The Whale Oil, Chicken, and Energy SyndromeWriston, Walter B.
Anyone in our society whose eyesight and hearing are not totally impaired is likely to believe that we are on a collision course with Doomsday. Certainly the energy shortage has produced no scarcity in the rhetoric of crisis. Considering the amount of time and space devoted to predictions of impending disaster, it would appear that the media have sought to validate a variation on Gresham's law: bad news drives out good.
The compulsion of the media to turn every scrap of bad news into a full-blown crisis distorts our perspective. It neglects to remind us that troubles may be news, but they are by no means new. This negative emphasis ignores the decisive role of human ingenuity in a free society. One of our distinguished historians, Barbara Tuchman, recently put it this way:
How right is her insight; alarmist's curves frequently are based upon downward trends. As early as the sixth chapter of Genesis some believed the world was headed downhill. The doomsayers were already looking back upon better times: "There were giants in the earth in those days."
Prophets of doom have a second weakness. They fail to appreciate man's inherent ability to adjust and innovate. The British economist Thomas Malthus predicted in 1798 that the imbalance between population growth and food production would cause the world to starve to death. The doomsayers called it Malthus' iron law. As time has proved, it was neither iron nor law. Like many of our current crop of transient experts, Malthus fell into the oldest trap of all in the prognostication game. He underestimated everyone's intelligence but his own; he was incapable of imagining that out of the Industrial Revolution would come reapers, threshers, combines and tractors. He did not foresee the era of cheap energy. Nor did he envision chemicals and fertilizers creating such abundance that foolish governments would pay farmers not to cultivate the soil.
A third fault accounts for the inability of the doomsayers accurately to predict what will happen. They cling to the belief that there are accepted absolutes in a world of rapidly changing value systems. As the French poet Paul Valery put it, we often tend to be marching backward into the future.
Examples abound. A Presidential commission appointed by Herbert Hoover in 1929 later reported to Franklin D. Roosevelt on how to plot our course through 1952. The report was in 13 volumes prepared by 500 "researchers." The summary required 1,600 pages. Yet there was not a word about atomic energy, jet propulsion, antibiotics, transistors or many other significant developments. The World's Fair of 1939, which was dedicated to the World of Tomorrow, not only failed to suggest any of these advances, but did not even entertain the idea of space travel. Herman Kahn's opus on the year 2000 never mentioned pollution, nor was there any real emphasis on the energy shortage. The people who have come closest to predicting the future are some of the science fiction writers, unencumbered by elaborate research or prestigious committees, but with the courage to dream. Jules Verne's wild imagination proved to be more prophetic than the calculations of Malthus.
Our latter-day Malthusians, whose forecasts are often dignified with computer print-outs, which substitute for ox entrails in modern day occult prediction, appear oblivious to the fact that man, given the proper incentive and freedom to act, has repeatedly found substitutes for dwindling materials. The United States was denied 90 percent of its sources of natural rubber during World War II, but technological ingenuity created synthetic rubber which is now more widely and flexibly used than the natural product. One of the most common substances in the world is bauxite, but it was not regarded as much of an asset until the way to make aluminum was perfected. Coal was not even considered a resource before the Steam Age, nor was uranium highly valued before the Atomic Age. Since the Industrial Revolution, resources have grown exponentially, step by step, with man's ability to apply fresh technology to his needs. These experiences of yesterday are relevant today. I do not assert that history repeats itself, but offer a reminder that the human story did not begin with today's crisis.
Energy is no exception. Few Americans even remember that from the time of the American Revolution until the Civil War, a major source of artificial lighting was the whale oil lamp. No one should have needed a Congressional commission to predict that the supply of whale oil could not forever keep pace with the demand of a growing nation.
The tragedy of our Civil War disrupted whale oil production and its price shot up to $2.55 a gallon, almost double what it had been in 1859. Naturally there were cries of profiteering and demands for Congress to "do something about it." The government, however, made no move to ration whale oil or to freeze its price, or to put a new tax on the "excess profits" of the whalers who were benefiting from the increase in prices. Instead, prices were permitted to rise. The result, then as now, was predictable. Consumers began to use less whale oil and the whalers invested more money in new ways to increase their productivity. Meanwhile men with vision and capital began to develop kerosene and other petroleum products. The first practical generator for outdoor electric lights was built in 1875. By 1896, the price of whale oil had dropped to 40 cents a gallon. Whale oil lamps were no longer in vogue; they sit now in museums and reproductions can be found in decorator shops to remind us of the impermanence of crisis. This cycle, repeated in thousands of other instances, is one which the rulers of the Persian Gulf might well bear in mind.
My capsule review of the whale oil "energy crisis" is one of an infinite series demonstrating the ability of the free market to solve problems of scarcity. Shortages, then and now, can often be eliminated when prices are allowed to exercise their age old functions -- motivate the consumer to consume less and the producer to produce more and spur on someone to develop a new product that is better and cheaper. Shortages become a crisis when government intervenes to frustrate the ability of the free market to function. A free market is not chaos, but a continuous economic referendum -- essentially it represents the decisions of an infinite number of individuals expressing in action their opinions of values.
