while rules keep potential value trapped.

That binary framing is stark but useful. Historically, distribution was the quiet end of the system: Power flowed down from large generators through transmission networks into local wires and then into homes and businesses, and distribution utilities connected customers, maintained wires, restored service after storms, and sent bills. It was essential work, but never imagined or designed as a dynamic market.

The distribution grid is now where rooftop solar, batteries, electric vehicles, heat pumps, smart buildings, and flexible loads connect. Here, resilience, electrification, decarbonization, and customer choice meet physical network constraints, and the most important transaction-cost questions arise. Who can see the relevant data? Who can act on it? Who gets compensated? Who bears reliability obligations? Who decides whether a distributed resource is an asset, a nuisance that introduces disturbances to the grid, or both? These are questions of institutional design.

The continuing need for integration

A more modular grid is not a fully unbundled grid; modularity and integration are not opposites. Healthy modular systems still require integration, but such integration no longer necessitates a single firm’s ownership. The internet depends on technical standards, protocols, routing systems, cybersecurity practices, and physical infrastructure; markets depend on law, property rights, enforcement, settlement systems, and governance. Modular electricity will require equally strong coordination institutions.

Some functions will likely remain deeply integrated: Real-time reliability needs system operators with authority and visibility, transmission needs regional planning and cost allocation, distribution needs engineering oversight as two-way flows and local constraints grow more important, cybersecurity needs coordination across firms and devices, and consumer protection remains necessary because electricity is essential and retail energy products can confuse people quickly.

The point is to update the institutional architecture as technology changes the economics of coordination, sorting the activities that now belong in competitive markets, performance-based contracts, or open-access platforms from the activities that still require monopoly provision or centralized control. That sorting requires humility. The old model had real strengths: reliability, universal service, capital formation, and coordinated investment. The new model has real promise: flexibility, innovation, customer participation, resilience, and greater efficiency. The challenge is neither to sneer at the old system nor to romanticize the new one, but to recognize when the economic conditions that justified a legacy institution have changed.

The end of the Edison bargain?

The traditional electricity system rested on what we might call the Edison bargain: Build the system as an integrated machine, let utilities coordinate the parts, and regulate them because customers are captive and scale economies are real. In return, expect reliable service, expanding access, and investment in long-lived infrastructure.

That bargain did extraordinary things. It electrified the country, supported industrial growth, improved household life, and made modern economic activity possible. Widespread electrification counts among the great institutional achievements of the 20^th century.

But institutions built for one technological era can become obstacles in another. When the system ran on large central stations, one-way power flows, passive customers, and limited information, vertical integration made strong economic sense. When the system includes distributed generation, storage, flexible load, electric vehicles, smart inverters, and granular data, the old model becomes less obviously appropriate.

The rationale for utility ownership and control must therefore become more precise. “The utility has always performed this function” is not an economic argument. The relevant question is whether internal coordination still economizes on transaction costs better than the alternatives. Sometimes the answer will be yes. Increasingly, in some domains, it will be no.

The modular grid will need new rules for data access, interoperability, interconnection, distribution planning, market participation, retail pricing, and performance measurement, in addition to new operating procedures for coordinating far more devices physically. It will need regulators who think less like accountants reviewing the prudence of capital expenditures and more like institutional designers shaping the rules of a complex adaptive system. That shift is difficult, but done judiciously, regulation can provide a framework for innovation.

The technology is not enough

Edison’s electric system was a machine: integrated, physical, capital-intensive, hierarchical. The pieces needed one another, and coordinating them through markets cost too much. AC power expanded that machine across larger territories, making it more powerful while preserving its integrated logic, and public utility regulation stabilized the bargain.

Digital technologies are changing the conditions underneath that bargain. They make the grid more observable and more responsive, and they lower the transaction costs of coordinating distributed resources enough to make a genuinely different system possible in which integration and modularity coexist, both physically and institutionally.

The future grid will be neither a swarm of autonomous devices nor a vertically integrated machine pushing power one way from central stations to passive customers. It will be layered: physical networks, digital controls, market platforms, contracts, tariffs, and standards, interacting across many scales.

The economics of electricity are shifting from the economics of vertical integration to include the economics of modular coordination. The old question was how to build and regulate an integrated monopoly capable of delivering reliable service; the new question is how to design institutions that preserve reliability while allowing innovation, flexibility, and decentralized participation from multiple diverse parties and their heterogeneous devices.

Edison would recognize the ambition. But the system he built is becoming something different—no longer only a machine operated from the center, but a platform on which many actors can build. Whether that platform becomes open and innovative, or closed and protective of incumbent control, depends less on the devices than on the rules.

Originally published in the Dispatch Energy newsletter at https://thedispatch.com/newsletter/dispatch-energy/power-grid-system-digitalization-costs-edison/

Source: ChatGPT’s conception of “repairable mistakes” and self-correcting democratic institutions. I have some disagreements with some of the characterization and language here (and the quotes felt a little Orwellian to me, especially in the banner), but I thought it was thought-provoking enough to include it as is! What do you think?

Reminder: I am using multiple translations; my main reading is from the hardbound copy of the Mansfield translation. When I refer to page numbers it’s to the Mansfield translation, and when I want to pull quotes that are longer I’ll use the online Schleifer translation, so the text may not match exactly but they are close (and I also read French so I calibrated across the translations to get comfy with Tocqueville’s word choice).

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Part II, Chapters 6 through 8 of Democracy in America build on each other into a more coherent and insightful progression than I honestly was expecting from these chapters. Tocqueville asks first what democratic government does well, then turns to its central danger, the omnipotence of the majority, before closing with the institutions that temper that danger. If you read them in isolation, these chapters look like praise, then warning, then reassurance. Read together, they form an argument about democratic self-correction. Democracy’s advantage lies not in avoiding error but in retaining, through the right formal and informal institutions, the capacity to recognize mistakes and change course without surrendering self-government. This progression and its dynamic feedback effects marks Tocqueville as an evolutionary institutionalist.

Democracy’s real advantage

Chapter 6 opens with an asymmetry: democracy’s faults are visible immediately, while its virtues only become apparent through experience. Tocqueville concedes that aristocracy will generally out-legislate a democracy due to better training, more continuity, more leisure for the work of governing. But skill in lawmaking is not the same as justice in purpose, and his claim is comparative: “The real advantage of democracy is not, as has been said, to favor the prosperity of all, but only to serve the well-being of the greatest number” (p. 223). Majoritarian rule does not harmonize every interest, but it does shift government toward a wider slice of society than aristocratic rule does.

Is Tocqueville being a bit idealistic here? A broader beneficiary class is not the same as a just one, and he knows this. He has a sharper point, though, that I think is one of the most important insights in these three chapters: “the great privilege of the Americans is to be able to have repairable mistakes” (p. 222). Democracy serves people by keeping its errors reversible: bad laws repealed, poor officials removed, failed policies revisited, local experiments contained before they become national ones. Opening governance to more people invites more error, and uncertainty makes some of that unavoidable regardless of who governs. What matters is that the errors stay cheap to fix.

That privilege has a condition attached, which Tocqueville spends the next two chapters complicating. Mistakes stay repairable only so long as the machinery of repair stays intact. A society can enact a bad law and later reverse it, or it can weaken rights, erode legal constraints, centralize authority, and punish dissent, wearing down its own capacity to notice and fix future errors. Repairability is not fixed or guaranteed. It has to be maintained.

Tocqueville grounds this maintenance process in rights: “The idea of rights is nothing other than the idea of virtue introduced into the political world” (p. 227). Rights set a moral ceiling above both self-interest and majority will, and democracy’s distinctive achievement is making that ceiling something ordinary citizens actually practice against, rather than something only elites understand. I found this idea abstract and confusing, but his analogy to property rights helped: “The government of democracy makes the idea of political rights descend to the least of citizens, as the division of property puts the idea of the right of property in general within reach of all men” (p. 228).

Citizens learn liberty the way they learn anything difficult: by practicing it, defending it, and living its reciprocal obligations (and in our time, I think too many of us forget those reciprocal obligations). “There is nothing more fruitful in wonders than the art of being free,” Tocqueville writes, “but there is nothing harder than apprenticeship in liberty” (p. 229). Despotism, by contrast, arrives promising order and quick relief, comforting now and only later revealed as costly. Liberty’s origins are usually tempestuous, and its benefits show themselves only with time and maturity.

This contrast explains one of Chapter 6’s more striking claims. Democracy’s greatness, Tocqueville argues, shows up less in what government executes than in what citizens accomplish outside it: an “energy that never exists without it and that, if only circumstances are favorable, can bring forth wonders” (p. 234). Measuring government purely by administrative output misses the point. The relevant question is what the institutional order frees citizens to do on their own.

From majority rule to majority omnipotence

Chapter 7 turns from democracy’s energy to its power. The same restless activity that Chapter 6 celebrated becomes, if unchecked, the source of Chapter 7’s danger: tyranny of the majority.

Tocqueville is not opposed to majority rule; some decision procedure is necessary, and majority rule fits democratic equality. His target here is majority omnipotence, the belief that a majority may act without obstacle and treat its will as the final measure of justice. “Omnipotence in itself seems to me something bad and dangerous. Its exercise seems to me beyond the power of man, whoever he may be” (p. 241). No earthly authority, whatever its source, is wise enough to hold unlimited power safely, a claim I find persuasive on both epistemic and moral grounds.

His diagnosis of America is correspondingly counterintuitive: “What I most criticize about democratic government as it has been organized in the United States is not its weaknesses... but on the contrary, its irresistible strength” (p. 241). The danger is not too much liberty. It is too little guarantee against tyranny, because the same majority reaches the legislature, the executive, and public opinion all at once.

That last point worries him the most, since democratic tyranny doesn’t have to censor anyone. It can just make dissent expensive. “As long as the majority is uncertain, people speak, but as soon as the majority has irrevocably decided, everyone is silent” (p. 243). That silence is as much an epistemic failure as a political one. Once disagreement disappears, officials hear only their own opinions echoed back, and democracy loses its capacity to test itself. Tocqueville reports finding startlingly little “independence of mind and genuine freedom of discussion” in America (p. 244), and describes a “courtier spirit” spreading through democratic society: where courtiers once flattered kings, politicians and writers now flatter the public.

Self-correction depends on friction, on someone being willing to say a decision is wrong. Majority tyranny does its worst damage exactly where it disables the mechanisms that would otherwise supply that friction.

Democracy correcting democracy

Chapter 8 answers the problem Chapter 7 raises. The American majority may have “the tastes and instincts of a despot,” but it “still lacks the most perfected instruments of tyranny” (p. 250), and Tocqueville credits three institutions with keeping it that way.

The first is administrative decentralization, which limits the reach of majority opinion. Local governments and overlapping jurisdictions create friction between what a majority wants and what gets executed, containing the damage of any single bad decision rather than preventing bad decisions from occurring.

The second is the influence of lawyers, whose professional habits — precedent, procedure, continuity, formal reasoning — slow the passage from popular desire to political action. Tocqueville sees this working through the inherited structure of English common law, adapted and carried forward in America: change happens, but embedded in institutional memory via precedent rather than improvised from scratch. Lawyers as stewards of self-correcting democratic institutions may be the nicest thing anyone has ever said about them!

The third, and the one Tocqueville treats most affectionately, is the jury, which he sees simultaneously as a judicial and a political institution. Jurors listen, weigh evidence, apply general rules to particular facts, and answer for the consequences. The jury moderates democracy by involving citizens in judgment rather than excluding them from power, a paradox Tocqueville captures in one of the best lines in these chapters: “the jury, which is the most energetic means of making the people reign, is also the most efficacious means of teaching them to reign” (p. 264).

That sentence closes the circle opened in Chapter 6 by “repairable mistakes”. Rights teach reciprocity, decentralization contains error, lawyers carry memory, and juries teach judgment — four institutions, doing different jobs, all disciplining the exercise of majority will without ever silencing it. None of the four legislates virtue directly; each cultivates it, building the patience, the tolerance for dissent, and the willingness to lose an argument that repairable mistakes ultimately depend on.

In these three chapters, Tocqueville’s defense of democracy rests on adaptability, not wisdom. A free society stays capable of repair only as long as it protects the institutions that make repair possible. That, more than any particular law or policy, is the argument worth carrying forward.

Source: ChatGPT’s conception of Tocquevillian association

Reminder: I am using multiple translations; my main reading is from the hardbound copy of the Mansfield translation. When I refer to page numbers it’s to the Mansfield translation, and when I want to pull quotes that are longer I’ll use the online Schleifer translation, so the text may not match exactly but they are close (and I also read French so I calibrated across the translations to get comfy with Tocqueville’s word choice).

Democracy in America, Part II, Chapters 4 & 5

Democracy works, when it works, not because citizens choose wisely but because participation forms citizens capable of governing themselves despite not always choosing wisely. This insight runs through Tocqueville’s chapters on political association and democratic government, and it feels evergreen, like the kind of thing each generation forgets and has to relearn.

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Reading these chapters as descriptive is tempting: parties, associations, universal suffrage, public officials, administrative instability, public expenditure. But Tocqueville is analyzing democracy to learn what democratic participation makes of the people who practice it. These chapters are prime Tocqueville as observer, ethnographer, political scientist, theorist.

True to form, he refuses to romanticize the answer. Universal suffrage has advantages, he argues, but guaranteeing good choices is not one of them. Democracy may select mediocre officials, reward short-term thinking, multiply offices, underpay excellence, and produce administrative instability. Aristocracy, by contrast, can offer continuity, skill, grandeur, and long time horizons. Tocqueville sees the advantages and disadvantages of each clearly, and does not pretend democracy is costless. His comparative stance weighs democracy’s costs against aristocracy’s, with its benefits assessed not only in policy outputs but also in the citizens democracy forms.

That comparative analysis is essentially economic, treating forms of government as bundles of tradeoffs. Aristocracy governs with refinement by concentrating power, status, and competence in a narrow class, which produces excellent rulers while politically infantilizing everyone else. Democracy governs less elegantly but diffuses agency, drawing ordinary citizens into public life and giving them practice in judgment. Its output transcends laws and budgets to include habits.

A French liberal inheritance

Tocqueville is heir to a French liberal tradition—Jean-Baptiste Say, Benjamin Constant, Charles Comte, Charles Dunoyer, François Guizot — that fused political economy with historical psychology and judged institutions by the forms of activity, dependence, knowledge, and character they produce. He brings that lens to America, thinking historically about competing social powers (monarchy, aristocracy, church, courts, public opinion) the way Guizot did, while attending to incentives and unintended consequences the way the liberal economists did. Tocqueville also adds a civic psychology sharper than most political economy offers: institutions do not just constrain behavior, they educate desire, ambition, judgment, and self-command.

Political association is the chief mechanism through which that education happens (Chapter 4). Tocqueville treats association as dangerous but indispensable, allowing citizens to organize around shared opinions, publicize claims, and contest majority opinion without violence. In Europe, association often turned revolutionary because it developed under regimes that excluded most citizens from legal participation. In America, association operates inside a framework of broad suffrage: its goal is to persuade the majority, divide it, or eventually become it, not to overthrow it.

That contrast between the Union (America) and Europe leads to different outcomes. Political association converts disagreement into organized persuasion. A minority in the Union can count itself, discipline itself, and seek allies without pretending to embody the whole people, because democracy offers it a path to become more than a minority. Association thus pluralizes popular sovereignty, keeping “the people” from hardening into a moral abstraction.

Association as a substitute for aristocracy

Association is also democracy’s remedy for its own individualism (which Tocqueville understands as a very atomistic concept). Equality loosens inherited bonds, weakening class hierarchy, family authority, and aristocratic patronage. But it can also leave individuals isolated and politically small, formally free yet practically powerless before the majority or the centralized state. Association lets citizens recover collective strength and coordinated action like the capacity for large projects, and without restoring hereditary privilege. Associations are post-aristocratic institutions, substitutes for the social power democracy has dissolved.

The institutional economics here is straightforward: associations lower the cost of collective action among equals. They aggregate dispersed interests, produce information, coordinate effort, and generate civic knowledge unavailable to passive spectators. Political and civil association develop together, Tocqueville later observes: where political association is forbidden, civil association is rare, and where citizens learn the art of association in politics, they carry it into ordinary life.

In other words, democracy has an institutional production function. Under some conditions, participation produces capable citizens; under others, it produces agitation, conformity, or dependence. The better question asks what kind of participation, embedded in what institutions, produces what kind of citizen.

Seen this way, aristocracy and democracy each solve some problems while creating others (again with the tradeoffs ...). Aristocracy coordinates through durable hierarchy and cultivates public men by training a class of men for command. Democracy, lacking hierarchy, must build voluntary mechanisms of coordination and cultivate citizens through use rather than birth. This process creates powerful collective actors through association instead of powerful individuals through lineage.

Institutions that make democratic equality compatible with individual liberty become the central problem Tocqueville asks democracy to solve.

Capacity, not just choice

The tradeoffs and the downsides of democracy show why Tocqueville treats universal suffrage so carefully [Note: The conception of universal suffrage here is far from universal, excluding women, Native Americans, and enslaved people. Tocqueville will discuss slavery and Native Americans extensively later, but takes as given the absence of women from formal political participation.]. He does not believe suffrage reliably selects the most capable rulers. Friends of democracy must solve a harder problem: helping the people choose capable governors while preserving enough popular authority to guide them without administering in their place. That problem sounds, and is, remarkably modern. Democracy needs popular control, but also competence, mediation, and institutional filtering. Tocqueville wants practical participation without the fantasy that direct popular impulse settles every question well.

