My first stab at answering the question at the end of my previous post starts with what I think is a basic claim, but one that does not get discussed much, or well, in electricity policy debates:
All other things equal, organic competition outperforms ordered/managed competition in delivering long-run dynamic benefits to both consumers and producers and in increasing total surplus.
By organic competition I mean the development of institutions supporting exchange (i.e., markets and the rules that govern them) through the interaction and mutual interest of potential buyers and sellers. Organic competition “arises spontaneously from human action and economic evolution based on choices and change over time” as Adrian Moore and I wrote in a Reason Public Policy Institute study from 2003 about competition in electricity transmission. As my great friend and co-author Dean Williamson puts it, this is the process by which markets do that voodoo they do so well, and this idea is precisely what is at the foundation of the long-standing notion of spontaneous order and the “invisible hand”. Millennia of human history suggest that organic competition can be very robust, and that the co-evolution of market processes and the institutions governing those processes is an important part of that robustness. It leads to robustness through decentralized mutual benefit.
By ordered competition, I mean competition engineered, controlled and managed to approximate some idealized notion of competition.
My interest here is not just in articulating the general distinction between organic competition and ordered competition, but is primarily in trying to articulate and understand an organic process of institutional change versus a more typical “control and manage” process of institutional change.
Note here a couple of things. First, I am not using any idea of efficiency or so-called “perfect competition” as a benchmark. Such benchmarks only exist on the blackboard or in the laboratory, and while they are useful in those contexts they are nonexistent in the real economy. The language of economic efficiency and perfect competition has sidetracked electricity policy debates for a decade, and has given political opponents to market liberalization a useful weapon — “If you don’t achieve perfection, your markets have failed, right? Well, isn’t that what we told you market fundamentalist types was going to happen?” Perfection is consuming, costly, and unattainable, so let’s recognize that and move on. As a related aside, I think this point is one reason why FERC Chairman Pat Wood III goes to such great lengths to point out that he views the objective as “workably competitive” markets. While I’m not enamored of the phrase, I think the concept is the same.
Second, note that the concept of markets that I use here is one in which markets are primarily human institutions of trial-and-error learning processes, not one in which markets are mechanisms for the allocation of resources. This idea is basically a corollary to the “perfect competition” point made above. While obviously one of the consequences of market processes and prices as transmittors of information is that resources get allocated to their highest-value uses, I do not start from the claim that market processes are designed specifically as resource allocation mechanisms. The idea of markets as resource allocation mechanisms is a very constructivist one.
That distinction may be part of the problem, and here’s why. This is an industry and a set of regulatory institutions that have become enmeshed over 85 years. It is very much governed by, as my colleague Vernon Smith would put it, constructivist rationality and a constructivist approach to policy, meaning that in a Cartesian sense we derive conclusions/theories via logical deduction from theoretical postulates. Natural monopoly theory is pretty high up on my Most Wanted List of Criminals of Constructivist Rationality. But we have to take the historical hand that is dealt us (as Marx poignantly reminded us over and over and over …), and the historical hand we are dealt in electricity policy in 2005 is a constructivist one. Given the very constructed, consciously-designed-by-human-intention place where we are, how do we get from here to that desired outcome of organic competition?
To put it another way: institutional change is in many ways itself a constructivist exercise. Is there a way to make the process of institutional change more organic, and thus more likely to lead to “valuable, meaningful, forward-looking, robust, evolutionarily adaptive institutional change”?