The Freakenomics blog over at the NY Times website recently did a piece on Chrysler offering $2.99 petrol for 3 years with a new Chrysler. Steven Levitt thinks this is a great idea because peak oil is just hot air.
The general gist of his piece is that no matter what happens, a free market economy can smoothly and cleanly handle it, and transition to a new stable mode of operation without resources that were previously plentiful… Pretty hopeful eh?
He praises Chrysler for having a brilliant idea; insulating consumers (for a short period at least) from the very price pressure that is the lifeblood of an efficient market. But there is a larger problem…
The truth is that markets can only find local minimums. Market forces do not create global improvements in efficiency because these require a move toward more expense in the short term. This is why government’s build roads (expensive, low return) and business’ build houses to line them (cheap, high return).
A good example of market induced inefficiency is in the area of car engines: turbine engines which can be used to propel cars have operational efficiencies of 40% where as internal combustion engines have a maximum theoretical efficiency of 38% and a typically operate at about 20%.
With a large proportion of consumer spending being on Veblen Goods anyway, price sensitivity only effects the very poorest, for the raw essentials of survival. While the rest of us consume as many expensive products are we can afford.
Another way that markets are not globally helpful is that not one pound from the FTSE-100 is spent on the common good unless it’s tax deductible or not really that common at all. And without this kind of spending all you get is cash-flow maximization for existing lines of mass-market business.
There are a few disruptors, but with the size of the modern global economy it requires so much money, time and risk to change our consumption of a major resource like oil that few have the will and the means to try. That doesn’t mean that we wont run out, just that we wont wean ourselves off until we have run out. And there won’t be a smooth transition…