Guizot’s liberalism struggled with the problem of political capacity: who is capable of governing, and how can a modern society recognize competence without freezing hierarchy into privilege? Tocqueville democratizes that problem rather than abandoning it. He characterizes capacity as a habit institutions produce, meaning that democracy has to both find capable citizens and make them.

That formative point is the deep connection between chapters 4 and 5. Chapter 4 shows democratic participation at its most constructive; Chapter 5 shows democratic government at its most ambiguous. Political association educates citizens in common action, while universal suffrage does not guarantee wise choice. Democratic equality produces agency, but it can also produce envy and impatience. Neither side cancels the other. Democratic self-government lives inside this tension, and doing so successfully requires citizens to practice the habit of self-rule.

Our own moment

That tension speaks directly to our current politics. Much contemporary participation does not look Tocquevillian in the formative sense—it is intense, expressive, nationalized, and identity-laden, but detached from practical self-government. Citizens experience politics more as national drama than local action, and political identity becomes less a habit of shared problem-solving than a badge of belonging and moral sorting.

In The Increasingly United States, Daniel Hopkins has argued that American political behavior has become increasingly nationalized, with citizens interpreting state and local politics through national partisan frames. Hopkins asks what happens to a constitutional order premised on meaningful state and local allegiances once those allegiances fade. Pew’s research on public attitudes finds that large majorities describe politics in negative terms and often feel exhausted or angry thinking about it. The Carnegie Endowment’s review of polarization research adds a related finding: Americans may not be as ideologically polarized as they believe, but they are deeply affectively polarized, disliking and distrusting members of the other party.

Tocqueville would not be surprised. He feared that once detached from robust local and associational life, democratic citizens would become weak where they could act and inflamed where they could not. National politics offers vast moral scale but little practical agency, inviting citizens to identify with abstractions — the nation, the people, history, decline, restoration. Politics cannot avoid such abstractions entirely, but when they displace local action and voluntary association, they deform participation. The citizen becomes a spectator with strong feelings.

Tocqueville’s analysis also helps explain populism’s appeal. Populism offers a shortcut through the hard work of association, telling citizens that “the people” already exist as a unified moral body and that the central task is empowering whoever truly speaks for them. Tocquevillian association begins from the opposite premise: the people are plural, scattered, and unfinished, becoming politically capable only through organization, argument, and repeated action.

Polarization looks different through this lens too. Tocqueville understood association itself as organized conflict, so disagreement is not the issue per se. The problem arises when disagreement loses its intermediary institutions. Parties, local governments, churches, unions, and civic organizations become schools of democratic conduct by forcing citizens to work with others in concrete settings. When politics is mediated chiefly by national media and presidentialized conflict, citizens absorb the emotional intensities of politics without the formative disciplines of participation. We learn to denounce rather than deliberate, to sort rather than associate, to consume politics rather than govern.

Institutional ecology, not nostalgia

Tocqueville’s remedy is thus better participation. Democracy needs institutions that keep politics local, associational, practical, and plural. Local self-government matters because it gives citizens real, substantive, meaningful things to do. Associations teach citizens to act together without waiting for centralized authority. Newspapers connect dispersed citizens and make association possible; juries educate judgment; federalism multiplies the scales of public action. Division of sovereignty plus right of association creates an institutional ecosystem (and a polycentric one at that) that can get the best of democratic equality and individual liberty.

The institutional dimensions of his analysis make Tocqueville such a productive interlocutor for economists. He thinks in tradeoffs, incentives, and institutional effects, but he does not stop where economic analysis usually stops: preferences are not simply given, they are formed in use, and institutions do not simply aggregate interests, they shape the people who hold them. Democracy thus serves as an allocation mechanism and an educational regime, allocating authority more broadly than aristocracy while promising that broad participation can form citizens capable of using that authority well.

That promise is fragile. Democracy can choose badly, centralize power, flatten excellence, and give public opinion tyrannical force. More beneficially, it can also awaken energy in ordinary people, make public life common rather than exclusive, and replace privilege with association. Can democracy build institutions that compensate for what it lacks while cultivating what only it makes possible? That’s the deep and profound question at the heart of these chapters.

Political association, in Tocqueville’s hands, is one of democracy’s central technologies of liberty, supplying coordination without command, power without privilege, and civic education without hierarchy. It teaches democratic citizens to use freedom together, which may be the most important lesson in these two chapters. Democracy is sustained by institutions that help the people become capable of ruling themselves.

Previous articles in this series: I’m not appending these to every one because that just gets annoying, but here we are 1/3 of the way through, so it’s a good time to capture links to the previous articles.

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Ride through is an operational rule in power systems requiring that a customer’s load stay connected to the grid during a brief disturbance rather than disconnecting immediately. The physics of alternating current is the issue. In an AC system, voltage and current oscillate as a sine wave at a nominal frequency (60 hertz in the United States) and the grid operator has to keep generation and load in continuous balance, moment to moment. Frequency is the signature of that balance: it holds steady at its nominal value when generation and demand line up, and drifts up or down when they diverge. Voltage is a more local phenomenon, rising and falling at a given point on the network rather than across the system as a whole. When either quantity moves outside its normal range, protective relays are often set to trip a customer’s load off the grid entirely, shielding that customer’s own machinery from damage.

Most voltage and frequency deviations are small, correcting themselves within seconds through the grid’s own automatic controls. The trouble starts when a very large load reads a passing disturbance as a serious threat and drops hundreds of megawatts (MW) all at once, turning a manageable fluctuation into a systemic problem.

In the days of electro-mechanical technology, the arrangement between a utility and a large industrial customer like a steel plant was straightforward and well understood by both parties. If the plant’s machinery was at risk, its owner could set the plant’s protective relays to trip its connection and drop off the grid. That trip happened quickly by the standards of its era, but slowly compared with today’s digital controls, and it dropped a load far smaller than a modern data center’s. The grid operator, for its part, had well-defined contingency protocols of its own, built around disturbances that likewise unfolded at electro-mechanical rather than digital speed.

The contract between them, and the reliability it protected, was built for those technologies. Now the technologies have changed, and the contract has to change with them.

Source: My conversation with ChatGPT asking it to explain ride through to a non-engineer so I could characterize it well

Ride through and the new operational bargain between data centers and the grid

Data centers consume large amounts of electricity and can change how they consume it in an instant. That speed changes what a utility has to manage. Large industrial customers have always been part of the grid — smelters, steel mills, chemical plants — and their outages have never been trivial. Today’s data centers present a different problem: they are big, fast, electronically controlled, internally flexible, and often opaque to the grid operator watching from outside.

In July [edit: I originally said February, corrected to July], 2024, a lightning-induced fault on a transmission line caused a series of voltage depressions. Sensing these “voltage excursions”, 60 data centers in northern Virginia simultaneously and autonomously dropped off the grid and switched to onsite back and uninterruptible power supply (UPS) resources, reducing grid demand by 1,500 MW (based on the NERC analysis of the event). These responses appear to have been uncoordinated, customer-initiated load withdrawals caused by voltage-sensitive protection and UPS controls.

From the data center’s perspective, fast disconnection looks like prudent self-protection, while from the utility’s perspective, the sudden disappearance of a very large load looks like a major imbalance. If generation keeps producing while demand vanishes, frequency and voltage can rise, and if multiple facilities have similar controls and respond at once, the effect compounds well beyond what any single customer intended.

Ride-through requirements have consequently become serious business. A ride-through rule creates a tolerance window: within a defined range of voltage or frequency deviation, for no more than a defined time, the customer must not trip off or cut load sharply in an uncontrolled way. It may still protect its equipment, just not by exporting a sudden disturbance onto the rest of the grid. If you want more technical depth, this ESIG large load report from February 2026 discusses ride through and other operational strategies for large loads.

While it looks technical, the ride through question is fundamentally economic. Ride through is an engineering setting that is part of a new operational bargain between the utility and the large-load customer.

What the old bargain assumed

The older electro-mechanical grid’s bargain looked different because the technologies had different capabilities. Large industrial customers ran physical processes — rotating motors, furnaces — while utilities operated synchronous generators, carried more rotating inertia, and built practices around known contingencies. A steel mill tripping off was a serious event, but it could not sense a disturbance, transfer demand to batteries, shed selected systems, and recover by a programmed algorithm, all of which a data center can do. Behind the meter, it runs UPS systems, rectifiers, cooling, and backup generators, governed by control software whose aggregate response the utility cannot see unless interconnection demands disclosure and telemetry (remote measurements fed into control systems in near real time).

Why Coase is the right lens

Changing technologies change what good operating rules are, opening up a Coasean bargain between utilities and data centers.

Ronald Coase’s 1960 paper, “The Problem of Social Cost,” pointed out that harms are reciprocal — if a railroad’s sparks damage a farmer’s crops, stopping the railroad harms it in turn. The real question is how to assign property rights/liability for harms so the parties minimize their combined cost. When transaction costs are low, they will bargain to the cheapest approach and split the surplus.

Ride through has exactly this structure. A data center that trips or cuts load during a disturbance imposes costs on the grid and other customers, while a utility requiring it to stay connected imposes costs right back, in equipment, batteries, controls, testing, and telemetry. Neither party is guilty; their technologies simply interact to create new margins of cost and value. One assignment of rights lets the data center disconnect whenever its controls deem necessary, leaving the utility and other customers to absorb the risk; the opposite assignment requires it to ride fully through defined disturbances, leaving it to bear the cost of grid compatibility.

One of Coase’s insights was that with zero transaction costs, the initial assignment wouldn’t matter, since parties would bargain to the efficient result regardless. But transaction costs here are real: the utility knows the grid constraints, the data center knows its control architecture, neither fully knows the other’s exposure, and other affected customers aren’t at the table at all, leaving regulators to stand in for them.

The form of the bargain shapes the outcome, then, and so do its default rules. “The data center shall ride through grid disturbances” assigns rights too crudely to let the parties discover lower-cost ways of splitting the costs and the surplus. A more useful arrangement specifies rights with measurable precision: voltage and frequency conditions for staying connected, minimum load retained at interconnection, the rate and sequence of any demand reduction, circumstances permitting transfer to backup generation, and required telemetry and recovery ramp rate.

Complete versus partial ride through

Complete ride through means the facility stays connected and keeps drawing approximately its pre-disturbance power: a 300 MW data center facing a short voltage disturbance holds demand close to 300 MW, batteries and controls smoothing the event internally. Partial ride through means the facility stays connected while temporarily reducing demand in a controlled, bounded way — that same facility might drop to 220 MW, recover to 260 MW within seconds, and return gradually to 300 MW, an 80 MW reduction rather than a sudden disappearance. Partial ride through can be the efficient compromise, because (in Coasean terms) it can avoid the harm while reducing the combined capital and operating costs to both the data center and the utility.

Economically, partial ride through works because the parties can negotiate over control specificity. The data center says, in effect: I cannot promise full load under every disturbance, but I can promise not to disappear, and I can tell you how much I will retain, how fast, and how I will recover. That promise lets the utility operate with far less uncertainty, which has real cost: a utility assuming an entire campus could trip instantly needs more transmission investment and reserves than one planning around a bounded response. That avoided cost is part of the surplus the two parties can divide, whether as faster interconnection, lower upgrade charges, a different tariff, or a mutually acceptable allocation of reliability risk.

The central object of this bargain is the right to impose a particular dynamic load profile on a shared network, not energy consumption itself. Understood this way, it can resolve data center interconnection timing without necessarily increasing utility investment or residential customer costs.

Source: Me explaining to ChatGPT the sense in which ride through is a Coasean bargain in our new technological context

The disappearance of tacit terms

In the older grid, some operational “contract terms” never needed writing down, since they were embedded in the technologies themselves. Physical characteristics narrowed the range of possible behavior, so no contract needed to say a large customer could not drop 800 MW in 120 milliseconds and restore it through a synchronized, software-controlled ramp. Those terms were tacit in the Michael Polanyi and Hayek sense: implicit and unstated, embodied in equipment, engineering conventions, and shared experience rather than in contract language.

Digitalization weakens that tacit coordination. Once behavior becomes programmable, a data center can decide, through control logic alone, whether to stay connected, reduce load, transfer to batteries, or recover in blocks — choices invisible to the utility unless disclosed and verified. “Large load” no longer tells the operator enough; the relevant context is now large load plus control architecture plus recovery algorithm. Ride-through requirements substitute for that lost tacitness: as the system grows more programmable, the contract has to grow more explicit alongside it.

A layered approach, not a micromanaged one

None of this calls for micromanaging every server rack. A well-designed bargain specifies performance at the interconnection point, articulates what the facility will do electrically when disturbed, and leaves flexibility behind the meter.

Of course, given my love of integrating systems theory with economics, I’m going to suggest a layered approach: an equipment layer, where the data center designs UPS systems, converters, batteries, and cooling to tolerate defined excursions; a facility-control layer, where it decides which loads stay at full power, which curtail, and how workloads adjust; and a grid-interface layer, where the contract specifies what the utility can observe — retained load, ramp rate, ride-through duration, telemetry, event reporting.

But the grid is a shared system, and many affected parties are absent when one utility and one large customer negotiate bilaterally, which is why minimum standards and regulatory oversight matter. Uniform rules have limits of their own, though: a 75 MW facility on strong grid infrastructure is nothing like a 1 GW campus at a constrained corridor’s end, and deep battery capability is nothing like backup architecture that produces a sudden full transfer away from the grid. The efficient arrangement often requires site-specific terms on general standards, since Coasean bargains are context-specific.

The most contentious policy work lies in that middle ground: too little specificity leaves the utility guessing and socializes risk, while too much regulation freezes technology in place. The goal is performance-based specificity — define what the grid needs, make it observable, and let both parties innovate around it.

The larger institutional point

Ride through, then, is a small technical phenomenon pointing toward a large institutional change: the old bargain relied on physical constraints and well-characterized contingencies, while the new one has to rely on explicit contracts, standards, telemetry, and adaptive governance. Digital controls create new gains from exchange as well as new reliability risks. A data center that can shape its load precisely during a disturbance is a source of flexibility with real value, not just a risk to be managed.

The Coasean opportunity is turning that flexibility into a bargain: the data center gains access, predictability, and credit for verifiable grid-supportive performance, while the utility gains a large load that is bounded and operationally useful rather than opaque and potentially synchronized with every other large load on the system.

Technological change does more than add devices onto an old grid—it changes the terms of coordination. When physics supplied more of the governance, contracts stayed thinner; as software expands the feasible activity space, more of the bargain has to be made explicit.

Ride through is one place where that transition is easy to see. Engineering settings become economic rights, private resilience meets system resilience, and the grid’s old tacit bargain gives way to one more explicit, more programmable, and more negotiable.

If we are going to get through this situation productively, we have to approach grid operations and regulatory policy looking for Coasean bargains.

This week’s chapters touch on long-standing debates over federal power and go into detail on the structure and jurisdiction, and moral force, of the Supreme Court. Although this year’s Supreme Court decisions have just occurred and have occasioned the inevitable analysis, and rancor, I leave it to you to associate Tocqueville’s analysis with the modern structure and decisions of the Supreme Court.

Happy semiquincentennial, y’all.

The Betsy Ross flag. Source: Wikipedia

Democracy in America, Volume 1, Part I, Chapter 8 from “On the Federal Courts”, Part II, Chapters 1, 2, 3

In a work celebrating its semiquincentennial this year, Adam Smith placed the division of labor at the center of political economy. Dividing production into distinct tasks lets people specialize, and specializing lets them coordinate through exchange rather than command. The result is greater output, yes, but also a complex order that no single participant designs, performs, or controls.

Near the end of Part I of Democracy in America, Tocqueville reaches for a parallel phrase: the “division of sovereignty” (p. 153). He never makes the comparison to Smith explicit, but the resemblance is suggestive. Just as the division of labor assigns different tasks to different workers, the division of sovereignty assigns different political functions to different governments. The federal government and the states govern the same citizens, but they specialize in different kinds of public action.

This arrangement lets Americans combine political goods that usually appear incompatible: national strength with local liberty, large-scale coordination with small-scale self-government, constitutional authority with a multiplicity of independent institutions. Division also creates complexity and conflict, though. The Constitution can allocate powers on paper, but paper cannot guarantee that the allocation stays clear, that federal laws get obeyed, or that competing authorities respect one another’s boundaries. Tocqueville therefore turns first to the federal courts, which give divided sovereignty its legal form, and then to the political culture—popular sovereignty, parties, and the press—that sustains it.

Making federal power real

“The greatest difficulty,” Tocqueville writes, “was not to know how one would constitute a federal government, but how one would make its laws obeyed” (p. 131).

A constitution may describe a federal government and enumerate its powers, but such a government remains an abstraction until it can enforce its laws. Under a traditional confederation, the central authority addresses commands to member states, and those states must then carry them out. The central government thus depends on the very governments it may someday need to restrain.

The American Constitution adopted a different principle. Rather than governing states as corporate bodies, the Union governs individual citizens directly, with federal officers executing federal laws and federal courts adjudicating them. If an individual violates a federal law, the Union proceeds against that individual, not against the state that failed to prevent it.

