One of the things we learnt early on in economics is that allocative efficiency which the perfect competitive market seem to move towards is efficient in terms of maximising social welfare even if distributionally it is skewed. In other words, by using the ability to pay as the final arbiter for who gets the goods and services, the society moves towards high levels of efficiency about what gets produced and who gets what goods/services without questioning whether things are really ‘fair’ or if in the first place, the ability to pay is properly distributed.
This is a problem that we seem to ignore because it is convenient to think we are already in the best of worlds. The idea of Pareto optimal is powerful – that you stop moving things around as long as you cannot make someone better off without having to make someone worse off even if the one who is slightly worse off is not much more worse than the amount of betterment you can create in another. That comparison isn’t objectively possible anyways.
But by sweeping it under the carpet, economics close itself off to a lot of interesting philosophical debate that really matters and tries to consign itself to an amoral science. Yet championing for markets is not exactly amoral, it is taking the stance that the market approach is morally superior and already deferring to the market in the work of economic justice. Michael Sandel writes and lectures extensively on this and as we ponder over how we marketize various things from infrastructure to healthcare, we can go back to consider those ideas.
I spent many years focused on infrastructure development, particularly working on getting private sector involvement into infrastructure investments, executing the projects, operating and maintaining them for government. The advantage, as we would often tout, has a lot to do with the efficiency of getting private sector with experience to do it. At the same time, it reduces need to use direct state budget for financing such projects, and reduce the need for government to get involved in the complexities of hiring specialists, working on those technical subjects that will not support other areas of government work.
We called these infrastructure projects public-private partnerships or PPPs. It has somehow unlocked lots of private sector financing into the market and supported infrastructure investments. That is all good but it made me wonder whether marketization infrastructure is necessarily a good thing. For one, collecting fees on a piece of infrastructure in order to maintain it sounds right; and that fee will somehow have to be regulated since the private sector party would try to extract all the surplus with its monopoly position. So what should the regulator allow? Average cost pricing or marginal cost pricing? There is a ‘right answer’ in economics but in practice it is always hard to really work out what is the long run marginal cost involved. Particularly if the amount of service you render in each time period varies with demand.
And who is to prevent the monopoly from trying to extract more surpluses by pushing the regulator to allow it to charge certain prices by gaming the criteria or the measurement methodologies that the public sector develops. So the cat and mouse game starts. Is this what we expect when we try to marketize infrastructure? And should we not expect it when we do go ahead to privatise infrastructure? Eventually the tax payers have to fund both the cat and the mouse – the regulator and the monopoly or the private shareholders’ profits. Does that really make sense in terms of overall economic efficiency?
And finally, can such a set up really deal with change? Especially with the energy and climate transition. A lot of infrastructure need to build in resilience, consider the climate impacts on not just their infrastructure but also their customers and the way their demand base will be evolving, whether that is going to impact existing business models. All that is not even accounting for the decarbonisation ambitions of their customers. Meanwhile, can these all become an excuse for extracting further surpluses?
What if the sun could give us all our power and energy, to drive everything we need to power our economies, perform our activities and live life? Or what if we can afford everything that we ever want and need? What if money can buy us everything? What if this one thing can solve all your problems?
If all that hypothetical questioning sounds like a bunch of marketing crap or storytelling, they are actually fantastic devices that somehow appeals so much to our psyche. But they can simultaneously be truth with caveats and also complete bullshit.
In case you are curious, I provide the solutions:
The sun does power a lot of things and is capable of providing sufficient energy for all of our activities and more but capturing it and channeling them properly is had.
We, as a collective earth, already is able to afford everything we produce and will be able to satisfy all of our needs – wants on the other hand are completely manufactured by ourselves and can be managed.
Money can buy us everything that can be bought (or sold).
One thing that can solve all your problems is a mental reframe to see them not as problems but challenges to help you grow.
There is always some kind of rhetoric to get you out of those conundrum but doesn’t really address the actual psychological appeal of those questions. The thing is that we naturally gravitate towards some kind of monolithic system or idea where we want a single solution or something that becomes a common denominator for everything else. Money comes close to becoming that. Yet that has probably demonstrated that such a system do not actually deliver what you think it would.
Likewise, the market economy and market system isn’t going to be the one that delivers us all from the problems around energy, climate change, innovations and poverty elimination. The market system needs to be rightly placed for what it is good for just as we should see wind and solar power in their place within the energy system rather than expecting them to deliver all our needs. Even oil and gas was not able to power all of our world’s energy needs even if they came close to that. Monolithic systems reduces resilience even if they provide scale economies.
