|The Knowledge Problem
Commentary on Economics, Information and Human Action
Tuesday, August 27, 2002
HOW COOL IS THIS? Technology news from Hawaii -- "A Big Island company will be the exclusive seller of a new bladeless-turbine technology the manufacturer says will drastically reduce costs for electrical power generation and hydrogen fuel production for use in fuel cells and automobiles," according to the Pacific Business News. If you read the article, you'll see something that occurs over and over and over in the history of technological change -- the inventor stumbled on this innovation by accident, in the course of doing some other research. That's precisely why efforts that dirigiste control-freak folks think are duplicative and wasteful are very much NOT wasteful. It's the knowledge problem -- how do you know? How do you know what might arise from that effort?
OIL AND GAS PRICE STABILITY: Even with the threat of military action in the Persian Gulf and the upcoming Labor Day holiday weekend, both crude oil and gasoline prices are pretty darn stable (although oil prices, especially, are high; more on that in a second). On gasoline, this Reuters article summarizes the results of the regular Lundberg survey of gasoline stations. In the most recent survey, gasoline prices were very stable, at levels sustained over 20 weeks! How often does that happen in the summer? Not very! This price stability is at least in part a result of the production substitution of gasoline for other distillate products such as diesel and jet fuel, which are less in demand because of economic slowness and the fact that many of us won't set foot on a plane unless we absolutely have to. So enough supply has been out there to meet demand without price having to adjust abruptly. Isn't economics beautiful?
FOREST FIRES AND SUSTAINABLE DEVELOPMENT: Amity Shlaes has a good Financial Times column on forest policy and trying to control, plan, and manage "sustainable development." Here's a teaser to entice you to read the whole thing:
Friday, August 23, 2002
GOOD NEWS ON THE ELECTRICITY COMPETITION FRONT: There's a lot of cheery news today about retail electric competition in the U.S. and how the black eye that California and Enron have given electricity restructuring have not been fatal. This Pittsburgh Post-Gazette article reports on a study showing that Pennsylvania's retail electricity rates in 2001 were 20 percent lower than in 1996, on average. Nationally, retail rates were 14 percent lower for residential consumers, 13 percent lower for commercial consumers, and 5 percent lower for industrial consumers. The article correctly points out that states with retail competition have seen green power providers come in and serve the market demand for renewable energy. What the article fails to point out, though, is that it's unclear how much of those rates decreases has come from real competition and how much has come from mandated rate freezes. Pennsylvania, for example, has frozen its rates over a 10-year phase-out period. Ten years? The interaction of this continuing relic of regulation with other regulatory hangovers, like standard offer prices or "price to beat", and provider of last resort at discounted rates, stifle potential entry and lengthen the timeframe over which consumers and innovative suppliers actually reap benefits from retail competition. Here's another story on the report.
Thursday, August 22, 2002
Unless something exciting happens today, I am incommunicado -- we have a monstrous storm system moving through Chicago, and the pressure drop has triggered a nasty migraine.posted by lkkinetic | 8/22/2002 08:45:00 AM
MY SENTIMENTS EXACTLY: Glenn Reynolds' Fox News column on airport "security" hits the nail on the head, elegantly and incisively. Particularly since March, when I had a horrendous encounter with a megalomaniacal, misogynistic law official, I have stayed out of airports as much as possible without hampering my career.
Wednesday, August 21, 2002
FUEL OUTLOOK FOR THE WINTER: This DOE Energy Information Administration presentation does a really nice job of explaining the complex interactions among different distilled products, foreign and domestic sources, etc. It's well worth a scroll through. Note that the EIA folks are less sanguine about distillate inventories than the API folks. That's the beauty of "redundant" investigation -- we use different assumptions, come up with different results, and learn a lot in the process.posted by lkkinetic | 8/21/2002 02:57:00 PM
LESS JET FUEL, MORE HEATING OIL: The July American Petroleum Institute report indicates that the inventory of distillate for heating oil and diesel fuel increased 7.2 percent relative to July 2001. This is a good thing, because it gives refiners a jump on the seasonal demand for home heating oil, which (all other things equal) should lead to more stable heating oil prices this winter. Part of the reason for these increased stocks is the continued sluggish demand for air travel (from which the demand for jet fuel is a derived demand).
