Energy Efficiency is Market Efficiency

While I am not a fan of Time magazine, for reasons I do not know I receive Time magazine at my home – so I read it most of the time. The January 12th edition’s front page leads the reader to a story about energy efficiency, by Michael Grunwald. The beginning of this article is pretty much, in my opinion, an accurate perspective of the differences between energy efficiency and conservation. Energy efficiency is ideal when the cost to benefits reveal positive alignment with free market forces (prices).

However, were Grunwald goes wrong is his implicit disregard for market forces and how the free market is the best approach to bringing about efficiency (of all productive capacities). Specifically, Grunwald writes: “History has shown that when the government mandates efficiency, the market figures out how to achieve it.” The processes of government mandates already reduce the possibility of market efficiency. That is these mandates distort market prices, which market prices are the best way to decide whether a given action is worthwhile.

“The efficiency of a given machine is defined as the ratio between the usable work that comes out of the machine to the energy that went in. But, again, no machine can be made to be perfectly efficient.” (Energy: The Master Resource) Additionally, Grunwald calls for innovation and incentives to spur energy efficiency. Again, markets are what spur innovation to deal with solving the problems that people face. Government mandates fail to fully optimize the productive abilities of free people.

Moreover, while Grunwald does mention the destructive outcomes of subsidizing inefficient energy alternatives he fails to mention why government involvement in the market creates impractical incentives for impractical solutions. Government mandates simply create a market for pressure groups that simply absorb and misuse large amount of economic resources.

“Mandates provide a big stick, but money is still the best carrot, and Obama has suggested that he wants to spend lots of it to promote efficiency.” writes Grunwald. The spending of large sums of money by the government only takes away from the private market’s ability to be productive – thus innovate to achieve efficiency as a result of market incentives.

The free market is still the best way to evaluate the most efficient ways to use our scarce resources in the most productive capacity. Furthermore, if we are to become more efficient in the way we produce and use energy resources, look to the free market to innovate (here are examples by Chris Brown and Murray Rothbard) not the government. A good book to read that is educational on the subject of markets, efficiency, and energy, in my opinion, is Energy: The Master Resource. “Market incentives lead people to balance these trade-offs to make the best use of available resources”.