Tocqueville regarded this structure as a major discovery in political science. The Constitution divided authority between two governments without reducing the federal government to a diplomatic council of sovereign states. Both the Union and the states could make laws, administer programs, collect revenue, and adjudicate disputes, each within its own sphere.

The individual citizen becomes the point where these sovereignties meet: a resident of a state and a member of the Union at once, subject to both governments and entitled to the protection of both. The Constitution divides sovereignty institutionally, then reunites it in the person of the citizen.

Courts at the boundary

Necessarily, this arrangement creates disputes. Tocqueville describes the Constitution as establishing “two distinct, opposing sovereignties,” (p. 133) each able to expand only at the other’s expense. If state courts alone interpreted federal law, its meaning could shift from state to state, with judges beholden to state governments deciding the limits of federal power. The Constitution therefore created an independent federal judiciary to settle questions of national concern.

The Supreme Court occupies the most delicate position of all. It must interpret the Constitution, distinguish federal from state authority, and adjudicate conflicts between the two, so its jurisdiction reflects the changing scope of federal power itself: “The jurisdiction of the courts of the Union extends or contracts as the sovereignty of the Union itself contracts or extends” (p. 137).

The point matters: jurisdictional disputes are never merely technical. When courts decide whether an issue belongs to the Union or to the states, they help set the practical distribution of political power. The boundary may be written into the Constitution, but it acquires meaning through interpretation, precedent, and political development.

Yet courts have few means to enforce their judgments on their own. Their authority rests on what Tocqueville calls “moral force” (p. 131)—the public’s belief that courts are legitimate interpreters of law. Federal judges may look powerful, but “they are omnipotent as long as the people consent to obey the law” (p. 142).

This combination of strength and dependence gives the Supreme Court its peculiar character. Arbitrating conflicts between sovereignties requires independence and broad authority, but the more extensive that authority grows, the more consequential its errors become. Tocqueville warns that a Court composed of “imprudent or corrupt men” (p. 142) could expose the Union to anarchy or civil war. The danger does not arise from faulty institutional design; it arises from the problem the institution exists to solve. Divided sovereignty requires an authoritative referee, and an authoritative referee can always abuse the position.

The Court does not abolish conflict between governments; at its best, it converts a contest of force into a question of law. Its success depends on the willingness of citizens and governments alike to accept decisions they oppose.

Political specialization

Tocqueville’s defense of federalism goes beyond the familiar claim that it checks tyranny. Division of sovereignty is also productive: different levels of government carry different capacities, information, incentives, and comparative advantages.

The Union performs tasks that require scale: national defense, diplomacy, regulation of matters of common concern, the strength to resist foreign powers. Large nations can mobilize resources, circulate ideas across broad territories, sustain commerce, and project influence abroad.

States and local governments carry different advantages: they stay closer to citizens and more attentive to local circumstance. Freed from primary responsibility for national defense and territorial expansion, they direct their energy toward “internal improvements,” (p. 153) debating plans in town meetings and state legislatures, airing those debates in newspapers, and searching continually for ways to improve their communities. Tocqueville argues that this activity channels ambition away from the conquest of national power and toward the more ordinary pursuit of well-being.

The states are more than administrative subdivisions executing national policy; they are political communities in which citizens acquire the taste and practice of republican government, as Tocqueville notes in Chapter 5. Towns and provincial assemblies developed the habits the federal republic required; the national capital did not impose them.

Federalism therefore combines the advantages of different political scales. Tocqueville summarizes the achievement in one of his most elegant sentences: “The Union is free and happy like a small nation, glorious and strong like a large one” (p. 154).

The pattern is the political analogue to specialization in the economy. The federal government concentrates on functions where size and uniformity pay off; states and towns take functions where proximity, variation, experimentation, and participation pay off instead. Neither level is simply superior—their capacities differ because their scale and position differ.

The cost of complexity

Specialization creates interdependence, and interdependence creates friction. The most visible defect of federal systems, Tocqueville observes, is the complication of their means, or the mechanisms by which government acts. Two sovereignties stand face to face, and no matter how carefully lawmakers define their spheres, they cannot keep those spheres from touching.

A consolidated government offers an appealing simplicity: one territory, one government, one chain of command. Federalism asks more of its citizens—to understand overlapping jurisdictions, to distinguish among several kinds of political authority, to decide whether a given failure belongs to a town, a state, Congress, the President, or the courts, and to tolerate disagreement over where the boundaries actually lie.

The federal system therefore requires what Tocqueville calls “the daily use of the light of their reason”—a demanding condition, and he is not sentimental about the cost: “An idea that is false, but clear and precise,” he warns, “will always have more power in the world than a true, but complicated, idea” (p. 155).

Federalism cannot be exported simply by copying constitutional language. Americans could sustain it partly because they had long practiced local government and had already built habits of political judgment. Geography helped too: weak neighboring powers and relative security from invasion reduced the need for centralized military authority. The system depended not only on laws but on experience, circumstance, and mores.

The Constitution can divide legal authority. It cannot manufacture the habits of mind needed to live under divided authority.

One people, many centers of power

Here the argument turns, moving from Part I of Democracy in America to Part II. Part I describes the formal machinery of government; Part II turns to the passions, opinions, and political practices that animate it.

Tocqueville begins with an apparently contradictory claim: in America, the people govern. If sovereignty belongs to the people, how can sovereignty also be divided between state and federal governments?

The contradiction dissolves once we distinguish the source of sovereignty from its exercise. The people remain the ultimate source of legitimate authority, but they exercise that authority through multiple governments and institutions—popular sovereignty is unitary in principle, plural in operation.

Political parties help organize that pluralism: they assemble citizens into coalitions, attach beliefs to candidates, and translate dispersed opinion into political action. Tocqueville distinguishes great parties, which struggle over fundamental principles, from small parties, which chase personalities, offices, and immediate advantage. Parties divide the sovereign people in order to make its rule effective, but the quality of that division varies—it may clarify competing principles, or it may reduce politics to factional ambition.

The press performs a related function. Tocqueville calls popular sovereignty and freedom of the press “two entirely correlative things” (p. 174): citizens cannot govern themselves if another authority controls the information and arguments from which they form their judgments.

Freedom of the press brings predictable abuses: falsehood, coarseness, sensationalism, partisan fury. Tocqueville nevertheless denies that a government can capture the benefits while shedding the costs. Once censorship begins, it must keep advancing, because thought escapes every partial effort to suppress it. Courts may “arrest the body,” but “the soul escapes them” (p. 173).

The structure of the American newspaper market reinforces this freedom. Newspapers are numerous, cheap to start, and scattered across the country. Most focus on local affairs while still connecting readers to national political debate. No single editor or metropolitan paper can easily corner public opinion—a point Tocqueville makes with an economist’s eye for market structure, decades before anyone called it that.

The press thus creates something like a federalism of opinion, distributing political judgment across many communities and institutions. Like constitutional federalism, it produces noise and conflict—and, like constitutional federalism, it makes domination harder.

Tocqueville’s America is governed by one people through many centers of authority. Its constitutional achievement lies not in resolving the problem of sovereignty once and for all, but in dividing its exercise without dissolving its legitimacy.

The system channels political conflict into jurisdictional disputes, lawsuits, elections, parties, and public argument. It gains resilience from the diversity of its institutions and the specialization of its governments, but it stays fragile because every part depends, ultimately, on citizens accepting complexity, restraint, and the legitimacy of authorities they do not fully control.

The division of sovereignty, then, is more than an arrangement among governments. Like the division of labor, it is a system of differentiated functions and mutual dependence, one that lets the republic do more than any single center of power could do alone. It also requires habits of cooperation, judgment, and trust, without which specialization collapses into paralysis, and division into disunion.

Next week’s chapters: Volume 1, Part II, Chapters 4 and 5 (5’s a banger and there will be lots to discuss!)

Note: In this article I use the word institution to signify various branches of government as well as different levels of government in our federal architecture. In this usage institution has more of an organization definition. This usage differs from the usual way I and other economists and political scientists use institution to signify the formal and informal rules by which we structure our interactions and incentives.

Democracy in America, Volume 1, Part I, Chapters 6, 7, 8 up to “On the Federal Courts”

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American liberty depends not on weakening government, but on distributing power among institutions that possess different sources of authority, different modes of action, and different incentives.

That principle runs through Tocqueville’s discussion in these chapters of the judiciary, impeachment, the federal Constitution, Congress, and the presidency. Dividing power and weakening government are distinct constitutional projects; enumerating separate branches and assigning powers to each is a beginning, not a finished design. His subject is a government capable of acting, but prevented from acting unilaterally through a single, undivided will.

In this semiquincentennial year, reading these chapters is instructive and occasionally unsettling. Tocqueville arrived in 1831, fifty-five years after the Declaration — close enough to observe its institutional experiments still running, far enough to assess which arrangements had taken root and which remained fragile. What he found was a living system, a work in progress, sustained as much by political habit as by constitutional text. He also issued warnings that two and a half centuries of republican experience have done nothing to make less relevant.

Judges as a Political Power

Tocqueville begins with the judiciary because he considers it one of the most original features of the American system. He identifies three characteristics that judicial power shares across nations: courts act only when called upon; they pronounce on particular cases rather than general principles; and they can move only when a dispute is brought before them (p. 94). These limits confine the judiciary and distinguish it from legislative or executive action.

Yet within those limits, American judges possess an extraordinary political power found nowhere else: the right to decline applying a law that conflicts with the Constitution. Understanding why requires understanding the constitutional theory that makes it possible.

Tocqueville contrasts three models. In France, the constitution was treated as immutable; no ordinary power could alter it, which meant courts had no standing to test legislation against it. In England, Parliament’s authority is unlimited; it can modify the constitution at will, which means, in a sense, that no constitution exists apart from Parliament’s current preferences. The American arrangement is different in kind from both. The Constitution is neither immutable nor alterable by ordinary legislative means. It is, as Tocqueville puts it, a “work apart” (p. 95):

An American constitution is not considered to be immutable, as in France; it cannot be modified by the ordinary powers of society, as in England. It forms a work apart that, representing the will of all the people, binds legislators as well as ordinary citizens; but it can be changed by the will of the people following established forms and in cases for which provisions have been made.

This structure makes judicial review both coherent and necessary. When a judge gives priority to the Constitution over a statute, that judge is not claiming sovereignty over the people. The judge is giving effect to the people’s higher and more durable act over the temporary decision of their representatives. And by forcing that challenge to occur through particular cases rather than abstract rulings, the American system shields the judiciary from appearing to attack the legislature directly, preserving both judicial legitimacy and the political independence that makes review meaningful.

The result, Tocqueville observes, is one of the most powerful barriers ever raised against the tyranny of political assemblies. The power is immense precisely because it is constrained in its form of exercise.

Political Judgment and Its Dangers

Tocqueville next examines impeachment, which he calls political jurisdiction or judgment, depending on the translation. The House accuses; the Senate judges; but the tribunal cannot impose ordinary criminal punishment. Its reach extends only to removal from office and disqualification from future service. Criminal liability remains with the ordinary courts.

He interprets this arrangement as fundamentally administrative rather than judicial in character — a means of withdrawing power from someone making poor use of it rather than punishing a crime (p. 102). The American system surrounds this administrative act with the solemnity and guarantees of a judicial proceeding, while withholding the harshest sanctions that make political jurisdiction dangerous elsewhere.

The formal structure is orderly: House accuses, Senate judges, courts punish — each action separated from the others. But Tocqueville’s actual judgment is more disquieting.

Precisely because American political jurisdiction is limited to administrative removal, it becomes more available, more regular, and more tempting as an instrument of majority will. A legislature empowered only to remove officials, not to imprison or execute them, faces fewer inhibitions against using that power frequently. The moderation of the penalty reduces the political cost of wielding it. Americans may have avoided the most violent consequences of legislative tyranny while leaving in place something potentially as dangerous: a removal mechanism convenient enough to serve as a routine instrument of factional control (p. 104).

His conclusion/hypothesis is among the most arresting in these chapters. When the American republics begin to degenerate, Tocqueville argues, the early sign will be easy to identify: an increase in cases of political jurisdiction. The institution designed as a constitutional safeguard carries within it the mechanism of its own abuse.

A Government Made from Governments

Chapter 8 turns to the federal Constitution and the framers’ core challenge: creating a national government capable of acting on individuals without absorbing the states that had authorized it.

The states preceded the Union. They were existing political societies with governments, laws, and sovereign claims. They delegated specific powers to a federal government while retaining the rest. The result was not a centralized nation divided into administrative provinces but a federal republic in which two orders of government acted on the same people — each legitimate within its own sphere.

The framers’ practical solution was giving the national government powers that acted directly on citizens rather than through state intermediaries. Without that direct reach, the Union would depend on state cooperation to carry out national decisions, possessing the form of government without the means. The Articles of Confederation had demonstrated exactly that failure, as Tocqueville notes (p. 106).

American federalism joined two goods that typically resist combination: national capacity for common action and state independence for local self-governance (p. 109). Governing a continental republic from a single center would have been epistemically impossible, requiring knowledge of things no single center could know. Federalism was not merely a political compromise; it was an institutional acknowledgment that self-governance at scale requires distributed knowledge and distributed authority. Vincent and Elinor Ostrom would later formalize this concept as polycentricity: a system of multiple governing centers, each possessing its own legitimacy and logic, producing order through their interaction rather than through hierarchical command. Tocqueville never uses that language, but he sees the thing it names. American republican government works not because a single authority optimally designs all outcomes, but because many authorities, checking and informing each other, arrive over time at arrangements superior to what any one of them could have devised alone.

Yet Tocqueville is careful not to present this as a self-sustaining design. No law, he observes, can foresee everything; institutions cannot substitute for reason and mores. The constitutional architecture depends on something the architecture itself cannot provide.

Executive Power and the Problem of Re-election

Within the federal government, power was divided again. The House represents population directly; the Senate gives equal representation to states and introduces deliberative stability. Bicameralism requires majorities to form through different channels, a test that slows legislation while screening for breadth and durability (p. 111).

The presidency supplies unity and energy that a legislature cannot. But Tocqueville is emphatic about the president’s subordinate position: “The president stands beside the legislature as an inferior and dependent power” (p. 117). In everything essential, the president is directly or indirectly subject to Congress. The executive’s weakness, not its strength, allows a president to govern in opposition to the legislative power (p. 119). This observation cuts sharply against two centuries of subsequent executive aggrandizement.

Institutional power also shifts with circumstances. In foreign affairs and national crisis, the executive’s advantages — unity, speed, secrecy, continuity — come into their own. In ordinary domestic governance, Congress occupies the stronger position. The balance is dynamic, not fixed.

A president’s re-election eligibility disturbs that balance in a specific way. A president seeking a second term is simultaneously a candidate: reading public opinion, managing allies, distributing favor, and calibrating every significant decision against its electoral effect. Governing by principle and governing toward re-election are not always compatible, and the incentive to survive politically tends to prevail. The structure converts private ambition into a reason to deploy public authority for partisan ends, not through corruption in the ordinary sense, but through the mechanism of treating electoral responsiveness as its own justification.

The Constitution as Information Architecture

These chapters speak with unusual force to a republic in its 250th year.

Political authority has shifted toward the executive across recent decades. Presidents govern through administrative agencies, emergency declarations, and broad interpretations of delegated statutes. Congress retains formidable constitutional powers but frequently declines to use them, choosing instead to state aspirational goals while leaving the executive to determine how those goals will be achieved. Claiming credit for the aspiration while avoiding accountability for the tradeoffs is individually rational behavior. When it becomes collectively routine, the constitutional order changes in ways no individual legislator chose and no individual legislator can reverse. And yes, for the game theorists among you, I would indeed characterize Congress today as being in the inferior outcome of a Prisoner’s Dilemma.

The result is poorly ordered government: sweeping executive action followed by litigation, reversal, and another sweeping action from the next administration pointed in the opposite direction. Each cycle erodes institutional legitimacy and the practical capacity to make durable policy.

Tocqueville’s analysis offers a diagnostic framework grounded in something deeper than procedural preference. Each branch’s distinctive mode of action is also a distinctive mode of processing political knowledge. Congressional deliberation aggregates diverse preferences through bicameral bargaining. Courts reason from rules and precedent, producing the predictability that makes planning possible. States govern with local knowledge no national institution possesses. When Congress surrenders its legislative function to administrative agencies, it does not merely lose power; it eliminates an information structure, replacing distributed deliberation with concentrated executive discretion. Policy made without deliberation is likely to be worse policy, not merely less procedurally legitimate policy.

The founders understood this, Tocqueville argues, and their clearest achievement was the courage to act on it. Beyond the people, they established powers capable of refusing the majority’s dangerous demands — powers that, while ultimately deriving from the people, enjoyed enough independence within their sphere to struggle against caprice. That, he writes, is the greatest glory of the American people: knowing how to appreciate that truth, and submitting to it (p. 129).

When the American republic begins to degenerate, Tocqueville hypothesized, an early sign will be the growing use of political jurisdiction. Although the modern history of impeachment is too complicated to fit that prediction neatly, his deeper warning remains relevant. Conflict between Congress and the presidency now takes the form of accusation, investigation, litigation, and judgment, while the ordinary work of deliberation, legislation, oversight, bargaining, and administration deteriorates. Two hundred and fifty years on, Tocqueville’s insight requires less correction than refinement: constitutional dysfunction appears not only when impeachment becomes common, but also when political institutions judge one another instead of governing together.