Tuesday, August 20, 2002
OIL CLOSES ABOVE $30: This Financial Times article recounts today's close at $30.11, attributing it to war fears. I think it's more complicated than that, but it's not worth quibbling. The next OPEC meeting will be quite interesting ...posted by lkkinetic | 8/20/2002 03:03:00 PM
FREE TRADE: This OpinionJournal editorial lays it out. I especially like:
BLOOD SUGAR AND MOOD: Norah Vincent asks about protein intake and mood. My experience as a recovering carbohydrate fanatic is that increased protein intake has improve my body's ability to burn fat for fuel, has increased my alertness and productivity, and has had an effect on my mood (although mood has never been a real issue for me). For me it's sufficient to eat eggs, cheese and fruit for breakfast, and eschew refined starches and sugars, juice, and other carbohydrate foods with little fiber. I find Atkins to be a little over the top, YMMV. But gee whiz, do I miss good french bread, risotto, polenta ... I've been on the "protein for breakfast and high-fiber the rest of the day" approach for two years, and as long as the exercise level stays up there, my attention and sleep are good. BTW, I've heard that the vivid dreams are a function of vitamin B12, of which you get more in spinach and meats.posted by lkkinetic | 8/20/2002 10:39:00 AM
MORE ON SPAM: Common sense and good advice from the reliably sensible Dan Gillmor.posted by lkkinetic | 8/20/2002 10:28:00 AM
Back from a week of Adam Smith, but still exhausted! Today and tomorrow we should be getting petroleum inventory information from API and the DOE, so I may have something to say on that subject. And more on Smith, of course.posted by lkkinetic | 8/20/2002 10:15:00 AM
THE COASE THEOREM: It's a mind-boggling insight that has transformed the way that (at least some of us) do economics. Megan McArdle has an outstanding description of the Coase Theorem and how it relates to spam. She points out something that usually gets lost in how people discuss and, gasp!, teach the Coase Theorem -- in order to get the efficient outcome regardless of the allocation of property rights, transaction costs have to be zero. Now, we all know that the only place that happens is on a blackboard, so the interesting analyses come in when you think about changing transaction costs and how that affects our choices and the outcomes derived from them. This is where I spend a lot of my life, in this avenue of research, so I am grateful to her for raising it.
Tuesday, August 13, 2002
Okay, NOW I'm going back to the Theory of Moral Sentiments!posted by lkkinetic | 8/13/2002 01:34:00 PM
IT NEVER RAINS, BUT IT POURS: In the shameless self-promotion department today, I am quoted in the Orange County Register's editorial today. I think that the FERC standard market design is baby steps, and at well over 300 pages does smack of micromanagement. The important question is, do those baby steps get us toward freer, more competitive markets? Are there better feasible ways of getting more of the benefits of more competitive markets?
BOY, YOU DRIVE TO THE OTHER SIDE OF LAKE MICHIGAN INSTEAD OF READING NEWS, AND LOOK WHAT HAPPENS? This Washington Post editorial from Monday is very good. It discusses FERC's standard market design proposal, which is open for public comment through mid-October, and the snipey comments that state regulators have been making about it as an unbridled power grab. I think the editorial lays out the argument pretty well, although the standard market design proposal is not an hommage to the "simple rules for a complex world" context that would bring the most long-run benefit from competitive electricity markets. It's baby steps, but it's not the fiasco that the California state regulators (and other state regulators) have made it out to be.posted by lkkinetic | 8/13/2002 01:16:00 PM
Here's an interesting New York Times article (registration required) from Sunday on BP's Marlin deep-water oil drilling platform in the Gulf of Mexico, and the economics of its being worth pumping. Very worth a read if you are interested in the economics of world oil markets.posted by lkkinetic | 8/13/2002 01:10:00 PM
ELECTRICITY MARKETS AND DEMAND RESPONSE: I have a column on Tech Central Station today, on the importance of consumer choice and demand responsiveness in electricity pricing. I will have more to say on this over the next few weeks, but for now, it's back to Adam Smith's Theory of Moral Sentiments.posted by lkkinetic | 8/13/2002 01:05:00 PM
Monday, August 12, 2002
OFF FOR A WEEK OF BRAIN CANDY: I am leaving today for a week-long conference on the works of Adam Smith. There's so much more to him than the "invisible hand" that most people associate with him, and this week will give me a chance to dig into all of that. I'll post as possible.posted by lkkinetic | 8/12/2002 10:32:00 AM
PHOENIX FROM THE ASHES, UNFORTUNATELY: The California Power Exchange will not die. After a year and a half of bankruptcy and the disappearance of anything resembling a market for electric power in California, the PX is still around. This article summarizes the soap operatic nature of its ongoing existence.
