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November 02nd 2013 print

Peter Smith

Woe to be in England

Strong winds have inspired warmists to further hysterics, in part inspiring an assault on power companies' 'obscene' profits. Also blown away: any grasp of true competition and free speech

LONDON: Wind at hurricane strength blew from the Atlantic across the southern half of the British Isles. Some of the trees which form an isolated narrow border of woodland alongside railway lines were blown onto the tracks. This is not uncommon in high winds. Trains were delayed for some hours. A small number of people lost their lives. They were very unlucky; for example, to be in a car directly under a falling tree at exactly the wrong place and time. The chaotic lottery of life and death is unnerving.

The only bright spot was the delicious irony of a wind generator in Devon blown down by the gusts. Unfortunately it was just one. A record number of onshore wind farms (188) have been approved for construction in the UK this year. So don’t let the sceptics convince you the battle has turned, with warmists and their policymakers in retreat. Meanwhile, back on Planet Sanity, energy prices are rising.

Energy prices have been pushed off the UK front pages temporarily as the ‘phone hacking’ trial of ex-News International Chief Executive Rebekah Brooks gets underway. There is also the related conspiracy among politicians of all parties, which has taken the form of a royal charter, to regulate the press. We have to be thankful that we have Tony Abbott and his Liberals to hold the line on a free press in Australia, rather than David Cameron and his tremulous Tories.

Energy prices will return to centre stage because they are shaping up as one of the defining political issues for the next UK general election; due in a about eighteen months’ time (7 May 2015). Surprise, surprise, efforts to promote inefficient green energy and cripple the production of energy from cheap fossil fuels have led to price rises.

Cameron’s solution is to roll back some green taxes without, of course, being specific. This seemed to be an off-the-cuff response in the heat of a parliamentary to-and-fro with Ed Miliband. The terribly green Nick Clegg was reportedly taken aback. After all, Cameron had used the line ‘vote blue to go green’ at the last election, which is something Miliband reminded him of before offering his solution of a price freeze. Cameron (rightly) said this was the solution of a ‘con man’, for which he earned the admonition of the Speaker. On the sidelines, John Major, giving a good Northern hemisphere impression of Malcolm Fraser, said that the Conservatives had to show more sympathy for the poor and ‘helpfully’ suggested the imposition of a one-off levy on energy companies.

It clearly engenders intellectual dissonance, messes with minds, when the very effect required to cut CO2 emissions, to wit higher energy prices, causes so much puzzlement, soul searching, and distress among the green-enthusiast political class.

There are six major energy companies in the UK and a number of smaller players. You would think that with so many companies supplying energy to households and businesses that competition would be keen. Nevertheless the one common factor that draws politicians together is the conviction that competition is inadequate and that energy companies are price gouging to earn immorally high profits. The rat-bag end of the British Labour Party (never in short supply) is not averse to suggesting that the big six are responsible for freezing poor people to death.

Apparently the profitability of the big six energy companies has been growing. They maintain that they earn only a reasonable amount on capital employed and, apart from paying dividends, need to earn and retain substantial profits to fund future investment. The retail arms of the big six say that their profits would be wiped out if they reduced prices by just 5%. Ah yes, but how do we know your wholesale arms aren’t padding their prices, comes the retort? The truth is that nobody can disentangle the business model of these companies; certainly not politicians.

In any event, the only relevant question is whether the big six are acting as a cartel. There are legal remedies if that were established to be the case. Otherwise, they are probably operating and competing in the market place, quite normally, to earn as much as they can. That, in the end result, makes societies richer.

There is a total misconception about competition. People who haven’t studied economics still, unconsciously, seem to have a steady-state model of ‘perfect competition’ in mind. In this fairyland, companies have all competed and exhausted each other until their earnings are reduced to bare profitability. So, for example, bank profitability in Australia is healthy and rising. Therefore, by definition, competition is wanting and yet another inquiry is apparently warranted.

Of course, when profitability is scarce, as in the Australian car industry, all of a sudden profitability loses its stigma and competition its allure. The only petrochemical plant in Scotland, the Ineos-owned plant at Grangemouth, recently threatened to close because it was making losses year-after-year and the applicable union (all too typically and depressingly) had rejected an offer that would have cut shift allowances and reduced pension benefits to keep the company afloat. Politicians on both sides of the border, unproductive and poseurs all, particularly Scottish First Minister Alex Salmond (the would-be leader of an independent socialist Scotland), went into hyper-speak to show how much they hadn’t a clue but cared. Eventually the union saw sense. Only a sledgehammer did the job.

There is no steady-state within a dynamic free-market economy. Companies are either earning large profits and growing or earning low profits, or no profits, and declining. What kind of companies is it best to have more of? Eastern Europe rather fancied the latter kind of company for four decades and more after the Second World War. Choose that model if you are a ‘revolutionary’ idiot like English comedian Russell Brand, or if you prefer Australian comedians there are many to choose from. Just tune in to the ABC.

Many entertainers, many academics, many politicians, many people in all walks of life, everybody remotely on the left, have no idea why we, in the West, are rich. If ignorance only bred apathy all would be fine. But, unfortunately, it breeds among too many politicians, even among some of those who are notional conservatives, the urge to make things better and fairer. No bitter historical experience is salutary for them; for they have the answer that has eluded mankind in the past.

 

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics