13/12/2011 - 09:55

Analysis: Government knows best, or does it?

13/12/2011 - 09:55


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Analysis: Government knows best, or does it?

Are we watching two world-class con jobs, or just another struggle between government and the free market? That’s the question after last week’s events in Europe, and in the latest instalment of the climate change debate.

If you’re a believer in the wisdom of government, and support arguments backed by the weight of numbers, then you will agree the Europe is being wiser than the U.K. when it comes to financial management, and that delegates to the Durban climate conference are wiser than a big oil company.

But, if you like to back the outsider, or at least consider an alternative point of view, then it’s worth considering why Britain opted out of a crucial European treaty, and why ExxonMobil reckons that renewable energy will remain a fringe energy source for at least the next 30 years.

In both cases, Europe v Britain and Durban v ExxonMobil, there is evidence that the government view is wrong, and that over time the free market view of the world will prevail.

Climate first because what happened in the latest round of government-led talks about cutting carbon emissions is that the seeds of a fresh deal were planted with the critical inclusion of China and other fast-growing Asian economies.

The ultimate aim of carbon-cutting is to replace a large volume of fossil fuels, such as coal, oil and gas, with renewable energy sources such as solar, wind and sea-power.

But, in the same week that this worthy cause was being debate the world’s biggest oil company produced its view of the future, which looks awfully like today, with a few changes, but with renewables growing from a modest 3% of global energy consumption to a still modest 7% by the year 2040.

Unpopular and vilified as oil companies are there is no denying that they make their profits from selling energy, and none really care whether what form the energy takes so long as it produces maximum profits.

That’s why the ExxonMobil view of the world, arguably the free market view, is a sobering reminder to Durban delegates that in 2040 and estimated 80% of the world’s energy will still come from coal, oil and gas. Coal’s share should be fading, gas, nuclear and renewables rising, but the end result is only modestly different than what we see today.

Britain v Europe is another case study of the popular view being that a big mistake was made when the U.K. used a veto to slow a major revision of the treaty which underpins the European Union in the name of retaining the freedoms which have made London the world’s financial capital.

Isolated is the common description of the place in which Britain now finds itself, but as Winston Churchill might have said it could turn out to be “magnificent isolation” because it has placed its future in the power of the free market. Europe has opted for even bigger government.

Believers in the wisdom of government are confident that their approach will prevail with all signatories to the European treaty forced in future to submit their budgets for review by a central, unelected, group of bureaucrats who will, in turn, use a German-made microscope to examine the detail.

Free market believers shudder at the thought of the latest Euro-process which has evolved because some of the governments of the region are broke, as are most of the banks, with each side blaming the other.

As for a German-led Europe, with all the history wrapped around that statement, the chances of Club Med countries accepting edicts and punishment dished up by Berlin triggers all sorts of potential reactions.

The bigger picture in both of these situations is that both represent examples of government saying it knows best, and the free market saying government is wrong.

Popular as it might be to believe that government is right after multiple financial train wrecks in the U.S. and Europe, plus claims of a world choking on its own smoke, there are significant disconnections emerging between two schools of economic thought.

Over time, the free market ought to win, but the next few years of big government created in part by recent free-market failures, will be a testing time for capitalism.


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