Government intervention destroys that path to a democratic decision. The result is non-economic. No one who saw it on television last year will soon forget the wholesale drowning of baby chicks. It was done because the government froze the price of grown chickens at a level which made it uneconomic for farmers to raise and sell them. Government seems loath to learn from experience in tampering with a free market. Drowning the chicks was a rerun of the plowing under of "surplus" cotton and grain and the slaughter of piglets a generation ago. Yet the "liberals" were the exponents of the destruction of such animals. This slaughter was predicated upon the proposition that governments are smarter than markets -- which all history refutes. Anyone observing the consequences in our country of price and wage controls can have few illusions left about the efficiency of government controlled markets. Yet many businessmen and labor leaders applauded this strangling of enterprise at the time controls were initiated.
To a large extent, what we call the energy crisis was made in Washington, just as was the beef shortage and the chicken shortage. A scarcity of energy in the United States was assured as early as 1954, when Congress empowered the Federal Power Commission to set an artificially low wellhead price on natural gas to be used in interstate commerce. This low price ceiling over-stimulated consumer demand and discouraged producer initiative -- an infallible guarantee of an eventual shortage. It was the chicken syndrome on a grand scale. Likewise, a ceiling on mortgage rates has great political appeal, but when the government creates inflation rates rise and the frozen rate becomes the rate at which you cannot borrow money to build your house.
Federal stop-go policies on mining coal, drilling for oil, and the construction and licensing of nuclear energy plants have not only curbed incentive, but also created a climate of doubt and dilemma. Substituting bureaucratic regulation for the marketplace has always created uncertainty and served first to produce and then to intensify shortages. Whenever our system appears to falter by not providing our accustomed relative abundance at a low price, the people who distrust freedom always stand ready with the simplistic solution: the government should intervene.
There is a paradox in the fact that those who look to government to remedy every economic grievance in our society also want government to get out of their personal lives and stop telling them how to run their affairs. They cannot have it both ways. They cannot ask more and more government intervention in what ought to be a free market and still insist on more and more freedom for themselves as individuals. No people have ever preserved political liberty for very long in an environment of economic dictatorship. We often learn too late that freedom is indivisible.
In America we have what is described as a free enterprise economy, at least in comparative terms. Nevertheless our government today regulates more business practices than most other democracies. This may seem incredible, but it becomes clear when you call the roll. The American bureaucracy regulates the utilities which produce heat, light and power; the railroads (or rather what's left of them); trucking companies, airlines, broadcasters, drug firms, dry cleaners, automobile manufacturers, meat packers, film makers, farmers, brokers, banks and a host of other enterprises. Most of these industries are highly competitive, but government has decreed that they serve a variety of objectives other than selling their products at the lowest possible price. It is not a bad rule of thumb for our Citibank lending officers to remember that the longer an industry has been government regulated, the worse credit risk it tends to become.
Over-regulation is partly our own fault. Our history sometimes reveals a cycle. We let something run wide open until the law of compensating forces operates. Businessmen sometimes fail to anticipate or even respond to the demands of the consumer. If this continues too long, the public becomes angry. Typically, then, the industry or the labor union that is perceived to be out of control forms a "self-regulating" group to set standards and police its own activity. These self-regulatory groups usually fail to respond quickly and strongly enough, so that pressure continues to mount and the government steps in. Currently, people in the accounting profession, who could not even agree among themselves on how to book a tax credit, has set up a sort of supreme court of accounting practice to bring order out of chaos. Maybe they can salvage their influence, but unless they are quick and firm, the SEC will take over and thenceforth do it for then. Lawyers who let some of their brethren disrupt the decorum of the courtroom without effective censure are moving into the same zone of trouble. So also are those Bar Associations who see nothing wrong with publicly recommending people as judges before whom they themselves will soon practice. Failure to reform themselves and to perceive how rapidly our value systems change will create volumes of regulations we will all live to regret.
The legal precedent upon which much of our regulation is still based was established in 1670, when Lord Chief Justice Hale declared that "property does become clothed with a public interest, when used in a manner to make it of public consequence, and affect the community at large." Defining the public interest in precise terms has occupied the time and attention of generations of judges and lawyers, economists and accountants, businessmen, labor leaders and politicians at a cost of billions of dollars to government and industry. With the passage of time, the doctrine of public interest has become buried beneath an avalanche of charges and briefs, statistics and analyses.
The regulator is always adjured to serve the public interest. Sooner or later he usually develops into both judge and jury, and often into prosecutor as well. Congress should legislate. The Executive should enforce the law. The courts should interpret the conflict. Instead of this, Congress does its best to bypass both the executive and judicial branches and create separate institutions that combine legislative, executive, and judicial functions, thus defying the basic rule of the Constitution -- the separation of powers. The new regulatory body then makes rules with the force of law, and an administrative judge, who is often an officer of the regulatory body, then becomes prosecutor, judge and executive all at the same time. The regulatory body substitutes its opinion for the judgment of the free market. As time goes on, the bureaucracy changes the active verb "to compete" into the passive "to be regulated." This process tends to create a rigid, backward-looking system -- which is neither business-oriented, nor consumer-oriented. Instead it is bureaucracy-oriented.
