After the Storm: In Florida and Beyond, a Lesson in Cooperative Capitalism

By Kevin D. Williamson

Sunday, October 09, 2016

With Hurricane Matthew threatening to tear things up pretty good in Florida, Georgia, and the Carolinas, the immediate concern is flooding and roofs caving in on people. But all those high winds and overturned trees produce a second, often more serious, and often more enduring problem: the loss of electrical power.

To prevent that, a small army of linemen, tree-trimmers, and crisis personnel were dispatched to the storm zone from Texas, Mississippi, and even farther away. This was not organized by FEMA or by any government agency, but by the private, voluntary efforts of investor-owned utility companies around the country.

This is standard operating procedure for the electrical-transmission industry. When Superstorm Sandy flooded a good part of the eastern United States in 2012, tens of thousands of utility workers were dispatched — from practically every U.S. state and from Canada — to reconnect the 10 million or so customers who had lost power. More than 80 different utility companies — many of them competitors — were involved in the coordinated relief effort.

Utility companies are funny beasts. Most of them are monopolies or near-monopolies, partly for historical reasons and partly owing to the nature of the physical infrastructure involved in the generation and transmission of power. Some of them are quasi-public, some of them are organized as co-ops, and some of them are ordinary profit-seeking ventures. Conservative investors love utility companies for the same reason that consumers often hate them: They are one of the last vestiges of mid-century-style high-industrial capitalism, heavily regulated, with very high barriers to market entry and largely captive consumers. (Some years ago, I met a utility executive at a party, and he explained to me that he was involved in long-term strategic planning for his company; I asked whether his long-term strategic plan was to continue being a monopoly, and he did not seem to find this amusing at all.) The margins are not large, but the dividends are reliable.

A good utility company is like a good government agency: You don’t ever have to think about it very much. Electric companies’ No. 1 concern is seamlessness and effective invisibility: You flip the switch and the lights come on, no questions asked. Their worst nightmare is having customers start thinking about them too much. No good can come of that, is the general consensus inside utility-company boardrooms.

For that reason, they have for several decades organized mutual-aid agreements through their trade associations, the most significant of which is the Edison Electric Institute, which represents all investor-owned electric utilities in the United States, providing power to some 220 million Americans. It represents 70 overseas firms as well and a great many subsidiary concerns, such as suppliers of electrical equipment and providers of related engineering services. It has been operating since Franklin Roosevelt was in his first term.

In theory, this kind of cooperation should not exist. If every utility executive were in fact a rational specimen of Homo economicus, he would gleefully greet hurricanes that put his competitors at a disadvantage and imposed large losses on them. (Utilities may not often compete directly with one another for customers, but they do compete for capital.) The difference of a few tenths of a percentage point in the dividend could be the difference between a large institutional investor putting its money into Jones Power instead of Smith Power, with billions of dollars potentially at stake. And, yet, Jones Power does not revel in Smith Power’s troubles — instead, it sends its own workers into Smith’s market to help out Smith’s customers.

No doubt you could construct a plausible economic narrative in which this can all be explained in terms of each firm seeking to secure its own self-interest very broadly defined — utilities maximizing utility.

But that misses the point.

For both its admirers and its detractors, the critical feature of capitalism is its competitiveness. For the admirers of capitalism, that is what makes it efficient, ensuring that the interests of large and powerful firms must in the end be roughly aligned with the interests of ordinary consumers, who in the aggregate have much, much more power than any individual company. Thus the economic might of Nike and Walmart and the innovative genius of Apple are bent in the interest of ordinary people, even poor people, who in spite of their limited means have the ability to choose Reebok or Target or Samsung instead. For the critics of capitalism — people who, not coincidentally, helped make monopoly the default model for utility companies — that competition encourages waste (Bernie Sanders bemoaning the many choices of deodorant underutilized by his followers, Barack Obama et al. treating the marketing expenses and profits of health-insurance firms as net deductions from the public good, etc.) and incentivizes bad behavior.

Properly understood, competition within markets is only a mechanism by which the actual preferences of consumers and investors are revealed. Revealing preferences, as opposed to simply asking consumers about them, is critical, in no small part because consumers never tell the truth about their preferences when asked. (As a newspaper editor, I was a party to endless readership surveys in which our subscribers told us that what they wanted was more in-depth reporting, foreign news, and high-minded book reviews, when what they actually read were sports scores, obituaries, and letters to the editor.) When consumers and investors have their own money on the line, we discover what it is that they actually value. We can, in fact, see the gradations in comparative valuations in some detail.

What is truly remarkable about 21st-century capitalism is not the competition — creatures that aren’t even quite sentient, like catfish, snails, and members of Congress, compete over scarce resources, too — but its cooperation. Every time you buy a T-shirt or a fast-food hamburger, you tap into a vast network of productive resources involving everything from agriculture to information science to logistics, millions of people who do not know one other — who, if they did, might even hate each other — cooperating in relationships of literally incalculable complexity, in the service of ordinary schmucks like us.

And there is one remarkable aspect of all that to keep in mind: No one is in charge of it.

Sometimes, as with the utility companies’ mutual-aid pacts, the cooperative nature of capitalism is explicit, and its simultaneously self-interested and altruistic effects are obvious. But more often, that cooperation happens in a way that is effectively invisible to the consumer.

“But who will build the roads?” That is a standing punch line for those of us who believe that free people acting through free markets and other voluntary institutions can do much (and perhaps most, and maybe even all) of what we normally think of as the work of the public sector. (For the record, this nation’s first intercity paved road was privately built.) Our attitudes toward permissionless innovation are partly informed by aesthetics, partly by differences in our appetite for risk, and partly by generally unexamined political attitudes, generally acquired early in life. Some people look at the emergence of the “Chinatown” bus industry and see an unregulated mess, a dog’s breakfast of actual and potential problems that could be avoided if only we would expand and adequately fund Amtrak. Others see a solution to the problem of Amtrak’s inadequacies, and inadequacies associated with the rest of the transportation market. The people who are more risk-averse — and who therefore prefer higher levels of regulation and more public-sector involvement in the economy — are not wrong to be more risk-averse. But it may be that they are using the wrong math to calculate the risk.

Who do you think would do a better job reconnecting utility customers’ power in the wake of a hurricane? FEMA? The great minds behind Obamacare? The sort of people who run your local DMV? The Pentagon? Or a voluntary mutual-aid cooperative representing people who have a great deal of capital at stake — and who happen to be the people who know the most about how electricity generation and transmission actually work?

When it comes to important social concerns such as health care, affordable housing, and education, the progressives say: “This is too important to leave to the unpredictability of the free market.” Others say: “This is too important not to leave to the unpredictability of the free market.”

One of those propositions is, in reality, more defensible than the other.