For some reason most people forget that energy markets were created through a combination of business activities and government regulation. There would be a push of some kind towards energy access, electrification in the beginning of any modern country’s development. There wasn’t that much public consultation around these topics – that was simply how development takes place and everyone sort of aspired towards that. Or so we thought; but systems were built to drive countries and societies towards those directions.
Today, in the struggle to set up an orderly energy transition, policy leadership from government is more important than ever. The challenge is in determining what are political choices and what are really policy-choices that is to be determined through more rigorous research and analysis. There is always the search for market-based solutions even though we might actually have seen in history that a lot of big dislocations are resolved or handled through public sector decisions and investments.
The idea of seeking the market for solutions is a new idea. And while the market appear to have been terrific in generating a whole load of choices and new options, the fundamental innovations are still pulled together by a greater sense of mission than market competition. We probably need to mature further to appreciate this.
We might not realise it but governments have a huge role in creating markets. This is because markets do not spontaneously emerge out of nowhere especially in highly developed economies. One of the reasons is that markets actually requires structures, institutions and frameworks such as rules and regulation can encourage players to step forward more boldly and grow the market.
Today, in Australia, despite the multi-dimensional benefits that bioenergy brings, and synergises with the traditional economy, there’s still little recognition of the low-carbon identity of bioenergy. And it is a shame that methane produced from biological processes are still seen as not too different from natural gas that is extracted from the ground. There is no forward direction by the government to stake the space and define the standards for biogas production, upgrading into biomethane and regulations around treatment and handling of the digestate, which itself is a by-product of the process that can be made useful.
There is perhaps a clear path to create a market not just through regulatory clarity but also enforcing demand. Market for audit, market for inspections, even market for many public services are created by regulations. Sure, there’s a need and the market contributes positively to society and so regulations support that. Why can’t we do the same with clean energy? One that displaces directly the fossil fuels in our system?
I’ve been reading Erin Meyer’s Culture Map. And I even did her survey on her website that would cost you a bit to get some results. Anyways, I realised as a Singaporean that my results lacked 1 dimension, and it was on the persuading scale. It was only when I had results not benchmarked to my country’s norm that I realised there was a dimension missing!
Only then I realised from her book that she claims the East Asians tend towards a ‘holistic thinking approach’ where they focus on inter-connectedness and inter-dependencies. I found this pretty interesting being a Singaporean and essentially East Asian descent. I’m not exactly sure how this drags us out of that Persuading spectrum of ‘principles-first’ vs ‘applications-first’ because I do find myself on the scale as well and I’m inclined towards ‘principles-first’. I attribute it to my western upbringing but I also think that holistic thinking is more compatible with the ‘principles-first’ approach to reasoning.
East Asians are also logical; even if they might not have a standard structure of approach. The holistic thinking perhaps just cause us to reach out farther to consider more marginal connections to the core topic. This could mean that in using the ‘principles-first’ approach, holistic thinkers are drawing from even broader principles that may at first sight, have nothing to do with the topic at hand.
For example, I was recently having a conversation with a renowned East Asian expert in the bioenergy field and in talking about the advantages of biofuels over e-fuels, he started by considering the efficiency of electrolysing water, and then the fact that most locations rich in wind or solar power tend to be scarce in water supply, and eventually the land required to support the power generation that is required to produce just a small amount of renewable e-fuel. Then he went on to talk about growing crops on some of these land, how they might help the habitat, the robustness of particular crops. Finally, that the crop residues can be processed to produce biofuels; allowing the land to be used for multiple purpose of food and energy – especially if the right kind of crops are grown to ensure more cycles of harvest.
The point about biofuels being superior to e-fuels was made somewhat indirectly and through a detailed explanation about something way beyond the issue of energy – it was about resource-intensity in terms of land-use and perhaps water. So he was drawing from a principle about resource intensity to produce the required fuel essentially though the manner he had approached it starts with considering linkages between the subject and other concepts.
For me, I am relatively comfortable with that sort of conversations and being patient for the point to be made; and even if the point is not really made clearly, I often give benefit of doubt and draw the connections by myself. Perhaps being East Asian in heritage, I rarely have an issue drawing the actual connections that the speakers are getting at. Indeed, perhaps persuading an East Asian will require more appreciation of the importance of connections and inter-dependencies or relationship than a linear approach to logic.
In this whole green wave there’s lots of hype and one of the dangers that corporates put themselves is being cast as greenwashers. The challenge is that some corporates might just be doing it unintentionally, without having realised the hypocrisy surrounding their brandishing of green credentials because they did not realise how much harm their business activities have been bringing to the environment.