Thomas Edison’s Menlo Park laboratory, now at the Henry Ford Museum, Greenfield Village, Michigan. Source: Wikimedia Commons

During the telecommunications revolution of the early 2000s, people often joked that Alexander Graham Bell would be bewildered by the modern communications network, while Thomas Edison would still recognize the electric system. The phone had become a pocket computer, a camera, a map, a shopping mall, a newsstand, and a small glowing portal into everyone’s opinions. The electric grid, by contrast, still looked like the same basic machine: big power plants, high-voltage wires, local distribution networks, mechanical meters, bills, and customers at the end of a one-way line.

For a long time, that joke worked because it was mostly true.

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Edison would recognize more than the physical wires; he would recognize the logic of the system. Although the incandescent light bulb became his transformational invention, Edison’s real achievement was the creation of an integrated electric light and power system: generation, distribution, wiring, switches, meters, lamps, financing, installation, and customer service. The bulb was useful only if all of the other pieces worked to power it.

That system logic has shaped the electricity industry for more than a century. Electricity was unlike ordinary goods: a real-time network service produced by large, specialized assets that had to operate together. Generation, transmission, distribution, and consumption had to be coordinated continuously. The physics were unforgiving, the equipment expensive, and the transactions among the pieces difficult to measure and enforce. In that world, vertical integration was a business strategy grounded in a technology coordination problem.

Economists have a useful way to think about this problem. Ronald Coase argued in his 1937 article “The Nature of the Firm” that firms exist because markets are not free to use. Finding trading partners, writing contracts, measuring performance, resolving disputes, and adapting to changing conditions all impose transaction costs. When those costs are high, organizing activity inside a firm can be cheaper than relying on a web of market contracts. This form of organization—vertical integration—brings the many transactions of a supply chain within a single firm that owns and operates the assets and relationships that performance requires. Four decades later, economists Benjamin Klein, Robert Crawford, and Armen Alchian showed why vertical integration becomes especially attractive when parties make specialized investments.

Electricity fit that logic almost perfectly. Power plants, wires, substations, meters, control rooms, and customers were bound together in a tightly coupled electro-mechanical system. Once a generator, a transmission line, or a distribution network was built, its value depended on the rest of the system. The resulting industry, built around integrated utilities, exclusive service territories, and regulation, became a system of government-granted monopolies in exchange for an obligation to serve and public oversight.

That world is now changing amid innovations in digital technology. Sensors, software, communications networks, advanced meters, smart inverters, batteries, power electronics, electric vehicles, and distributed energy resource platforms make it cheaper to observe, measure, verify, forecast, and control electricity services within the grid and around its edge.

An economic interpretation of these innovations is that they lower transaction costs, which changes the boundary between firms and markets. Activities that once had to be coordinated inside a vertically integrated utility may now be coordinated through contracts, platforms, prices, standards, and protocols. The electric system may remain physically interconnected, but its institutional structure can become more modular. A modular system is built from standardized, self-contained parts that can be combined, rearranged, replaced, or expanded, like Lego blocks.

Edison might still recognize the grid’s bones. He would see central stations, wires, substations, meters, and customers. He might not recognize a system in which millions of devices can produce, store, shift, and manage electricity in response to prices, software, and system conditions. The old grid was a machine. The emerging grid is becoming a platform. Can our institutions keep up? Grappling with that question requires a deeper understanding of why the grid was built as an integrated machine in the first place, and why that design made economic sense for as long as it did.

Edison’s system

Making electric light commercially useful required more than a better lamp; it required a network. Edison had to supply not only generators and wires but capital, customers, operating routines, technical standards, and enough confidence in reliability to displace gaslight, candles, and other familiar lighting technologies.

Beginning operations in 1882, the Pearl Street Station in lower Manhattan embodied this systems logic. What looked like a generator wired to a cluster of lamps inside buildings was in fact a central-station power system serving customers in a defined area with an integrated set of technologies. Edison’s direct-current system could not transmit power economically over long distances, so generation had to be located near customers. The physical limits of the technology shaped the organizational form.

That relationship between technology and organization is the central point. Edison’s system was integrated because its parts were deeply complementary: a generator without wires, wires without lamps, or lamps without dependable current each had little value. The system had to come first; the market could develop only after the system existed.

Electricity was therefore unlike most 19^th-century industries in how tightly coupled its technology was. A shoemaker could sell shoes to customers who already had feet; a newspaper publisher could sell papers to readers who already had eyes and literacy. Electricity required an elaborate bundle of complementary assets before anyone could consume the product at all. In economic language, the business involved high asset specificity, strong complementarities, and significant coordination costs. Edison was building an institutional and technological ecosystem.

AC and the system’s first great expansion

The transition from direct current to alternating current (AC) is often told as a high-stakes drama of Edison versus Nikola Tesla, with George Westinghouse entering as the commercial champion of Tesla’s AC. That story has some truth, and it keeps biographers and screenwriters busy. But as an explanation of the electricity system, the more important story is about scale, modularity, and coordination.

Direct current worked well enough over short distances, but it was difficult to transform from one voltage to another. Alternating current could be stepped up to higher voltages for long-distance transmission and then stepped down for local use. That technical feature changed the feasible geography of electric power. Generation no longer had to sit as close to customers, and power systems could extend across larger territories, connecting bigger generating stations to dispersed loads and exploiting economies of scale.

Tesla’s inventions in AC motors and system components were crucial, and Westinghouse’s role in commercialization mattered enormously. But the AC system was not the product of a single mind. It emerged over decades from a broader engineering and entrepreneurial ecosystem involving transformers, motors, meters, generators, insulation, transmission lines, protection systems, standards, financiers, managers, and customers. A new technological architecture changed the system’s economic possibilities.

AC loosened one constraint while reinforcing another. It made the power system geographically larger, but it did not make the system institutionally modular in the way that digital networks would later become. By enabling larger networks and larger generating stations, AC strengthened the case for coordinated planning and operation. A bigger synchronized machine required more elaborate coordination.

The early 20^th-century electric utility emerged from this logic. The industry developed around large fixed investments, extensive network economies, and long-lived assets. Utilities built generation, transmission, and distribution systems; served customers within exclusive territories; recovered costs through regulated rates; and accepted an obligation to serve. Public utility regulation became the institutional bargain that made this structure politically and economically sustainable.

That bargain was imperfect, but it reflected the economic conditions of the technology. When the cost of coordinating through markets is high, hierarchy and centralized control become attractive. When duplication of infrastructure is wasteful, monopoly becomes feasible. When customers are captive, regulation becomes necessary. The vertically integrated utility was not just an exercise in corporate control; it was also an answer to a then-new question: How do you coordinate a tightly coupled, capital-intensive, real-time network whose services are essential and whose customers have few alternatives?

The logic behind vertical integration

The traditional utility model emerged because it economized on real coordination costs. In ordinary economic models, markets often look almost frictionless. Buyers and sellers meet, prices adjust, contracts are enforced, and resources move to their highest-valued uses. In the real world, using markets is costly. People must find one another, discover prices, evaluate quality, write agreements, monitor performance, adapt to surprises, and resolve disputes. Those are transaction costs.

Coase’s insight was that firms and markets are alternative ways of organizing economic activity. A firm replaces some market transactions with managerial direction, and the boundary of the firm depends on the relative cost of coordination inside the firm versus coordination through markets. Klein, Crawford, and Alchian added that vertical integration becomes especially attractive when investments are specific to a particular relationship. If one party builds an asset that is valuable only when paired with another party’s asset, the parties may become vulnerable to opportunistic bargaining after the investment has been made. Economists call this the hold-up problem.

Electricity is full of such relationship-specific investments. A power plant is built to connect to a grid. A transmission line is built to move power between particular locations. A distribution network is built to serve a particular territory. Customers install equipment that depends on reliable electric service. These assets are expensive, long-lived, and difficult to redeploy.

The product itself adds another layer of complexity. Electricity must be balanced continuously because of the physics of AC networks. Supply and demand must match in real time, not approximately next quarter. The network has physical constraints, and actions at one point can affect conditions elsewhere. Reliability is a system property, not a simple bilateral transaction. Whether my lights stay on depends not only on my relationship with the utility but also on generation adequacy, transmission capacity, distribution operations, voltage control, system protection, and the behavior of many other users.

Under those conditions, vertical integration reduced transaction costs. Instead of contracting separately for every component of generation, wires, balancing, reliability, metering, billing, and customer service, the utility organized many of those activities internally. Regulation then supervised the resulting monopoly. The model had costs, including weak incentives for innovation and efficiency, but it economized on a genuine coordination problem.

The traditional electric utility was, in this sense, a Coasean institution built around an Edisonian machine. It endured, too, because state-level regulation reinforced the business model, creating the economic certainty utilities needed to build and expand this tightly coupled system around large-scale technologies and centralized organization.

The first institutional unbundling

The late 20^th-century restructuring of electricity regulation challenged the old model, especially in generation. Catalyzed in part by the combined-cycle natural gas turbine, policymakers and economists increasingly argued that generation did not always need to be owned by the same firm that owned transmission and distribution wires. Independent power producers, wholesale electricity markets, open-access transmission rules, regional transmission organizations, and competitive retail supply in some states all reflected efforts to separate potentially competitive functions from natural monopoly functions.

This restructuring showed that vertical integration was not an essential fact of electricity. Some functions could be unbundled. Markets could coordinate generation dispatch. Independent firms could build and operate power plants. Regional transmission organizations could run wholesale markets and manage transmission access across utility boundaries. Prices could convey information that had previously been embedded in utility planning and internal dispatch.

But restructuring has been incomplete, uneven, and institutionally constrained. Transmission and distribution remained network monopolies. Retail competition in different states produced mixed results. Wholesale markets required complex rules, administrative oversight, and constant adaptation. Reliability still required centralized coordination. Resource adequacy, transmission planning, interconnection, market power mitigation, and state policy integration all turned out to be harder than the 1990s reformers anticipated.

That experience offers an important lesson for the next phase of electricity transformation. Unbundling is not magic. Markets are not self-executing; they are institutionally grounded processes that require rules, measurement, enforcement, information, settlement systems, and governance. When those institutional complements are weak, unbundling can disappoint. When they are strong, unbundling can create enormous value.

This history leaves us with a sharper way to think about what comes next. The vertically integrated utility was neither an accident of corporate ambition nor a mere artifact of regulation; it was an economically sensible response to a real coordination problem, pairing Coase’s logic of the firm with Edison’s tightly coupled machine. Restructuring then demonstrated that some of those coordination costs had fallen far enough to support markets in generation, while also revealing how much institutional structure a working market actually requires. Both lessons travel with us into the transformation now in progress.

Digital technologies make a deeper form of unbundling possible, especially at the edge of the distribution network. But possible does not mean automatic. Digital technology will not decentralize the electric system on its own; whether institutions allow decentralized resources to be observed, valued, coordinated, and compensated in ways that make economic sense will shape what the architecture of future power systems looks like and enables.

First published at Dispatch Energy, https://thedispatch.com/newsletter/dispatch-energy/thomas-edison-electricity-grid-power-economy/

Faneuil Hall in 1826. Source: Wikimedia Commons

In Part I, Chapters 3, 4, and 5 of Democracy in America, Tocqueville moves from the social foundations of democracy to the local institutions that teach people how to govern themselves.

Reminder: I am using multiple translations; my main reading is from the hardbound copy of the Mansfield translation. When I refer to page numbers it’s to the Mansfield translation, and when I want to pull quotes that are longer I’ll use the online Schleifer translation, so the text may not match exactly but they are close (and I also read French so I calibrated across the translations to get comfy with Tocqueville’s word choice).

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In the previous installment of this series, I examined Tocqueville’s account of America’s “point of departure” — his argument that nations, like individuals, bear the marks of their origins. Chapters 3, 4, and 5 now move from origins to structure. Tocqueville begins with what he calls the American “social state”, proceeds to the principle of popular sovereignty, and then descends into the detailed workings of towns, counties, and state governments.

He does not begin with the Constitution, the presidency, or the Supreme Court. He asks what kind of society Americans inhabit, where political power is understood to originate, and how ordinary people encounter that power in their daily lives. His answer is institutional as well as moral and developmental. Free government depends on more than distributing authority correctly on an organizational chart; it depends on forming people who know how to use liberty, and the town is where that formation begins.

The Social State and Its Warning

Chapter 3 opens with one of Tocqueville’s most important claims: “The social state of the Americans is eminently democratic” (p. 46). He never offers a tidy definition of “social state”, expecting readers to infer it from context. The concept describes the underlying pattern of relationships within a society — property distribution, status, inherited privilege, and social mobility. A political regime tells us who formally governs; a social state tells us how people stand in relation to one another.

America’s social state is democratic because it is characterized above all by relative equality of conditions — not equal wealth or talent, but the absence of durable, legally entrenched hierarchy. Wealth exists, but it does not create permanent castes. Social positions remain fluid; families rise and fall.

Tocqueville’s treatment of inheritance law makes the institutional logic precise. Under primogeniture, landed property remains concentrated and attached to a family line. Under partible inheritance, property divides among heirs at each death, producing what Tocqueville calls “a revolution in property” (p. 47): “Not only do goods change masters, but they change, so to speak, nature; they are constantly fragmented into smaller portions” (p. 47). A civil rule governing estates quietly reshapes the distribution of political power across generations. The democratic social state is neither simply natural nor simply designed — it is an emergent order whose development is powerfully shaped by legal rules, even as those rules themselves reflect underlying social conditions.

But equality of conditions does not guarantee liberty. A society of relatively equal individuals may move toward genuine self-government, or it may submit to a centralized and absolute power. Individuals freed from aristocratic superiors may govern themselves, or they may find themselves equally subordinate to a distant state. The corrupted democratic passion does not raise the weak; it seeks to pull down anyone appearing stronger or more independent. In its worst form, it leads people to prefer equality in servitude to inequality in liberty. America had avoided that outcome, Tocqueville thought, because its equality was joined from the beginning to favorable mores, enlightenment, religion, and, above all, local institutions capable of channeling democratic energy toward self-governance rather than submission.

Popular Sovereignty as Practice

Chapter 4 examines the political principle corresponding to the democratic social state. Tocqueville describes popular sovereignty in America not as a constitutional phrase but as a “law of laws” — a belief recognized by mores, proclaimed by laws, spreading freely without obstacle (p. 54).

The principle begins with individual sovereignty. Under the democratic dogma, each person forms an equal portion of the sovereign power, presumed as capable of self-government as any fellow citizen, obeying no one on grounds of natural superiority. Why, then, does anyone obey at all? Tocqueville’s answer cuts to the core of democratic political obligation (p. 61):

He obeys society, not at all because he is inferior to those who direct it, or less capable than another man of governing himself; he obeys society because union with his fellows seems useful to him and because he knows that this union cannot exist without a regulatory power.

Obedience rests on the recognized usefulness of association, not on natural hierarchy.

Despite being mutually reinforcing, individual sovereignty and popular sovereignty stand in potential tension. The same democratic principle that rejects rule by a natural superior can, when aggregated, produce rule by an overwhelming majority. The equal moral standing of individuals gives rise to collective power, and that collective power may bear on those same individuals with considerable force. Tocqueville does not pursue this problem fully here — his analysis of majority tyranny comes later — but its foundations are already visible, embedded in the very logic of popular self-rule.

The American Revolution did not create this principle from an abstract theory. It generalized and elevated what local communities had long practiced, sovereignty developing through lived experience before receiving a more universal political expression. This sequence is important for understanding how institutions actually form and sustain themselves — a theme running through all three chapters, and one that helps explain why Tocqueville turns immediately from popular sovereignty to the town. The town is the arena where the sovereignty principle becomes practice, where individual sovereignty and collective self-rule find their most immediate, tangible, and educative expression.

The Town as a School of Liberty

Chapter 5 is the longest and most institutionally rich of the three chapters. Tocqueville explains why understanding American democracy requires studying towns and states before the federal Union: the states created the federal government, not the reverse, and most important American political institutions developed first at the local level.

Tocqueville begins with an arresting observation: “The town is the only association that is so much a part of nature that wherever men are gathered together, a town takes shape by itself” (p. 57). But he immediately distinguishes the natural existence of towns from the political achievement of town liberty: “If the town has existed ever since there have been men, town liberty is something rare and fragile” (p. 57). Central authorities tend to encroach on local independence, while local institutions often lack the strength to resist. Town liberty survives only when legal protection has existed long enough to become embedded in mores.

Mores, on this account (and as discussed last week), are not doctrines imposed from above. They emerge through repeated interaction — citizens participating in local government, learning its procedures, developing expectations about appropriate conduct, and acquiring attachments to institutions through which they act. The formal institution gradually becomes a social habit, sustained not by compulsion but by familiarity and investment. And sometimes that goes the other way, with social habits that are robustly beneficial being codified as formal institutions.

Tocqueville’s deepest claim about town institutions is not that they produce efficient administration. It is that they educate citizens: “Without town institutions, a nation can pretend to have a free government, but it does not possess the spirit of liberty” (p. 58; note here that Schleifer uses “liberty” while Mansfield uses “freedom”).