Time and again when there is opportunity to introduce a new technology, or a new service to meet public need, the regulator's first question is not whether the consumer or the public will be better served, but rather whether or not what is new fits into the regulatory pattern. Can it be regulated? Will it require a new statute? Does it call for a shift in policy? The result has often been that what the regulator cannot regulate, he will not approve.
The Eurodollar market is a perfect example. Its birth and continued health is a monument to over-regulation. Congress, in its economic wisdom, decreed that American banks could not pay interest on demand deposits. Italian banks, owned by their government, had a cartel which put a floor of 7 percent under interest rates charged to borrowers. There is a lot of daylight between zero return and 7 percent -- and so the dollars moved away from zero toward a better rate of return. Extreme regulation on two sides of the Atlantic unintentionally created a new market. The bureaucrats of the world, who by definition dislike free markets, have been worrying about this flow of funds ever since. They no longer really want it to go away, since it helped finance the European postwar boom; on the other hand they would like to regulate it. Its very existence undermines their argument that nothing can work for the good of the world without government control.
Many industries continue to be regulated as though they were monopolies, whereas in fact new competitors have long since taken away a good share of their business. Free competition which grows up outside the reach of the regulator creates a whole new situation with the odds heavily stacked against the regulated. The railroads were put at a disadvantage when the truckers began to siphon off revenues; so were the scheduled airlines when the chartered flights began to invade the market of the regular carriers. Instead of welcoming the competitive challenge posed by new industries, or applauding the new benefits to the public, the regulatory reflex was to reach out and regulate the new lot also -- permitting no industry to either win or lose on its merits, but causing the public to pay the check for poorer service and higher costs.
Creativity, particularly the invention and application of new technology, requires brains, capital and hard work. Reward runs with risk but the regulatory system is not receptive to change. Thereupon talented people move on to areas where talent is rewarded. With some notable exceptions, the history of railroad regulation is a classic example of this. It also demonstrates opposition to change through improved technology.
Before the Interstate Commerce Commission clapped the railroads into a regulatory straight jacket, railroads were pioneers in technology -- creating the standard track gauge, new freight cars and safety devices. One of the first acts of the ICC was to tell the railroads that rails should be made of domestic iron -- not imported steel which at the time was far more durable. Time after time, efforts of the railroads to improve efficiency through the introduction of new and applied technology were hampered by infuriating and costly delays in regulatory decisions. The regulators expended their efforts in setting tariffs which distinguished between horses for slaughter and horses for draught, between rates for sand used in cement and sand used in glass making. This bureaucratic concern with trivia, instead of key issues, at a time of trouble, can only be compared to the steward's obsession with rearranging the deck chairs on the Titanic. Predictably, many railroads chugged slowly down the road to ruin.
Now more than ever, we need efficient healthy railroads; so the King Canutes of the ICC issue 20 pages of regulations! If the situation were not so serious, it would be funny. Louis Menk suggested delicately to the ICC what the problem was. "It has become hellishly unworkable, a dismal failure that has made a shambles of our national railroad system... I take issue with the erosive system of regulation that has wasted a substantial portion of this nation's rail system and threatens the rest of it." With the return on capital of our national railways under 3 percent, investors are not standing in line to buy railway securities. Things could be worse -- the government could own and operate the railroads. Japan does and we hear how fast and clean they are. What you do not so often hear is that Japan employs 450,000 people for about 13,000 miles of track -- the Union Pacific with roughly 9,500 miles track employs 28,000 people. Government productivity is not so good, even in Japan.
Our current energy crisis furnishes another fork in the road. If you look beyond the panic and concentrate on the problem, there are a number of ways that we can go. We can create a new ICC for oil and gas with the absolutely predictable result that the current market dislocations will become institutionalized, and temporary scarcity will be regulated into permanent shortages. The 1973 chicken syndrome should still be fresh in our minds, and we may yet have time to prevent our government from repeating the same mistakes with energy that we made with the price and wage controls.
The other way to go is to permit the enormous innovative talents of the American people to function. Just as Malthus' iron law was relegated to the library stacks by the fantastic increase in agricultural productivity, and the invention of kerosene and practical electric generators took the whale oil lamps out of the homes of America and put them in the museum, our current energy problem will also be solved in a myriad of ways that no one here can now foresee -- if we let the free market operate. Whether it is whale oil, baby chicks, or energy, control by a bureaucracy is no match for the free market in the allocation of human and material resources for the good of all.
|View all images in this book|
|The Whale Oil, Chicken, and Energy Syndrome at The Economic Club of Detroit 25 February 1974|
This document was created from the speech, "The Whale Oil, Chicken, and Energy Syndrom," written by Walter B. Wriston for the Economic Club of Detroit on 25 February 1974. The original speech is located in MS134.001.002.00026.00001.