FLUX IN THE ELECTRICITY WORLD: A period of extreme stress in energy markets because of trading liquidity and debt problems at energy companies. There is value there, but it's hard to see right now with so much uncertainty.posted by lkkinetic | 8/12/2002 10:18:00 AM
WHERE DID LAST WEEK GO? Between writing a book chapter on retail pricing, demand responsiveness and dynamic pricing in electricity, and having a contract accepted on a house, I lost last week. Wow. More to come over the next few weeks on dynamic pricing and the importance of demand response in getting efficient, integrated wholesale and retail electricity markets. And, assuming all goes well with our house purchase, more on the 1921 arts and crafts Chicago bungalow!posted by lkkinetic | 8/12/2002 10:16:00 AM
Friday, August 02, 2002
ADAM SMITH ON EDUCATION: Yesterday Joanne Jacobs posted a quote from Adam Smith on education and teacher retention. Just to add to what Joanne said: Smith experienced what he considered to be the worst of incentives when he attended Oxford University, where the faculty droned on and on and on, and didn't seem to care whether the students were getting anything out of their lectures. Smith advocated a teacher remuneration system whereby the students paid teachers directly; in fact, this system was in place when he was chair of logic and then of moral philosophy at the University of Glasgow. Talk about the incentives to exchange value for value.posted by lkkinetic | 8/02/2002 02:49:00 PM
WALTER WILLIAMS ON MARKETS: This Townhall.com column by Walter Williams illustrates a very important point about markets: they are not things, they are not places, they are not individual people. Markets are the interaction of our choices and decisions, based on our private, local knowledge.
CARP AND INTERNET RADIO: When I am writing, I like to listen to ambient techno music. My favorite source for this music has been, for the past two years or so, SomaFM from San Francisco, on their channel called "Groove Salad." Like most people, I suspect, I have been meaning to send them a donation for a while, but some things slip when life is hectic, even though I knew that Soma and other internet radio stations were under threat of closure depending on what the Librarian of Congress decided about royalties to pay to artists, as was required under the Digital Millennium Copyright Act. Then in mid-July, after the Librarian had decided on the royalties they should pay, I went to SomaFM and saw this headline:
Thursday, August 01, 2002
MORE EVIDENCE THAT WARREN BUFFETT SEES VALUE IN ELECTRICITY: Berkshire Hathaway has provided financing for Williams. His credibility, integrity, and vision are things that the electricity industry needs right now, as well as his capital. He also knows a bargain when he sees it. Here is a more thorough article on the deal from TheStreet.com.posted by lkkinetic | 8/01/2002 11:24:00 AM
HOW AUCTIONS WORK, AND WHY DESIGN MATTERS: Hal Varian, writing today in the New York Times' Economic Scene, describes auctions, how they work, and how design can influence whether or not participants can collude. This article summarizes a recent journal article by Paul Klemperer, an economist at Nuffield College, Oxford, and one of the most pre-eminent auction theorists.
FERC'S STANDARD MARKET DESIGN PROPOSAL: The press release on it is 20 pages, the design proposal runs to 800 pages. The comment period extends to 21 October, so expect to see some comments here as I process and analyze this proposal.posted by lkkinetic | 8/01/2002 10:57:00 AM
SONIA ARRISON ON HOLLYWOOD HACKING: Sonia's Tech Central Station article on the proposed bill is very good. She hits the nail on the head with
TRANSACTION COSTS AND FRAUD LEGISLATION: This Dow Jones newswire article indicates that one consequence of more stringent SEC regulatory enforcement to reduce corporate accounting fraud will result in increased litigation and decreased settlement out of court. This is one of the most striking costs of increased regulation -- the litigation and slow-as-molasses process of resolution. Lawyers are probably raisin' the roof and figuring out how they'll spend that extra income.posted by lkkinetic | 8/01/2002 10:23:00 AM
Wednesday, July 31, 2002
THE NEPTUNE PROJECT: The Neptune project is a privately-funded, high-voltage, direct current (yes, DC, not AC!) project to connect Manhattan and Long Island with other areas that have larger supplies of generated power. This type of interconnection of markets is a driving force in reducing transaction costs and increasing efficiency in energy markets. The progress of this project is very important as an indicator of the investment value of new, private transmission, and of the fact that just because electricity transmission is network infrastructure, that does not imply that it must be either provided by government or subject to government economic regulation (I am happy to concede the importance of safety standards in electricity transmission). This story, about TXU joining the investment consortium that is funding the Neptune project, illustrates the investment appeal of competitive electricity transmission to reduce bottlenecks. TXU's development capital will expand the construction to include DC lines connecting Manhattan and New Jersey, which gives Manhattan better access to the liquid and well-supplied PJM (Pennsylvania-Jersey-Maryland) wholesale electricity market. This is a good thing.posted by lkkinetic | 7/31/2002 02:18:00 PM
GAME THEORY AND HUMAN NATURE: This Wired News article highlights remarks by Martin Shubik, an eminent economist and game theorist, who is advocating pushing the use of game theory in economics beyond its grounding in rationality and strategy, to incorporate such human traits as emotion and error.