Town government puts liberty within the reach of ordinary people, giving citizens manageable responsibilities and repeated opportunities to exercise judgment. They debate practical questions, raise revenue, select officials, oversee schools, repair roads, resolve disputes, and cooperate with neighbors whose opinions they may not share. In doing so, they acquire civic competence — learning that public problems do not solve themselves, that collective action requires patience and compromise, and that the neighbor with the most emphatic opinion is not always the person best equipped to repair the bridge. Liberty becomes habitual by being exercised.

Scattering Power

One of Tocqueville’s most striking observations is that New England town government deliberately “scatters” power (p. 64):

See with what art they have taken care in the American township, if I can express myself so, to scatter power in order to interest more people in public things.

Power is divided both to prevent abuse and to widen participation. By distributing offices and responsibilities among many citizens, the town draws more people into public life — numerous officials with specific duties creating numerous points of entry into governance, making public authority less imposing and more accessible.

This arrangement also does something subtle with ambition. At the national level, only a tiny number of people exercise meaningful power. Town government brings esteem, influence, and responsibility into ordinary life, concentrating the desire for recognition near the domestic hearth and redirecting passions that might otherwise become socially disruptive toward local public action. Tocqueville is not trying to eliminate ambition; he is institutionalizing it, connecting ordinary motives to socially useful activity.

Scattering power thus performs at least three functions simultaneously: limiting domination by preventing authority from concentrating in a single visible official (the constitutional function); mobilizing dispersed knowledge by giving those closest to local problems the capacity to address them (the epistemic function); and forming citizens by involving many people in public responsibilities (the civic function).

Tocqueville’s formulation of the objective is superb (p. 67):

In this way they wanted to make authority great and the official small, so that society might continue to be well regulated and remain free.

This institutional vision differs subtly but importantly from Montesquieu’s and Madison’s separation of legislative, executive, and judicial powers. Tocqueville is examining the vertical and horizontal dispersion of administrative responsibility throughout society — a nation may contain internally separated branches while still centralizing the administration of local life, leaving citizens as recipients rather than participants.

He distinguishes two forms of centralization. Governmental centralization concerns interests common to the whole nation: general laws, foreign affairs, national defense. Administrative centralization concerns the detailed execution of public affairs within particular localities. Americans had “almost entirely isolated administration from government,” maintaining capable central authority on genuinely national matters while leaving most administration to states, counties, towns, and citizens themselves (p. 85).

He concedes the costs: local administration may be uneven, amateurish, or duplicative. A centralized administration may perform certain tasks more neatly — files standardized, procedures uniform, reports arriving in triplicate, everyone enjoying the modest consolation of knowing that nothing can happen until Form 17-B has been approved in the capital. Yet administrative efficiency is not the highest political value. A system that solves public problems for citizens may gradually deprive them of the habit of solving problems together, the central administration growing more capable as the population grows less so. This dynamic becomes self-reinforcing. “What I admire most in America,” Tocqueville concludes, “are not the administrative effects of decentralization, but its political effects” (p. 90).

Tocqueville’s America and Ours

The America Tocqueville describes in 1831 feels simultaneously familiar and remote. The vocabulary persists — federalism, local control, divided powers — but the political structure has shifted, dramatically. National politics increasingly organizes political identity, even when the decisions affecting daily life remain local.

His description of ambition is especially revealing. In 1831, most politically ambitious citizens directed their energies toward towns and states, where they could exercise visible responsibility. Contemporary politics has largely reversed this orientation — national office dominating attention, fundraising, and partisan identity, while even local disputes are rapidly translated into national ideological conflicts. When political attention migrates upward, citizens may begin to regard meaningful power as something exercised elsewhere, local participation seeming small or technical by comparison. Yet national politics offers most citizens little opportunity to do anything beyond voting, donating, and becoming angry at professionally selected intervals.

Tocqueville would likely ask what this structure does to civic agency, whether it forms citizens capable of governing or spectators skilled at expressing approval and contempt.

These questions do not imply that America should recreate the Massachusetts town of 1831, even if it could. Many problems genuinely cross local and state boundaries, requiring coordination at larger scales. Tocqueville’s principle is not that everything should be local. His principle is that the burden of proof should fall on removing responsibility from those with the closest interest and knowledge.

Freedom, in Chapters 3–5, does not follow automatically from equality, nor from elections. It must be institutionalized, requiring legal protection, dispersed authority, repeated participation, and enough time for institutional practice to become part of the mores. The sovereignty of the people can remain a majestic abstraction, proclaimed in constitutions and invoked in speeches. Or it can become part of ordinary everyday life, exercised imperfectly by citizens deciding together what to do about schools, roads, public order, and the repair of the town hall.

The former may produce the appearance of free government. The latter produces its spirit.

Previous articles in this series:

Source: Town Meeting 101, Discourse Magazine, 2022

Note: In this first essay I didn’t both with quotes and page references because I wanted to focus more on broad themes. If I am doing page references or quotes I’ll specify which edition and put a reminder in each article. And please do treat this like a reading club by sharing ideas and interpretations and implications in the comments!

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Alexis de Tocqueville went to America in 1831 to discover democracy.

Democracy in America is often treated as a book about the United States, and of course it is. Tocqueville observed American geography, settlement patterns, town government, religion, slavery, newspapers, courts, parties, associations, manners, ambition, restlessness, and the habits through which democratic people learn, or fail, to govern themselves. America was the great case study; democracy was the real object of inquiry.

For Tocqueville, democracy is not merely a system of elections, reducible to majority rule, representative institutions, written constitutions, or popular sovereignty. Democracy is a social condition before it is a political form. It begins with what he called equality of conditions: the weakening of hereditary rank, the erosion of fixed social orders, and the gradual emergence of a world in which human beings increasingly see themselves as comparable, mobile, and entitled to judge their own affairs.

For that reason, Tocqueville began his great book in a way that can feel surprising to modern readers. He does not start with Congress, the presidency, the Constitution, or the mechanics of American elections. He begins with equality. He begins with social transformation. He begins with the most important fact, as he sees it, of the modern world.

The young United States of America was distinctive because equality of conditions had advanced further there than in Europe, and because it had done so under unusual circumstances. America, for Tocqueville, is democracy with fewer aristocratic ruins lying around. France had encountered democracy through revolution, violence, centralization, and the destruction of an old regime. America seemed to show democracy nearer its point of departure, before centuries of aristocratic hierarchy had so thoroughly complicated the landscape.

More than asking how America works, Tocqueville asked what happens to human beings when equality becomes the organizing fact of social life.

That question remains alive today, and may be more alive now than when Tocqueville posed it. We still live inside the world he was trying to understand: a world in which equality is morally powerful, liberty is rhetorically revered, freedom is demanded in private life, and democracy is invoked as both ideal and weapon. We often use these words as if they all meant the same thing. Tocqueville’s insight begins with his refusal to do that, and with his interrogation of them as distinct concepts.

Equality is not liberty

Tocqueville carefully separated concepts that modern political language tends to blur. Equality, liberty, freedom, and democracy are related but not synonymous. Much of Democracy in America is an extended meditation on how they reinforce one another, how they threaten one another, and how difficult it is to preserve liberty in a democratic age.

Equality, for Tocqueville, is first a social condition. It does not mean that people have the same wealth, talent, education, status, or influence. Equality of conditions means that inherited rank loses its power to organize society. Social positions become less fixed. Wealth circulates. Professions open. Education spreads. Families rise and fall. The old assumption that some people are born to command and others to obey becomes less credible.

This change is moral and psychological before it is institutional. Equality changes how people see one another and how they see themselves. The peasant, the merchant, the lawyer, the minister, the legislator, and the landowner may still differ in wealth and power, but they increasingly inhabit a shared social imagination. Each can imagine becoming something else. Each can compare himself with others. Each can resent, sympathize, admire, imitate, compete, and aspire.

Democracy is the social and political world that grows from this equality of conditions. Tocqueville used the word more broadly than we do: not merely electoral government, but the whole ensemble of habits, ambitions, anxieties, resentments, beliefs, and expectations that social equality generates.

Liberty is something different and more demanding, not simply the absence of restraint. Liberty requires the capacity for self-government, and self-government requires citizens who can do more than cast votes. They must form judgments, accept responsibility, participate in common affairs, respect rights, restrain appetites, cooperate with others, and resist both private domination and public servility.

Freedom, in the ordinary sense, often means the ability to act without immediate coercion: to speak, worship, move, work, buy, sell, associate, and choose. Tocqueville values these freedoms without mistaking them for political liberty, which demands considerably more. A people may enjoy many private freedoms while slowly losing the habits of public liberty. Citizens may withdraw into private life, ask centralized authority to manage common affairs, and retain the feeling of personal independence while surrendering the practice of collective self-rule.

This possibility is one of Tocqueville’s deepest anxieties. Equality may produce democracy, but democracy does not automatically preserve liberty. Indeed, democracy can endanger liberty when equality becomes a passion for sameness, when majority opinion becomes morally coercive, or when citizens prefer administrative comfort to the burdens of self-government.

The central problem of democratic society is therefore not whether equality will come. Tocqueville thinks it had already arrived, treating its advance as nearly providential. The problem is whether equality can be joined to liberty.

Through his 1831 lens: democracy is coming. The question is whether it will be free.

The long democratic revolution

Tocqueville’s Introduction offers a compressed and stylized history of European social leveling — a time-lapse film, not a researched parish record. In the old aristocratic world, power was rooted in land. Over time, other forces eroded that order: clergy gained influence, monarchs elevated commoners to weaken nobles, lawyers rationalized, commerce expanded, towns grew, movable wealth displaced inherited property. Each group acted locally, strategically, and partially, advancing equality without intending to do so. The emergent result was a world none of them chose fully.

This pattern explains one of Tocqueville’s most striking claims: democracy has grown up like a child abandoned in the streets. The metaphor can sound odd, since equality had advanced gradually over centuries; if the process was so slow, why call the result uneducated? The answer is that slow causes can produce revolutionary conditions. A river may rise inch by inch, but once it overflows the levee, the whole landscape changes. By Tocqueville’s age, equality had become strong enough to define the social order itself.

Tocqueville’s purpose is to educate democracy for liberty, the animating project of the book.

America as a democratic landscape

The first chapter of Part I can seem, at first glance, like a long geographical preface. For modern American readers, the detail may feel familiar or excessive. For Tocqueville’s French readers, it was neither: he was writing for people who had little sense of the United States as a continental reality, and before he could explain American democracy, he had to put America on their mental map.

Tocqueville’s landscape does more than orient the reader. It has causal force, which is a debatable claim. North America appears in his account as a physical setting unusually favorable to democratic development: vast, abundant, and conspicuously empty of feudal structure. There are no ancient castles, no inherited manorial order, no dense aristocratic past pressing down on every acre. His description of the Mississippi watershed becomes almost rhapsodic, a continental artery gathering the energies of an immense interior, land that seems to contain not only resources but destiny. A Smithian undercurrent — he almost certainly read Smith as well as Jean-Baptiste Say — runs through this geography: terrain shapes relative returns, returns shape occupations, occupations shape habits, habits shape institutions. In Tocqueville, political economy does not always announce itself, but it is frequently in the room.

The argument is not that geography determines democracy, but that democratic liberty takes root more easily where the material environment weakens aristocracy, encourages activity, disperses property, and rewards self-reliance. America’s physical world does not create its moral world, but it creates the conditions for it.

Occupation, possession, and the Lockean shadow

Tocqueville’s discussion of indigenous peoples reveals both his analytical power and his civilizational limits.

On one hand, he sees something real in indigenous societies that contrasts sharply with European aristocracy. He identifies forms of equality and liberty among indigenous peoples, and he notices that social distinction there does not resemble the rigid hierarchy of aristocratic Europe. His description can verge on romanticization, but it’s more than sentimental. He uses indigenous society as a mirror in which European inequality looks less natural than Europeans often imagined.

On the other hand, Tocqueville’s treatment of land and possession is deeply marked by European assumptions. His claim that indigenous peoples occupied the land but did not possess it rests on a theory of property in which agriculture performs the decisive act of appropriation (John Locke, call your office). To cultivate land is to make it one’s own. To hunt across it, dwell within it, or attach meaning to it in nonagricultural ways does not count in the same way.

Tocqueville’s foundation here is thoroughly Lockean. Property appears not merely as presence or use, but as improvement. Agriculture becomes the social technology through which land enters the world of recognized ownership.

He correctly treats property as a social institution, not just a physical relation between a person and a thing. It is a relation among persons concerning things, stabilized by norms, law, recognition, and enforcement. But Tocqueville’s framework also implies that peoples whose property systems do not resemble European agricultural property can be described as occupants rather than possessors. That distinction helped make dispossession legible as improvement.

That theme will matter more later in Tocqueville’s discussion of the “three races” in America. For now, it’s enough to notice that Tocqueville sees the institutional character of property clearly.

The point of departure

If Chapter 1 gives democracy a continent, Chapter 2 gives it an origin story. Tocqueville calls this the “point of departure” — the foundational conditions a society carries forward, shaping development long after the original circumstances have changed. Origins are not everything, but they are rarely nothing. We now call this institutional path dependence; Tocqueville was its theorist before the term existed.

His image of old chains hanging from the vaults of a building captures the idea precisely. Inherited institutions continue structuring society even after people forget what they once supported, a phenomenon known after Tocqueville’s time as Chesterton’s fence. Tocqueville’s point is subtler than conservatism, though. Old things should not be preserved because they are old, but because social practices contain knowledge that is not fully articulated — knowledge that cannot be recovered simply by reading statutes or constitutional texts.

Social mores (moeurs in French) are not designed or installed by statesmen like machinery. They emerge from the accumulated interactions of families, churches, towns, courts, markets, and political assemblies. Repeated practices become expectations. Expectations become norms. Norms shape judgment. Judgment shapes law. The line between custom and institution is, over time, nearly impossible to draw.

Tocqueville’s great insight is that constitutions rest on this pre-constitutional social order. Institutions begin as habits before they become constitutions. But habits themselves begin as lived practices before anyone thinks to call them political theory.

Why New England matters

Tocqueville places special weight on New England because the American point of departure appears there in its clearest form, but not without distortion, since New England is not all of America. He distinguishes North and South carefully from the start, preparing his later discussion of slavery’s destructive influence on Southern society.

Still, New England provides his central example. The settlers who came were not aristocrats transplanting feudal hierarchy to a new continent; the physical and institutional conditions of settlement made it hard to sustain the old noble order. Small holdings, local institutions, and the demands of a new landscape favored broadly distributed social and political participation.

The liberty that emerged was therefore closer to bourgeois and democratic liberty than to ancestral aristocratic liberty: the liberty of ordinary citizens governing local affairs, levying taxes, serving on juries, making rules, sustaining churches, founding schools, and acquiring the habits of public responsibility.

Aristocratic liberty belongs to orders, estates, and privileges. Democratic liberty must belong to citizens, which makes it more morally expansive, but also more fragile. If liberty belongs to everyone, then everyone has to learn how to practice it.

Sectarians who invented self-government

Tocqueville’s treatment of Puritanism refuses easy categories. The Puritans were not liberals; their moral legislation was severe, intrusive, and intolerant, punishing religious dissent and regulating private conduct in ways that rightly offend modern ideas of freedom.

Politically, though, they were astonishing innovators. Principles that many Europeans barely grasped in the seventeenth century were already practiced as facts in New England: popular participation in public affairs, free voting of taxes, accountability of officials, individual liberty, jury trial. The founders of New England were, in Tocqueville’s phrase, both ardent sectarians and impassioned innovators.

That pairing unlocks his account of American democratic liberty. Religion restricted some forms of conduct but formed moral habits — self-restraint, seriousness, literacy, discipline, covenant, obligation. Political liberty gave citizens responsibility for common affairs. The result was ordered liberty: freedom embedded in moral expectations and sustained by local practice, not freedom as expressive individualism.

Near the end of Chapter 2, Tocqueville names this juxtaposition as one of the book’s central claims: Anglo-American civilization arose from the combination of the spirit of religion and the spirit of liberty, two elements often opposed elsewhere. Religion gave moral structure to freedom; liberty gave public scope to religiously formed citizens. Each restrained the other from its worst tendencies, religion from consuming public life, liberty from dissolving into private license.

That lesson extends beyond seventeenth-century New England into Tocqueville’s time and today. Democracies need freedom, but freedom alone does not tell citizens how to use it well. Democracies need equality, but equality alone can morph into envy or conformity. Democracies need institutions, but institutions alone cannot generate the habits that make them work. Those habits must be formed before the institutions arrive. Before Madison, mores. Before formal institutions, habits. Before national government, towns. Before democratic theory, democratic practice.

Democracy’s promise and danger

Tocqueville’s attitude toward democracy is neither sentimental nor reactionary. He sees its virtues in enabling equality to elevate human dignity, weaken inherited domination, broaden opportunity, and draw ordinary people into public life. Democratic liberty can produce energy, responsibility, innovation, and moral seriousness.

But he also sees democracy’s natural vices. Equality can make people restless, envious, and conformist. Democratic citizens may become so absorbed in private affairs that they abandon public life. Majority opinion may become intellectually oppressive. Centralized administration may expand while citizens congratulate themselves on their independence. A people may remain free in small things while losing liberty in great ones.