The initial audit of the business is important from the ESG perspective but it doesn’t stop at just reporting because if the initial audit is all it takes to establish green claims and then allow businesses to carry on, it would have been a waste of opportunity. Corporate leaders need to recognise that subjecting themselves to these audits and scrutiny should not earn them any kudos. So they should not be patting themselves on the back if those reporting metric turns out stellar. Rather, they should be thinking about what approach they have taken to their businesses that enabled that.
And then they should be considering if there are blindspots or areas of their businesses where the right philosophy hasn’t been applied. The hypocrisy can often stem from the fact that executives are too busy gaming the reporting metrics as opposed to genuinely thinking through business processes and activities. That can still be unintentional but they can start making sure that their activities to gear the company towards green can be more intentional.
There’s going to be a new kind of entrepreneurship; not necessarily one that is building businesses with an established revenue stream or for a current market need, but one that bets on the needs of a future that the world wants to be creating. And the upcoming green race might unleash this new breed of entrepreneur more strongly than before. In the post-pandemic era where people might have got sick of government stimulus allowing billions of capital to slosh around the system, risking inflation and simply making the richer rich, fiscal policy might be returning to the center-stage as the new means of keeping the public voting base satisfied.
The green race is going to drive new winners in the economy as entrepreneurs who have positioned themselves to make the critical investments needed for the economy. Especially the ones that going to create the very jobs that politicians plan to trumpet about. Being able to think ahead and consider the kinds of businesses desired both by the public sector in an economy that is highly pro-market will be rewarded. The risk is that the public sector decides to take on the direct investments themselves rather than to ‘incentivise’ the businesses to do so. This is why the pro-market orientation of the government is important.
For the markets where the government have the tendency to perform direct intervention or deem infrastructure investments way too strategic to be left to private sector, the green race may take those economy in a different direction. They may choose to create new state-owned and managed entities to make new direct investments or to use the existing ones. And the green jobs will be created within state-linked enterprises. Civil servants who are savvy in these areas will tend to gain within such systems.
Either way, there are going to be new ways smart people will be gaming the system.
The beauty of the market system emerges when there’s competition along the right dimensions just when we all need them. But competition doesn’t always require a market economy – there’s always limited resources, time and other constraints that requires us to somehow compete. There’s also reputation, attention of people and recognition that drives us to compete. In the 20th century, the space race during the cold war led to phenomenal technical and technological advances which powered the growth over the 21st century.
There was an alignment of political, and public interest. The economic interest was not entirely foreseen and only realised much later. But it seemed that entire economies of Europe, US and Soviet Union were engaged in this mission. It seemed like a conflict and perhaps competition of egos but eventually worked for the good of mankind.
Today we need to shift this mission for space to a mission for mankind on our planet. Developing a green race probably takes a good alignment of the public and political interest, as well as some kind of competitive tensions. We are beginning to observe this with first sound of the trumpet from US with its IRA focus on Clean Energy and climate transition last year; and then Canada followed with its own programme to fund indigenous clean energy projects. Australia’s announcement last week with a highly targeted programme focusing on hydrogen reflects the same sort of tension around the competition to attract the competent hydrogen players to develop required projects in their backyard.
As an energy transition consultant, I welcome this. As much as we might think the competition can result in duplicative efforts and inefficiency, it is what we need to align the incentives in the market with the interest of the overall society. Moreover, harnessing the public interest and pressure upon this topic through directing the workforce and human capital towards the low-carbon economy is much needed. The green race should hopefully create the necessary ecosystem we need to drive further changes and ensure the climate transition.
Last year, I wrote a post about market leadership. And it is interesting to see the move by Home Depot to increase salary as an investment towards increasing market share and dominance. Retail and service are being automated more and more with the improvements in technology and rise of AI. It is not so much about the existence of the technologies as they had existed for a long time. But the investment made over the years have accumulated and mass acceptance have reached this stage where broad-based adoption becomes increasingly common.
In the situation where capital investment in machines and technology becomes a more level playing field for companies, the edge that companies can get from replacing humans with machines becomes smaller. But it takes market leadership to decide that the new basis of competition is probably not about having more automation than the competition but to be able to attract and motivate the best frontline workers serving the customers and making their day.
Market leadership is not about following what the rest of the industry is doing but deciding what is the next basis of competition and focusing on those parameters. Scale helps but more critical is the courage and strategic thinking of those in charge.