MONOPOLISTS, OLD AND NEW: Microsoft and AT&T are forming a strategic alliance to provide wireless connectivity, particularly in work environments, according to this article.posted by lkkinetic | 7/31/2002 09:53:00 AM
FERC SETTING MARKET RULES TODAY: According to this Bloomberg News article, FERC will announce rules today to govern cross-regional wholesale electricity sales, including market monitoring and pushing "regulated utilities to cede some authority over transmission lines." This has been coming for a while, with lots of industry and public comment time. I hope Commissioner Massey's quote in the article is not indicative of the policy stance, though:
7/31/2002 09:30:00 AM
Tuesday, July 30, 2002
POPE AND CRANE ON THE ENERGY BILL: Anytime that Carl Pope of the Sierra Club and Ed Crane of the Cato Institute agree on something, it's worth reading. Such is the case with this opinion piece in the Washington Post today.posted by lkkinetic | 7/30/2002 05:41:00 PM
HOW COOL IS THIS? Also courtesy of Slashdot, this New York Times article (registration required) describes the flywheels that the NY Port Authority has installed in the subway to collect and use the energy given off when subway trains brake. What a win-win -- their energy bills go down, and subway stations are less hot!posted by lkkinetic | 7/30/2002 02:37:00 PM
A WIRELESS FUTURE? Courtesy of Slashdot, this Business Week article discusses the prospects and hurdles for wireless, "wi-fi" networks. My favorite quote:
JANIS IAN GETS IT; WHY DOESN'T THE RIAA? As Janis Ian wrote in an article on her website, the internet and music downloads can and do benefit artists. This is a well-researched and well-written article. Thanks to my husband for forwarding it to me.
CRUDE OIL UPDATE: We're drivin', there's political uncertainty in the Middle East, and it's almost August, so U.S. inventories are being depleted in a typical seasonal pattern. Thus, as this Bloomberg News article reports, crude prices have gone up. But they have not gone up much, because the continuing economic malaise is countering the price-increasing factors mentioned above. (Bonus points to those of you old enough to recognize my Carter reference in the previous sentence)posted by lkkinetic | 7/30/2002 09:45:00 AM
MORE ON HOLLYWOOD HACKING: Here and here are two articles from Wired that are good complements to Dan Gillmor's article referenced below. Not only would this bill have unintended consequences, as the first article discusses, the large media companies would not have to stop their P2P music distribution under this bill.posted by lkkinetic | 7/30/2002 09:41:00 AM
SCHUMPETER'S PERENNIAL GALE OF CREATIVE DESTRUCTION: This Financial Times article analyzes Dynegy's recent sale of a pipeline it acquired from Enron to bolster its balance sheet and reduce its debt. Dynegy's stock price increased accordingly yesterday. The first paragraph of the article says it well:
HOW MARKETS DISCIPLINE COMPANIES: I don't know whether or not Perot Systems actually did share confidential information about the structure and design of the California electricity market, but as this Financial Times article indicates, what matters is what investors believe, and how they act on those beliefs. As the article says, investors are not convinced by the arguments that Perot Systems has put forth to this point, and they respond by selling in anticipation of some future bad thing happening that would affect the value of the stock. It's those expectations and those actions that discipline companies, and deter them from behaving badly. Prices communicate valuable private knowledge (like how much a given investor believes their arguments) to a wider audience, and induce companies to take those beliefs into account. That's what I call effective regulation.posted by lkkinetic | 7/30/2002 08:48:00 AM
Monday, July 29, 2002
THIS IS GREAT, BUT ... : In this press release titled "LADWP Funds Innovative Energy Efficient Technology Ideas", the Los Angeles municipal utility announced an initiative to fund innovative energy-efficiency technologies that will particularly reduce peak-load demand. You know, if you just allow for market-based real-time pricing, even just for large industrial users, LADWP wouldn't have to spend $750,000 on this program -- innovative companies would come out of the woodwork and seize the marketing opportunities! Grrrrrr ... why is demand responsiveness so culturally difficult for utilities? Why don't they see the opportunities to earn more money by selling less power? (NOTE: I have to credit Vernon Smith for that last sentence, it's his phrase) I am actually writing a paper in which I try to answer my own questions, so I welcome any suggestions.posted by lkkinetic | 7/29/2002 01:55:00 PM
HOW DEPRESSING IS THIS? Dan Gillmor on the proposed "Peer to Peer Piracy Prevention Act," under which the music and movie industries would be legally allowed to hack into computers running file-sharing programs. Dan puts it very gloomily.posted by lkkinetic | 7/29/2002 12:44:00 PM
COMMON SENSE IS THE VICTIM OF UNTHINKING BUREAUCRACY IN AMERICAN AIRPORTS: This OpinionJournal editorial by George McGovern is an incredibly eloquent statement of how ridiculous and unthinking airport security bureaucracy has become. Read it, tell your airlines that you'll avoid flying and they are more likely to go out of business because of this static, backward-looking approach to making us feel safe that instead just makes us, as Senator McGovern said, "flustered, humiliated and exhausted."