This warning endures: democracy is not self-securing. It does not automatically produce liberty. The social condition that weakens aristocracy may also weaken the intermediate institutions, inherited obligations, and local attachments that help citizens resist centralized power. Equality liberates while it isolates. Democracy empowers ordinary citizens, but can also encourage conformity. Freedom expands choice, but does not by itself cultivate judgment.

The work of democratic civilization is thus to join equality to liberty. That work cannot be accomplished by constitutions alone. It requires law, religion, association, local self-government, property, education, and mores. Above all, it requires citizens who have learned, through practice, to govern themselves.

The beginning that keeps beginning

Tocqueville begins Democracy in America with equality because he thinks equality is the fact modern people must learn to govern. He turns to geography because democracy does not unfold in abstraction. It takes root in land, settlement, abundance, scarcity, distance, and opportunity. He turns to New England because institutions begin in practice before they become theory, and because democratic liberty depends on mores that no constitution can simply summon into existence.

The Introduction announces the democratic age. Chapter 1 gives that age a continent. Chapter 2 gives it a point of departure in religion, settlement, law, and local self-government.

At this early point in the text, Tocqueville’s deeper argument is already visible. Democracy is not just what happens when people vote. Democracy is what happens when equality reshapes the social world. Liberty is what happens only if democratic people acquire the habits, beliefs, and institutions necessary to govern themselves.

Tocqueville’s America is young, energetic, flawed, expansive, religious, commercial, practical, and restless. It is also morally contradictory from the beginning. It contains self-government and slavery, equality and dispossession, liberty and intolerance, local responsibility and national ambition. Tocqueville sees enough to admire it, enough to criticize it, and enough to treat it as a warning to Europe.

His question is still ours. Equality has remade the modern world. Democracy has become our common political language. Freedom remains our personal demand, but liberty requires the harder work of self-government. The democratic age would be saved, if at all, by learning how equality, freedom, and liberty can live together without devouring one another.

That task begins before politics as we usually define it, in the habits of ordinary life. It begins in the family, the town, the church, the school, the association, the jury, the meeting, the market, and the thousand small practices through which people learn to act with others.

Next time: Part I, Chapters 3,4,5

This summer marks the 250th anniversary of the Declaration of Independence.

That fact alone is astonishing: a republic born in rebellion against monarchy survived civil war, depression, world wars, constitutional crises, social upheaval, and the immense pressures of industrialization, globalization, and technological change. The American experiment has endured longer than many of the democracies that once dismissed it as unstable or naïve. I celebrate that endurance enthusiastically and gratefully.

And yet this anniversary arrives at a strange and dispiriting moment. Americans today often seem less capable of living together as fellow citizens than at almost any point in recent memory, as Lauren Hall has documented effectively (in two articles here and here). Our politics has become intensely polarized, but polarization alone is not the deepest problem. Democracies have always contained conflict, disagreement, and faction.

Contempt is the deeper problem.

Too many Americans increasingly regard political opponents not merely as wrong, but as morally illegitimate, intellectually corrupt, or fundamentally alien. Public life often feels less like democratic disagreement among fellow citizens and more like tribal warfare funneled into two camps and conducted through institutions that both sides increasingly distrust.

I share Lauren’s despair about this condition. But I also think the crisis runs deeper than contemporary politics, election cycles, or social media incentives. What we are witnessing is, in part, the erosion of civic virtue.

That phrase has acquired an unfortunate ideological coding in modern political discourse. “Civic virtue” is often interpreted as a conservative slogan or, worse, as a moralizing demand for conformity. I think that interpretation badly misunderstands the concept. Civic virtue is not partisan. It is not reducible to politics. And it is not fundamentally about agreement.

At its core, civic virtue rests on two simple but profound premises that are fundamental to the American project. First, every person possesses dignity as an individual human being. Second, human beings are social creatures who must live together in communities, cooperating in countless ways even amid disagreement. We rely on each other not only emotionally and culturally, but also materially and politically. We maintain institutions (informal and formal) together. We build infrastructure together. We govern together. We inherit constitutional orders together. A liberal democracy cannot survive without some shared commitment to those truths.

This idea lies at the heart of the American founding itself. The Declaration of Independence is not merely a legal document announcing separation from Britain. It is a moral claim about human equality and human dignity. The proposition that “all men are created equal” asserts that individuals possess inherent worth and therefore deserve liberty, protection under law, and recognition as moral equals. It is an aspirational statement of a set of core values and a yardstick for our moral improvement in achieving those values.

That tradition is fundamentally liberal in character. It joins liberty with dignity, rights with responsibility, and individual freedom with mutual obligation.

But we live in a political culture saturated with outrage, suspicion, and performative antagonism, so that moral foundation increasingly feels fragile. Many Americans now encounter fellow citizens primarily through nationalized ideological conflict rather than through local civic life, neighborhood institutions, religious congregations, voluntary associations, or community organizations. We increasingly experience one another as abstractions rather than as human beings.

Alexis de Tocqueville saw this danger nearly two centuries ago, and that recognition is one reason I want to reread him now. Revisiting Tocqueville during the semiquincentennial year can help reanimate the ideas and ideals embodied in the Declaration of Independence as an aspirational statement of values.

Alexis de Tocqueville (1805–1859) was a French aristocrat turned political thinker, historian, and statesman. He is best known for Democracy in America, a work that remains one of the most penetrating analyses of democratic society ever written, as Brendan McCord of the Cosmos Institute has argued recently. Tocqueville was a comparative social scientist avant la lettre, asking how modern democracy reshapes law, culture, religion, and everyday life.

Reading Democracy in America today can be almost unsettling because of how contemporary many of its warnings feel. Tocqueville admired American democracy deeply, but he also understood its vulnerabilities with remarkable clarity. He recognized that democratic equality could elevate human dignity while simultaneously weakening the habits and institutions necessary to sustain liberty.

Most importantly, he understood that democracy depends upon culture and character as much as upon constitutions and laws. Americans often assume that liberal democracy survives through formal institutions alone: elections, courts, constitutions, and procedures. Tocqueville thought those institutions mattered enormously, but he also believed they were insufficient in and of themselves. Free societies require mores, habits, associations, local institutions, and civic norms that teach citizens how to govern themselves. Democracy requires civic virtue.

Tocqueville famously observed the role of civil society in the young American republic. Today, many of the mediating institutions Tocqueville admired have weakened simultaneously: local journalism, civic organizations, churches, neighborhood associations, and geographically rooted communities. Americans participate less in shared local life while consuming more national political conflict. The result is a society filled with people who are hyper-politicized yet civically disconnected.

Tocqueville believed Americans historically counteracted some of the corrosive tendencies of democratic individualism through the density of their associational life. Americans formed clubs, churches, reading groups, charities, local organizations, and civic associations for nearly every conceivable purpose. These institutions did more than accomplish practical tasks. They taught citizens habits of cooperation, compromise, responsibility, and mutual respect. They taught people how to disagree while still regarding one another as fellow citizens.

The tragedy of our present moment is not merely that Americans disagree passionately. Democracies are supposed to contain passionate disagreement. The tragedy is that many citizens increasingly struggle to imagine political opponents as participants in a shared constitutional project, which is precisely why Tocqueville matters today.

Reading Democracy in America offers both historical insight and a kind of civic reorientation. Tocqueville approaches democracy neither with blind celebration nor with cynical contempt. He combines admiration with warning, hope with realism, and criticism with genuine affection for democratic life. He writes with humility. He even writes about technology, which you know I am going to want to discuss!

Tocqueville understood that democracy is fragile because human beings are fragile. Free societies depend upon habits of restraint and mutual recognition that no formal constitution can compel. A people incapable of respecting one another eventually becomes incapable of governing itself. That observation feels painfully relevant during this 250th anniversary, and it is one reason I think reading Tocqueville today is an important civic exercise.

At a time when contempt increasingly dominates public life, Democracy in America reminds us that liberal democracy requires something deeper than procedural rules or electoral victories. It requires citizens capable of balancing liberty with responsibility, individuality with community, and disagreement with mutual respect.

Tocqueville recognized both the greatness and the danger embedded within the democratic revolution in America. We would do well to read him again.

That is what I plan to do, and I invite you to join me.

I will be reading the copy I have, which is the University of Chicago Press Mansfield/Winthrop translation (2000), as well as Schleifer’s companion (2012). Electronic copies of Democracy in America are available at the Liberty Fund website, a 2010 new translation in four volumes. So if you want to read along with me and don’t have the same edition, the pagination won’t match but the chapter numbers should.

A small sentimental recollection: this volume of Tocqueville was one my father purchased on a visit to us in 2000, shortly after its publication, when it was one of the new publications featured on the front table at the Seminar Co-Op Bookstore at the University of Chicago (back when it was still in the basement of the old seminary building). I don’t know how much he read it; it doesn’t have any marginalia. I inherited it from him when he died in 2006.

Here’s my schedule starting next week, if you would like to read along and have a Tocqueville book club (which I would love):

Essay 1
Volume 1, Part 1, Chapters 1–2 (42 pages)

Essay 2
Chapters 3–5 (48 pages)

Essay 3
Chapters 6–8 (through “On the Federal Courts”) (37 pages)

Essay 4
Remainder of Chapter 8; Part 2, Chapters 1–3 (50 pages)

Essay 5
Chapters 4–5 (40 pages)

Essay 6
Chapters 6–8 (44 pages)

Essay 7
Chapter 9; Chapter 10 through the section on slavery (61 pages)

Essay 8
Remainder of Chapter 10 (73 pages)

Essay 9
Volume 2, Part 1, Chapters 1–12 (44 pages)

Essay 10
Chapters 13–21 (34 pages)

Essay 11
Volume 2, Part 2 (entirety) (56 pages)

Essay 12
Part 3, Chapters 1–15 (47 pages)

Essay 13
Chapters 16–26 (54 pages)

Essay 14
Part 4 (entirety) (38 pages)

Essay 15
Analysis, synthesis, and contemporary relevance

Please do join me!

Source: https://www.aboutamazon.com/news/aws/aws-data-center-inside

Most of us experience electricity as a subscription service. We move in, call the utility, set up an account, and expect the electrons to arrive. The power system is one of the great coordination achievements of modern life precisely because, for most of us, it disappears into the background. When it works, we do not notice it. When it fails, we notice nothing else.

That mental model does not scale. A data center requesting hundreds of megawatts is not another customer signing up for service. At that scale, electricity service becomes an infrastructure negotiation—and the problem is not just how much power data centers consume. The problem is how a large, fast-moving, uncertain new customer becomes a permanent enough fixture around which to build power systems.

This distinction becomes more important as artificial intelligence drives a surge in data center development and an expectation of ensuing demand growth. Public debate has focused on quantities: how much electricity data centers will use, how much new generation we will need, how much bills might rise. Those questions matter, but their focus on the shortage of electricity infrastructure misses a deeper problem: a shortage of institutional infrastructure.

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Beyond Plug-and-Play

Large new electricity demand does not simply appear on the grid. It has to be forecast, studied, planned, financed, physically connected, and then delivered reliably hour after hour. These steps need much more than engineering; they require credible commitments.

A data center developer may want the utility to reserve hundreds of megawatts of future capability, while the utility may have to build substations, transmission upgrades, and transformers before the data center is fully operating. Regulators must then decide whether those investments are prudent, who should pay for them, and what happens if the project is delayed, uses less electricity than expected, or never materializes at all. The grid-owning utility has to make durable investments under uncertainty (and so does the hyperscaler). Better forecasting can reduce that uncertainty but not eliminate it. The harder institutional question is how to write rules and contracts that make investment possible without asking ordinary customers to become involuntary insurers of speculative demand.

Historic trends. New uncertainty.

Data centers are not the first large customers utilities have ever served. The electricity system has a long history with energy-intensive industrial loads—steel mills, aluminum smelters, chemical plants, auto factories—that shaped the 20^th-century economy and power grid. These customers received special contracts, industrial rates, and sometimes interruptible service in exchange for paying lower prices. But many historical large loads were anchored to physical production processes, local resource bases, and long-lived industrial assets, arriving on timescales that aligned reasonably well with utility construction cycles.

Data centers scramble that model by combining features that collectively strain the inherited utility planning process. They arrive in large concentrated increments, with a single campus demanding hundreds of megawatts and a handful of projects transforming a utility’s load (demand) forecast. They are fast, with developers caring intensely about “speed to power” while transmission upgrades, substations, and generation procurement run on slower clocks. They are mobile, shopping across utility territories and grid regions, with each site inquiry showing up as potential future load before a developer commits to building anywhere. They are uncertain—some backed by major companies with real demand, others contingent on financing, permits, chips, or favorable tax treatment. And they may be flexible, though not automatically, with some computing workloads more amenable to shifting across time than others.

A new paper on large-load tariffs and load forecasting, by Angela Navarro and Molly Knoll for the National Association of Regulatory Utility Commissioners, captures the key shift: Historical load forecast errors were driven by population growth, marginal changes in end-use consumption, and macroeconomic factors that were diffuse and incremental. Today’s large, discrete loads are localized, infrastructure-intensive, and often seeking service faster than utility planning cycles can accommodate. The old forecasting world was about gradual demand trends. The new forecasting world is about project-level shocks. Poor load forecasting, welcome to your main-character era.

When the forecast becomes the problem.

For much of the 20^th century, load forecasting was necessary but quiet, most noticeable when something went wrong, because demand growth was generally steady. The data center boom changes that. In regions with substantial data center interest, the load forecast becomes contested terrain.

The underlying difficulty is the phantom load problem. If developers request service in multiple locations before deciding where to build, utilities and regulators may see more proposed demand than will ever materialize. PJM, the grid operator in the mid-Atlantic region, has responded by requiring firmer commitments for near-term forecast years while treating longer-term projects as less certain. ERCOT in Texas adjusted its large-load forecasting assumptions after observing an average project delay of 180 days and data centers’ consumption of less than half the capacity originally requested for study.

A forecast is easy to inflate when someone else bears the cost of relying on it. Forecasting is both technical and strategic, with developers wanting to reserve capacity, utilities potentially expanding their rate base, economic development officials courting investment, and consumer advocates all having stakes in the outcome. In such an environment, a load forecast is a claim on future infrastructure, and when forecasts are wrong, the consequences are expensive. Transformers, substations, and transmission upgrades cannot be returned with a receipt and a sheepish apology. Bad forecasts become bills.

The real problem is credible commitment.

This observation brings us to the central institutional economics question: Who should bear the risk created by uncertain large-load forecasts?

The easy answer says that big technology companies should pay more because they are large and profitable. This claim has political force but is not quite the right analytical frame. The better question is what commitments a large customer should make before everyone else is asked to commit resources based on the forecast.

When a utility constructs infrastructure to serve a large new customer, it makes investments that are durable, capital-intensive, and difficult to repurpose. The relevant concept from transaction cost economics is asset specificity: A transformer, substation, or transmission upgrade built to serve a particular large load in a particular location may have little value if that load never materializes. This characteristic transforms a forecasting problem into a contracting problem.

The structure is a classic setting for what are known as contractual hazards. One party must make a durable investment before the future is fully known; the other party has better insight into its own plans and commercial prospects, but it, too, has durable investments on the line. Once the investment is sunk, bargaining positions change. MIT professor Paul Joskow’s work on coal contracts showed that contract duration tends to increase when relationship-specific investments matter most; when one party must invest in durable assets to serve another, longer contractual commitments reduce the risk of being left exposed. Nobel laureate Oliver Williamson described the need for “hostages” to ensure credible commitment: A deposit, collateral requirement, minimum bill, or termination fee gives the customer something at stake, making its forecast more than cheap talk.

The relevant question is practical: What kind of contingent contract can make investment possible when the future is uncertain? When parties cannot know the future, they can still agree in advance on what happens under different future conditions. If the data center arrives on schedule, here is how costs will be recovered. If it builds more slowly, here are the minimum charges. If it leaves early, here is the exit fee. If it offers flexibility during grid stress, here is the compensation.

That is not punishment. It is governance.

Turning forecasts into commitments.

Properly understood, a large-load tariff is a rulebook for joining the grid when a customer is large enough to alter system planning, infrastructure needs, and cost allocation. These tariffs may require long-term contracts, minimum billing commitments, collateral, exit fees, phased ramp schedules, and notice requirements. The basic institutional function is consistent: Large-load tariffs convert forecasts into commitments.

The new National Association of Regulatory Utility Commissioners paper adds an important insight. Tariffs are more than customer-protection mechanisms—they can also improve forecasting. Minimum demand obligations, collateral requirements, phased load ramps, eligibility thresholds, contract lengths, and exit fees all contain information about the timing, magnitude, persistence, and credibility of large-load requests. Navarro and Knoll propose that regulatory commissions use tariff terms directly in load forecasting, applying them to baseline planning assumptions and sensitivity analyses, and updating forecasting assumptions as actual queue and realization data accumulate. This approach reveals that a large-load tariff is more than a price, it is a forecasting institution.

The components of a well-designed tariff are not random regulatory appendages. Long-term contracts address duration. Minimum bills address downside demand risk. Deposits and collateral bond the customer’s promise. Exit fees protect against costly early departure. Ramp and build schedules make timing uncertainty contractible. Curtailment provisions that lay out the conditions under which the large load customer will reduce its demand define what flexibility means operationally. The goal is not a complete contract specifying every possible future state; no tariff can perfectly anticipate AI demand trajectories, chip constraints, or capital markets. The more modest and useful goal is contingent contracting: specifying what happens under the most important foreseeable deviations from the forecast.

The experience of AEP Ohio illustrates this well. After regulators approved and the utility adopted revised data center tariff terms in July 2025—including 25-megawatt eligibility requirements, an 85 percent minimum billing obligation, 12-year contract terms, and termination fees equal to minimum charges for 36 months—the interconnection queue fell from 30 gigawatts to 13 gigawatts. The missing 17 gigawatts was not necessarily “phantom” in any simple sense. But once capacity requests became costly to maintain, the queue began to contain better information, filtering speculative entries before utilities built around them. Better load forecasting can tell us which futures are more likely. Large-load tariffs help decide who is responsible when the likely future turns out to be wrong.

Can the cloud learn to bend?

Requiring data centers to pay for the infrastructure they require is the necessary first principle. Existing customers should not subsidize speculative load growth. But stopping there misses the question of whether data centers might reduce the infrastructure they require by becoming more responsive to grid conditions.

Not all megawatts are created equal. A customer requiring firm, round-the-clock service imposes different costs from one able to reduce demand during scarcity, shift computing tasks across time, or coordinate operations with grid needs. Some workloads—AI training, batch processing, cooling systems—may offer flexibility that latency-sensitive inference cannot. This flexibility is not automatically valuable, however. It has to be defined, contractualized, and verified. A data center claiming flexibility should have to specify what that means operationally: how much load can be reduced, how quickly, for how long, and at what compensation. Flexibility becomes useful to the grid only when it is reliable enough to plan around, making this too a credible-commitment problem.

Large-load tariffs could become tools for institutional discovery, revealing which customers are firm, which are flexible, and which are speculative—making their characteristics visible and actionable rather than forcing public utility regulators to guess.

The larger lesson.

The data center boom did not create weaknesses in electricity regulation. It removed the luxury of ignoring them.

Load forecasts are no longer technical appendices to utility plans; they are central to economic development, reliability, affordability, and decarbonization. When a forecast becomes the basis for billions of dollars of infrastructure on both sides of a transaction, the assumptions behind it deserve scrutiny: which projects are included; how credible they are; what commitments customers have actually made; and how much projected demand is firm, flexible, speculative, or duplicative.

But forecasting is only part of the solution. Forecasts reduce but do not eliminate uncertainty. Once we better understand the likely timing, magnitude, and persistence of large new loads, we still need rules assigning responsibility when expectations prove wrong. Data centers are neither villains nor ordinary customers. They are large, sophisticated, fast-moving actors whose demand can reshape the electricity system, and good institutions should be able to tell the difference between those creating real value and those claiming capacity without credible commitment.

Better forecasting tells us which futures are more likely. Better contracting tells us what happens when the actual future is different. The first reduces uncertainty; the second governs the uncertainty that remains.

You cannot just plug in a data center. But with better rules, better forecasts, and better commitments, perhaps we can learn how to connect one.

First published at Dispatch Energy at https://thedispatch.com/newsletter/dispatch-energy/data-center-electricity-use-regulators-utilities/

Source: Yet another productive conversation I had with ChatGPT.

PJM’s recent white paper, Powering Reliability Through Market Design, does not solve the problem underlying its title. But the paper is extremely valuable because it acknowledges that the foundational assumptions of organized capacity markets no longer fit the environment in which those markets operate, and does so more openly than most institutional discussion in this industry. That candor is significant.

The striking thing about the paper is how familiar the concerns are. Reading the document, I recognized the same institutional problems that were already visible nearly two decades ago during the early expansion of organized capacity mechanisms. In a chapter on resource adequacy and capacity markets in my 2009 book Deregulation, Innovation and Market Liberalization (Chapter 7), I argued that those mechanisms were emerging largely because organized wholesale markets had combined two institutional design choices that interacted badly: price caps and suppressed demand responsiveness. The resulting market structure then required administrative supply-side mechanisms to compensate for demand-side flexibility it had institutionally prevented from developing.

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The Missing Money Problem Was Never Purely Technological

The conventional justification for capacity mechanisms is familiar. Electricity markets cap scarcity prices to mitigate market power and political backlash. Most retail customers face flat or quasi-flat retail rates rather than real-time prices. Demand therefore becomes highly inelastic precisely during scarcity conditions, limiting the ability of energy market revenues alone to support investment in resources needed primarily during peak reliability events. Capacity mechanisms emerge to supply the missing money — the revenue shortfall created by combining administrative price caps with inelastic retail demand.

This logic has long underpinned organized capacity mechanisms throughout wholesale power systems. But even in 2009, this explanation struck me as incomplete because it treated demand inelasticity as though it were an unavoidable technological characteristic of electricity systems rather than partly the consequence of institutional design choices. As I wrote then, capacity mechanisms are “an attempt to remedy the consequences of a distortionary policy with another distortionary policy.”

That framing remains central to understanding today’s resource adequacy debates.

Retail price caps, limited dynamic pricing, barriers to demand aggregation, insufficient integration between wholesale and retail markets, and governance structures designed around passive load all suppress the emergence of active demand participation. The resulting lack of demand elasticity creates the appearance that administrative supply-side procurement is necessary to maintain reliability; this appearance, though, is at least partly endogenous to the institutional architecture itself.

The irony is that organized markets have spent two decades building increasingly elaborate administrative mechanisms to compensate for the absence of demand responsiveness while simultaneously preserving many of the institutional arrangements that suppress demand responsiveness in the first place. PJM’s paper indirectly acknowledges this reality throughout. Its discussion of the credibility trap is especially illuminating: PJM correctly recognizes that scarcity pricing during tight conditions is economically rational, yet those same scarcity prices create political backlash because large portions of load remain exposed to volatility without corresponding flexibility or meaningful hedging arrangements. Policymakers then intervene, investors discount the credibility of future market revenues, investment becomes more hesitant, and scarcity persists. Lather, rinse, repeat.

This dynamic reveals a problem deeper than insufficient supply-side incentives: a broader institutional problem involving governance, risk allocation, and the persistent underdevelopment of active demand.

The Administrative Demand Curve as Epistemic Substitute

One of the most revealing features of organized capacity markets is their reliance on administrative demand curves. PJM, ISO-NE, and NYISO all eventually adopted downward-sloping administrative demand curves intended to approximate the value of future capacity resources. Yet the fundamental problem with these curves has always been that they substitute for actual preference revelation.

As I argued in 2009, “the artificial capacity product has no intrinsic value to customers,” because what customers actually value is reliability itself, not an engineering reserve margin target. The resulting administrative demand curves therefore become bureaucratic approximations of preferences that markets themselves are institutionally constrained from revealing directly. At best, such curves are rough estimates derived from incomplete information; at worst, they become bureaucratic substitutes for the decentralized discovery processes that active markets would otherwise facilitate.

My recent work on RTO governance argues that RTOs are best understood not simply as market operators but as governance institutions managing a congestible common-pool resource through rule-defined participation and exclusion. These institutions are non-replicable — no competing alternative can simply be constructed — meaning that the rules defining who participates, on what terms, and bearing what obligations become the primary margin of institutional adaptation rather than competitive pressure from outside.

That framing exposes a basic epistemic limitation: the distributed knowledge embedded in modern electricity systems — about flexibility, reliability preferences, and operational capabilities — is precisely what centralized administration struggles to incorporate, yet organized market governance still largely reflects the institutional assumptions of the 1990s restructuring era: centralized thermal generation, homogeneous demand, and limited customer participation. Administrative constructs increasingly substitute for the decentralized coordination they were never designed to replace.

Administrative demand curves substitute for actual demand expression, accreditation methodologies substitute for market discovery regarding reliability value, centralized reserve targets substitute for differentiated reliability preferences, and capacity constructs substitute for forward contractual coordination. The more technologically heterogeneous the system becomes, the more administratively demanding this substitution becomes, requiring more regulatory complexity to compensate for the coordination it cannot fully supply.

The Accreditation-Penalty Trap

Recent work by Ke Xin Zuo, Joshua Macey, and Jacob Mays identifies a structural dilemma at the institutional core of capacity market design. Capacity markets require non-performance penalties strong enough to create honest performance incentives, but penalties strong enough to be economically efficient expose suppliers to catastrophic financial risk when outages are correlated, as they were during Winter Storms Elliott and Uri. Under those conditions, high penalties drive generators toward default, and bankruptcy itself becomes a hedge against non-performance. Softening the penalties restores the problem they were designed to solve: suppliers again overstate their reliability contributions, and load again bears the consequences.

The institutional response has been to develop increasingly elaborate accreditation methodologies — marginal effective load carrying capacity (ELCC) estimates, performance assessment hours, seasonal accreditation — substituting regulatory constraints on position size for the market-based performance discipline that adequate penalties would otherwise provide. But accreditation introduces compounding challenges of its own. Optimal values depend on the resource mix at the time of the capacity auction, not the mix that will exist at delivery. Correlated outages are rare by design, making the hardest-to-model events the most consequential ones. And adopting improved methodologies requires navigating multi-veto stakeholder governance structures that move more slowly than the resource mix is changing.

The result is a mutually reinforcing administrative expansion: weak incentives require elaborate accreditation, elaborate accreditation requires complex governance, complex governance requires long implementation timelines, and long timelines mean that accreditation methods chronically lag the technical realities they are designed to measure.

PJM’s paper largely takes this institutional inheritance as given. Zuo, Macey, and Mays draw the more fundamental inference: reduce reliance on administrative accreditation by restoring economic incentives through stronger price signals in the energy and ancillary services markets, using accreditation primarily to assess credit risk rather than substituting for performance incentives that markets should supply directly. That inference maps directly onto PJM’s Path C proposal, as well as onto the vision of integrated spot and forward energy markets that I argued for in 2009.

Hedging, Risk Allocation, and the Architecture of Markets

Farhad Billimoria’s recent Substack article on hedging architectures reframes organized wholesale markets fundamentally as systems for allocating and managing risk rather than merely as systems for dispatching generation resources. That perspective clarifies what PJM’s three proposed pathways actually are: alternative hedging and risk-allocation architectures, not just alternative market designs. The Stabilized Markets pathway (Path A) relies more heavily on long-term centralized hedging structures, requiring load to be covered by forward commitments before the spot auction, preserving the capacity market while insulating consumers from its price volatility. Differential Reliability (Path B) reallocates reliability risk across customer classes or geographic areas, making explicit the allocation that currently happens implicitly and arbitrarily. The Energy Market Transition pathway (Path C) shifts revenue recovery toward the energy and ancillary services markets while relying on long-term energy contracting to provide the consumer protection that stable administrative capacity payments currently offer.

Billimoria correctly observes that no one-size-fits-all architecture exists; the appropriate design depends on regulatory structures, retail market development, and consumer engagement in each jurisdiction. This insight echoes arguments I advanced in 2009 about the importance of integrated spot and forward energy markets and the use of financial call options as transitional resource adequacy mechanisms — offering revenue certainty to investors while creating direct, market-based performance incentives rather than administrative ones (an idea I credit to the brilliant Shmuel Oren). Forward financial arrangements are constitutive of resource adequacy.

But even sophisticated discussions of hedging architectures like Farhad’s tend to understate one dimension: the importance of demand responsiveness itself. The problem is more than incomplete financial markets; it encompasses incomplete institutional participation. Technology increasingly enables active, flexible demand participation — smart devices, automated controls, distributed storage, EV charging, flexible industrial processes, and advanced metering all expanding the feasible scope of decentralized responsiveness — yet governance structures, retail rate design, participation rules, and market institutions still largely treat demand as passive load rather than as an active reliability resource, artificially inflating the scale of administrative procurement needed to compensate.

Differential Reliability and the Institutional Transition

Perhaps the most consequential element of PJM’s paper is its discussion of Differential Reliability — significant not primarily as an operational proposal but as an implicit acknowledgment that reliability preferences and operational capabilities are becoming irreversibly heterogeneous.

Some customers may value extremely high reliability and willingly pay for it, while others may prefer lower-cost service with greater exposure to curtailment or dynamic pricing. Some loads may be highly flexible and technologically capable of rapid adaptation (including the hyperscale data centers whose load growth is driving the current situation) while others remain relatively inflexible. This heterogeneity connects directly to arguments I made in 2009 regarding differentiated reliability products and the possibility of technology enabling what I called “privatizing many aspects of reliability”, drawing on the vital, seminal work on priority service of Chao and Wilson (1987).

Once differentiated reliability becomes institutionally feasible, the logic of administratively pooled uniform reliability begins to weaken. Demand no longer appears merely as passive load requiring protection through centralized reserve procurement. Instead, demand itself becomes an active reliability resource capable of dynamic adaptation in response to prices, contractual arrangements, and system conditions, changing the structure of the resource adequacy problem fundamentally. The central question becomes less about determining reserve margins administratively for undifferentiated passive demand and more about creating governance institutions enabling decentralized coordination among heterogeneous participants with differing capabilities, preferences, and risk tolerances. That governance transition is difficult, requiring changes in retail rate structures, market rules, legal obligations, property rights, and technology deployment. But the mounting strain visible in organized capacity markets suggests that avoiding this transition indefinitely may prove more difficult still.

A Bridge, Not a Destination

One argument from my earlier work seems especially relevant today: capacity mechanisms, if necessary at all, should function as transitional mechanisms rather than permanent fixtures, bridging toward more integrated spot and forward markets with active demand participation, clearer property rights, and richer forms of decentralized coordination. Specifically, I proposed that regulators stipulate milestone-based sunset provisions for capacity markets, reducing their scope as the volume of forward commitments in financial markets approaches the desired reserve margin.

That concern now appears even more pressing than it did then.

Administrative capacity mechanisms tend naturally toward institutional entrenchment, with entire business models, stakeholder coalitions, regulatory processes, and governance structures evolving around them, making the mechanism originally intended as a transitional response to incomplete market development into an obstacle to further institutional adaptation. As I said in 2009, imagine if 1850s law had dictated the existence in perpetuity of a capacity market for the production of whale oil. That deliberately provocative analogy has a serious underlying point: institutional resilience requires an ability of governance structures to evolve, adapt, and sometimes disappear as technologies and coordination mechanisms change.

PJM’s white paper represents an important step forward in acknowledging the depth of the current institutional strain, opening space for a more fundamental conversation than this industry has generally been willing to have.

The strain affecting organized wholesale markets arises both because generation investment has become more difficult and because the institutional framework continues suppressing decentralized demand responsiveness, differentiated reliability preference expression, dynamic coordination, and risk-sharing that modern technologies increasingly make feasible. Relaxing those suppressive institutional constraints — through retail rate reform, expanded demand participation pathways, clearer property rights, and milestone-based governance transitions — goes to the institutional root of the resource adequacy problem.

Continuing to add administrative layers to compensate for institutional constraints that could instead be removed is not a sustainable strategy. It is, at best, a bridge. And bridges built without any plan for what comes after them tend to become permanent fixtures.

Source: An iterative conversation about Michael’s series with ChatGPT

Michael Lee’s Distributed Grid series reads like a field report from the institutional frontier. Lee, formerly CEO of Octopus Energy US, is writing from inside the practical problem that has animated my work for decades: how do we build a power system in which customers, new technologies and resources, flexible loads, and digital control and automation become working parts of a more adaptive grid? Reliability, affordability, and abundance will depend increasingly on that coordination.

Lee’s answer, across the first seven essays in his planned ten-part series, is that the next utility will not look like the old utility. It will look more like a platform business — a coordinator of capabilities, transactions, information, contracts, and performance across a dynamic network of resources the utility does not necessarily own. That vision gives operational specificity to a broader institutional-economic transition I have been writing about for over two decades. The grid’s future is decentralized coordination.

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Lee begins with the utility business model. His first essay makes the crucial point that the investor-owned utility is built for a different era because its core financial incentive still rewards capital deployment more than customer value. Traditional cost-of-service regulation does not simply allow utilities to build; it creates a business model in which building is the primary path to earnings. New substations, feeders, transformers, and other capital assets enter rate base. Less visible substitutes — flexible demand, distributed batteries, non-wires solutions, better information, or third-party coordination — may reduce total system cost but generate no equivalent durable earnings stream.

Lee is careful, and rightly so, not to frame this as a morality play. Utility executives and employees are not villains; they are organizations responding to incentives. The rate-base model did what it was designed to do: it financed a capital-intensive universal network. The problem is that the task has changed. Rather than an institutional framework that induces building large assets, we need an institution capable of discovering when building is the best answer, when operating differently is, and when customers and third parties can solve problems more cheaply and quickly.

This framing is where Lee’s practitioner critique meets the knowledge problem perspective. In my 2009 book, Deregulation, Innovation and Market Liberalization, I argued that the traditional natural-monopoly model is inherently static and poorly suited to a system characterized by technological change, heterogeneous agents, diffuse private knowledge, and evolving institutions. The fundamental economic problem in electricity is not allocating known resources to known uses. It is coordinating the actions and plans of people and organizations who know different things, value different things, and face changing technological possibilities.

Lee’s second essay, on performance-based regulation, pushes that analysis further. PBR is often presented as the corrective to cost-of-service regulation: pay utilities for outcomes rather than inputs. Lee’s contribution is to show why that reform, while directionally right, is often too small to change behavior. If a utility can earn large, durable returns from rate-base growth but only small, episodic rewards from performance incentives, the basic earnings logic remains intact. A modest performance incentive sitting beside a much larger capital incentive decorates the old model with a new ribbon. It does not transform the organization.

That diagnosis connects to a central finding in the economics of rate-of-return regulation: cost-of-service rules encourage capital investment even when capital is not the best path to reliability, resilience, affordability, or innovation. Lee adds the organizational mechanism, showing that a utility optimized around capital deployment will have planning, engineering, accounting, and managerial routines reinforcing that deployment. Changing the metric is not enough. The business model has to make operational excellence, flexibility procurement, and customer value financially consequential.

Lee’s third essay applies cost causation to one of the most important current stress tests for the grid. He argues that data centers should fully pay their own way, particularly when new large loads drive upstream transmission, substation, or distribution upgrades. His core intuition is sound: if the system met reliability standards before the new load arrived, upgrades required to maintain reliability afterward are caused by that load.

I agree with Lee that cost causation should discipline the data center debate, although I would put more weight on the institutional problem these loads reveal. Data centers expose a pacing mismatch: they can be built in 18–24 months, while major grid infrastructure often requires 7–10 years. That mismatch is a coordination problem under uncertainty; ignoring workload shifting in time and place, UPS-based frequency response, hybrid on-site generation, and other capabilities that can reduce system stress and upgrade costs, just makes it worse.

Here the Lee framework and my data center flexibility work converge. The question is not whether data centers should receive subsidies through socialized grid costs — they should not. The question is whether our rules can distinguish between large loads imposing rigid peak demands and large loads capable of offering flexibility, speed, and grid support. Cost causation and flexibility valuation have to work together, or we will either socialize too much cost or push customers toward inefficient bypass.

Lee’s fourth essay turns from data centers to what he sees as the larger opportunity: the distribution grid. Public debate remains fixated on bulk generation, long-distance transmission, and large loads, which are important. But the distribution system is where customers experience reliability, where many costs accumulate, where DERs connect, and where local constraints can often be resolved by local capabilities.

Lee emphasizes distribution-system load factor, observability, and topology. Distribution infrastructure is built for peaks occurring only a small fraction of the year. Without real-time topology, granular metering, and operational visibility — all achievable now through digital technologies — DERs remain blurry objects on the edge of the system rather than usable grid resources. Engineering conservatism and capital bias compound each other under poor observability, producing more iron rather than better coordination.

Lee’s fifth essay is deliberately pro-DER while also anti-hype. He is bullish on distributed energy resources, bearish on the infrastructure around them, and that distinction has meaning. Rooftop solar, batteries, electric vehicles, smart thermostats, and flexible devices can create system value, but not by existing heroically in PowerPoint slides. They need telemetry, data access, locational compensation, workable interconnection processes, OEM cooperation, and distribution-level price signals. Without that institutional and technical infrastructure, DERs remain potential rather than capability.

This institutional gap explains why flexibility remains the missing economic category in so many electricity debates. The old system valued energy and capacity. The emerging system also has to value capabilities: the ability to shift, reduce, inject, absorb, store, substitute, and orchestrate electricity use across time and space. The analysis must shift from a resource’s physical capacity to its capability to perform a specific service at a specific time and location, treating flexible demand not as a burden to be satisfied but as one of the system’s most valuable resources. What matters is not just how many kilowatts exist, but what they can do, how fast, and where they are in the network.

Lee’s sixth essay identifies the institutional precondition for this world: transparency as an operating model, not public relations. Utilities ultimately sell trust because customers cannot see electricity, often lack competitive alternatives, and receive bills whose causes are opaque. Distribution constraints, hosting capacity, feeder loading, engineering assumptions, interconnection queues, and performance data have to become legible to qualified participants if third parties are going to propose alternatives and if regulators are going to evaluate whether utilities are delivering value.

This necessity connects directly to what I have called the pacing problem in electricity. Technologies are changing faster than regulatory institutions can metabolize them. DERs, data centers, automation, AI, batteries, EVs, and digital control systems are evolving through modularity and recombination, while regulatory processes still move through rate cases, prudence reviews, tariff filings, and contested proceedings. Institutions need stability, but they also need adaptive capacity — otherwise the system gets ossification or chaos, and neither keeps the lights on.

That brings us to Lee’s seventh essay, where the platform vision becomes explicit (a vision my co-authors and I analyzed in our “From Airbnb to Solar” paper (Theisen, Kiesling, Munger (2022)). He imagines a distribution planning engineer facing a feeder constraint. In the traditional model, the engineer proposes a substation: capital investment, rate base, familiar process. In the platform model, the engineer opens a constraint marketplace. Storage developers, aggregators, flexible load providers, and conventional infrastructure options compete to solve the constraint on comparable terms, with each option evaluated on cost per unit of reliability delivered rather than on how much capital it adds to rate base.

That example is doing a lot of work. Converting the utility from a builder of owned assets into a coordinator of solutions creates a way for the utility to earn by saving customers money rather than by expanding rate base, treating third-party resources as complements rather than irritants, and recognizing that the cheapest reliable solution to a grid problem may sit in software, customer behavior, distributed storage, reconductoring, or traditional capital investment. The point is not to privilege DERs over wires. The point is to discover the least-cost, best-performing portfolio of capabilities.

In my 2020 paper “Plug-and-Play, Mix-and-Match: A Capital Systems Theory of Digital Technology Platforms,” I argued that digital platforms create value through modularity, scalability, and adaptability — a stable core, standardized interfaces, heterogeneous edge participants, governance rules, and mechanisms for matching capabilities to needs. That architecture applies directly to the grid edge: devices must communicate, market participants must know what services are needed and what those services are worth, and utilities must have incentives to publish constraints and treat edge resources as working parts of the system.

The hard part is that the wires monopoly still sits at the center of this architecture. Drawing on the Baxter/Bell Doctrine — that regulated monopolists have both the incentive and the opportunity to distort adjacent competitive markets — I have argued that the platform utility vision requires structural discipline. The utility may coordinate the platform, but absent regulatory constraint, using network control to foreclose competitive entry at the edge is the predictable response.

Lee’s series is important because it gives operational language to a transition that institutional economists have been analyzing from a more theoretical angle. He is describing the grid from the customer and distribution edge outward; my work has described the same transition from institutions and coordination inward. Those perspectives meet at the same point: a power system in which reliability, resilience, affordability, and decarbonization emerge not from suppressing decentralized action but from coordinating it.

The distributed grid is not a gadget story. It is an institutional story. The technology now exists to make millions of small decisions useful to the system. The question is whether regulation, markets, and utility business models will let that knowledge into the room.

Since AI development’s acceleration in late 2022, one question has loomed over electricity policy: can the decidedly twentieth-century electric utility industry build infrastructure fast enough to meet the speed-to-power expectations of hyperscalers and AI companies? Data centers can be planned, financed, and built on timelines that make utility planners blink twice and reach for another cup of coffee. Transmission lines, substations, turbines, interconnection studies, certificates, permits, and rate cases do not move at software speed.

That timing mismatch produces a second question: can data centers reduce their electricity use when the grid is stressed? The answer is “sometimes,” which is both less satisfying and more analytically useful than yes or no. The better question is what kinds of flexibility different types of data centers can provide, under what conditions, at what cost, with what effect on reliability, and through what institutions.

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Flexibility as Elasticity

Flexibility is fundamentally an economic question of elasticity — how responsive electricity demand is to changes in price, grid conditions, utility instructions, or reliability events. Infrastructure is a question of supply elasticity: how responsive quantity supplied is to changes in expected demand and prices.

Embedded in both is the variable of time. Alfred Marshall’s fish-market example is useful: in the immediate run, supply is fixed by the boats and fishers already at sea; in the short run, more fishers may go out with the same number of boats; in the long run, people can build more boats. Electricity infrastructure has the same structure, albeit with fewer nets and way more acronyms.

For data centers, many important questions are long-run: how much generation, transmission, and distribution infrastructure should be built, and how energy-efficient can chips, servers, cooling, and data center designs become? Other questions are short-run: where does the grid have unused capacity, during what hours, and at what locations? Can digital load move across time or place before new infrastructure arrives?

The locational dimension is crucial. Grids have different conditions not only at different times but at different places at the same time. At 5 p.m. on a hot August afternoon, PJM may be near its operating limits while cooler weather in the Midwest leaves MISO with excess capacity. A company with data centers in both regions may shift compute from PJM to MISO, maintaining service while reducing stress on the constrained grid and lowering its energy cost.

Defining Flexibility

That example points to a definition:

The four moving parts are timing (moving work from a stressed hour to a less stressed one), location (shifting workloads between regions or facilities), magnitude (reducing total power draw), and source (drawing from grid, batteries, fuel cells, or on-site generation). The definition’s final phrase matters because a data center is not an aluminum smelter or an irrigation pump — some digital work can move; some cannot. Uptime, latency, customer contracts, and quality-of-service obligations all matter. For a good definitional framework for flexibility, see this impactECI February 2026 report.

Flexibility is therefore broader than curtailment. Curtailment (reducing consumption below the level that otherwise would have occurred) is one form of flexibility, but flexibility also includes shifting, substitution, self-supply, and orchestration. A data center can be flexible at the meter while keeping computation running.

That distinction matters for business models. OpenAI, a pure-play AI company, and AWS, a cloud hyperscaler, both operate large compute infrastructure but face different control problems. A pure-play AI company has direct authority over its training workloads — deferring training, prioritizing urgent inference, slowing fine-tuning, or shifting compute geographically when software architecture allows. In contrast, AWS provides cloud capacity to many customers (including AI companies like Anthropic) whose workloads it cannot simply pause for the good of PJM. AWS flexibility comes less from curtailing customer workloads than from managing infrastructure and contractual portfolios: batteries, on-site generation, internal workloads, opt-in customer products, regional orchestration, and meter-level operating envelopes. The utility may see a 500 MW load request, but inside that request are layers of property rights, contracts, control rights, software, and reputational risk.

Data center flexibility is thus not a generic attribute. It depends on workload, ownership, contracts, design, location, telemetry, incentives, and institutional rules. EPRI’s 2025 Grid Flexibility Needs and Data Center Characteristics paper distinguishes data centers by size, reliability requirements, workload, and ownership model, emphasizing that flexibility requires a common taxonomy among power providers, grid operators, and data center stakeholders.

Evidence on Flexibility

Over the past two years, a body of work has clarified these distinctions. The Norris et al. (2025) Rethinking Load Growth analysis asked how much large flexible load the existing U.S. power system could accommodate by tapping latent grid headroom, finding that 76 GW of new load could be integrated if those loads could curtail for only 0.25 percent of maximum uptime. The result rests on important assumptions and does not eliminate the need for transmission, ramping, and reserve analysis, but it suggests small amounts of well-timed flexibility can have outsized capacity value — unsurprising in a nonlinear complex system. Subsequent work at Duke University has continued to develop these analyses.

EPRI’s DCFlex initiative contributes a power-system taxonomy, framing flexibility as the ability to adapt across time scales from seconds to decades and identifying where flexibility comes from inside data centers: compute assets, balance-of-plant systems, and power assets. The framework moves the conversation from “can data centers turn down?” to “which subsystems can provide which services under which rules?”

ACEEE’s 2025 and 2026 reports widen the aperture. Data center policy should not be only about emergency demand response “programs”, a category into which too many imaginative demand response opportunities have been shoehorned. Efficiency remains the first demand-side resource; improving chips, algorithms, cooling, software, and utilization reduces the baseline from which flexibility begins. Data centers, ACEEE reminds us, are the flashiest part of a larger load-growth problem driven by electrification, industrial development, and manufacturing, not the whole circus.

GridLab and Telos take the question into resource planning. Their NV Energy case study, reviewed in LBL’s 2025 large load literature survey, found that 1–2 GW of data center flexibility produces NPV savings of roughly $300–400 million over 2025–2050 when incorporated into integrated resource planning rather than treated as an afterthought (LBL March 2026 update). Most utilities still plan for large loads as firm, inflexible demand — understandable, since planners are paid to keep the lights on rather than ruminate on optionality. But treating dependable flexibility as fully firm leads to overbuilding.

Camus, encoord, and Princeton’s ZERO Lab push the analysis into interconnection architecture, arguing that flexible grid connections and “bring your own capacity” structures can speed interconnection while protecting other customers from cost shifts. Their analysis suggests that traditional firm-only interconnection adds $764 million in system supply costs per GW of new data center demand, while conditional firm service plus BYOC could reduce costs by roughly $400 million per GW, and a 500 MW data center using both could reach full operation three to five years faster. The approach demonstrates how to operationalize flexibility: not a handshake promise, but planning models, telemetry, contracts, verification, and enforcement that together make flexibility legible to the grid.

The newest operational evidence comes from Emerald AI, EPRI, National Grid, and Nebius. Their March 2026 UK demonstration tested whether AI infrastructure could operate as a “power-flexible” asset without disrupting mission-critical workloads. Over five days, a 96-GPU NVIDIA Blackwell Ultra cluster at Nebius’s London AI Factory responded to 22 live dispatch events, including surprise emergency signals, reducing power by 30 percent in under 40 seconds. Emerald’s Conductor platform, prioritizing urgent workloads while absorbing flexibility through lower-priority work, hit 100 percent compliance across more than 200 power targets while preserving SLAs. Small relative to gigawatt-scale demand, but a real operational proof point.

So what should we make of all this? Data center flexibility is real, valuable, heterogeneous, and institutionally fragile. Real because demonstrations and planning studies show some loads can respond. Valuable because relatively small reductions during constrained hours can avoid expensive capacity additions or accelerate interconnection. Heterogeneous because OpenAI, AWS, a co-location provider, and an enterprise data center do not share business models or control rights. Institutionally fragile because technical capability does not become system value automatically.

The Flexibility Stack

The framework I use to make sense of all this is a flexibility stack. Power systems are layered cyber-physical-social systems of machines, software, markets, laws, regulators, firms, consumers, and communities. The stack metaphor helps us see that flexibility is not just a technical feature of servers, batteries, or cooling systems. Those technologies matter, but they operate within an institutional architecture that determines who may act, who gets paid, who bears risk, and who is accountable when things go sideways.

Source: A thorough iterative conversation with ChatGPT about my flex stack idea.

At the bottom are physical assets: generators, wires, substations, batteries, data centers, cooling systems, sensors, and controls. These define the physical possibility frontier. Above sits the digital-control layer—telemetry, forecasting, workload orchestration, AI scheduling, DERMS, and automated controls—which turns physical possibility into operational capability. A battery is only potential flexibility until integrated into a dispatch platform; a shiftable AI workload becomes usable flexibility only when software can classify, defer, migrate, and verify it.

The firm and business-model layer comes next. Ownership and contracts determine control: a pure-play AI company, a cloud hyperscaler, and a co-location provider each control different parts of the workload, facility, and service obligation. Flexibility is partly technical but also a function of governance inside the firm.

Markets and tariffs determine whether flexibility is rewarded. Energy, capacity, ancillary services, demand response, congestion pricing, and bilateral contracts all shape its value. A tariff is more than a price schedule; it is an institutional technology reflecting risk allocation, curtailment rights, cost causation, collateral, and service quality.

The regulatory layer operates across jurisdictions. State public utility regulation shapes retail tariffs, integrated resource planning, and cost allocation, raising questions like whether data centers should pay minimum demand charges, post collateral, receive conditional service, or bring accredited capacity, and whether other customers should bear the risk if forecasts are wrong. Regional RTO governance and market design shape wholesale participation, capacity accreditation, transmission planning, interconnection, and scarcity pricing, where location matters: a megawatt of flexibility in the wrong place may have little value, while a smaller reduction at a constrained node may be highly valuable. Federal regulation and environmental rules together govern interstate transmission, reliability, and whether flexibility can rely on diesel, gas, batteries, fuel cells, or clean procurement.

Consumers and communities sit at both top and bottom: they use electricity, cloud services, and AI tools, but they also pay rates and live near infrastructure. Regulatory legitimacy depends on making the bargain explicit—who benefits, who pays, who bears risk, who has recourse.

Implications

Flexibility can fail at any layer of this stack. A workload may be technically shiftable but prohibited by customer contracts. A utility may want conditional service the tariff doesn’t offer. An RTO may value flexibility but lack a market product that fits. A data center may have backup generators its air permits won’t allow it to run. A regulator may approve a flexible tariff that, without telemetry and penalties, can’t be verified.

Flexibility is not a resource until the stack makes it actionable. A flexible workload, a battery, or a data center willing to help during grid stress is only potential flexibility. To become a grid resource, flexibility must be defined legally, measured technically, compensated economically, dispatched operationally, and enforced contractually.

The architectural challenge is to move beyond a binary model of service — connected or not, firm or non-firm, load or resource. Data centers could instead buy modular service bundles combining firm and conditional capacity, self-supply obligations, demand-response commitments, clean-energy requirements, and verification-and-penalty structures, with the bundle depending on location, workload, business model, and grid constraints.

The current evolution of power systems is an institutional coordination problem under technological change. Data centers make it visible because they are large, fast-moving, geographically concentrated, digitally controllable, and politically salient. They stress the old architecture but also reveal where it can evolve. The flexibility stack is the architecture through which latent technical capability becomes reliable system value.

The practical question at the center of data center energy policy is not whether data centers can be flexible; it is whether our institutions can make their flexibility real.