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An Open Letter to the Young Man with the Petition

First of all, I want to make clear that when I said your petition was "idiotic," I did not mean that you personally are an idiot. Otherwise, I would not have engaged you in discussion when I came out of the grocery store a few minutes later. Not only did I think you would be willing to have some give-and-take (and you were), but I felt guilty about not keeping my cool in the first place. It's just that it seems I never see a petition from any earnest young person, no matter what organization has sent them out, that has the least modicum of realism or economic and political insight. I'm not like so many of the scholars of the Mises Institute (whose web address I gave you and I hope you look it up), who somehow manage the cheerfulness of their mentor, Murray Rothbard, whom I only met once which I guess is not enough to have had it rub off on me. Besides, they fight these battles daily, and can take it in stride.

Your petition, as you stated it, intends to lower gasoline prices by taxing the oil companies and giving the proceeds to one or more particular companies to develop alternative sources of energy. I wish to review with you my arguments for exactly why this cannot work in any possible scenario.

Firstly, in the short term, of course, much of the burden of this tax will be passed directly to consumers in the form of higher prices at the pump. How much will be passed on depends upon the elasticity of the market. Assuming the population as a whole is unwilling to reduce their gasoline consumption in the face of the increase imputed to the tax, they'll just have to pay it and lump it. So from the outset, the proposal is prima facie a failure.

To the extent that they do reduce their consumption to avoid the increase in their costs from the tax, the tax will fail to generate revenue desired. In this sense, your tax is like a sin tax (and if I heard you right you had another petition about what to do with California's favorite sin taxes, particularly the tobacco tax, but that's grist for another mill), and is therefore subject to the contradictions inherent in all sin taxes, that to the extent they work, they reduce the revenue they can collect. Fr. Robert Sirico of the Acton Institute has written a clever monograph on this subject, and you should check out that site too.

The main objection to your proposal, however, is that the tax will actually waste resources, by directing production to areas that consumers do not at present value. In brief, if alternative energy sources were profitable, there would be no need for a tax subsidy to bring them into existence, and if they are not profitable except on the assumption of a subsidy, they represent a waste of resources.

To understand this, you have to understand what "profit" really is, and if you don't understand it from your high school economics class, don't blame yourself (unless you fell asleep that day), because the textbook probably didn't go over it properly. In the absence of force or fraud, when two people exchange goods, they both benefit. Each wants what he will obtain from the exchange more than he wants what he will give up. Each expects to improve his situation, otherwise, he wouldn't exchange. That improvement in his situation is, broadly speaking (but accurately), his "profit."

We are in the habit, because we live in a complex monetary economy, of limiting our concept of profit to the idea of making more on the sale of a good than you had to spend to produce it. That's not wrong, but it does tend to obscure this broader meaning, because, low and behold, under this understanding, only the producer/seller makes a profit, while the consumer/buyer does not. The buyer's money balances have dropped; he has less money than before, he has not benefited as much as the seller. Well, just because you can put a number to the seller's "amount of profit," and you can't to the buyer's, it doesn't mean the buyer's profit is "less." In fact, since to say so is to compare satisfactions of different people, it's impossible to say that either person's profit is less or more, because their profit is subjective to each alone.

But we can say about profit that if a producer/seller is making a monetary profit (and no force or fraud is involved), that he must be satisfying his customers, at least for the most part. That does not mean that every customer is subjectively "happy" with the price he has to pay (every buyer can always truthfully say, "I wish I could have paid less for that"), but he still demonstrates by his action in buying that he prefers obtaining the good to holding his money.

This is true in the absence of force or fraud. A government subsidy is always force. To deny this is to assert that the oil companies which are to be taxed are willing to have their money taken from them and given to another firm to produce a competitive product. Obviously, they are not willing to do this. If they were willing, the state would not threaten them with physical force (imprisonment and the confiscation of their assets) if they didn't pay. Furthermore, they would already have taken their own money and freely invested it in the competitive firm, expecting that the future prospects of the firm are so compelling that even if this firm cuts into their business, they are better off supporting it and deriving profits from it than directing all of their resources to their own business.

Now, why would the alternative energy firm want to force anyone to support them? Clearly because they know that they cannot make a profit without the subsidy, which is to say, that they cannot provide a product that the consumer will freely choose to buy at (at least) the price they must charge to make it worthwhile (on their own terms) to stay in business. That is why I asserted that the firm receiving the subsidy must necessarily be producing their type of energy at a higher cost than the oil companies produce their kind, because it is evident that if their costs were lower, they would be able to undercut the oil companies' prices and make a substantial profit.

If the company can only produce energy that consumers are unwilling to buy, their efforts are wasteful. That's what waste is, to make something no one (or not enough people) wants to use.

I understand that the individual consumer may have many reasons for buying a product, and price is only one. In many cases it is not even the most important. In some cases it is important because it is high (a Rolex), rather than low (a Timex). For some, that the energy source is "renewable" is more valuable to them than the fact that it is more expensive. They are free to throw their money wherever they please. We are free to persuade them to persevere in their valuations (you) or disabuse them of their misunderstandings (me). But neither of us should be free to force other people (the oil companies) to make it easier for these consumers to get what they want, at the expense of all the others who don't particularly care about this. That is tyranny, plain and simple.

Some people think tyranny is acceptable if they have TRUTH on their side. I reject this, though also I reject any suggestion that Truth is relative. But beyond this, not all truths turn out to be true. If oil is a renewable resource, as some recent research suggests, then even the justification of your petition on the (tenuous) grounds of necessity falls apart. This is why I brought up the subject of the possible renewability of oil resources.

If you want oil prices to go down, then agitate for removal of the external conditions that reduce supply. Peace in the Middle East may be a good start. So might permitting oil exploration in places where it has not so far been permitted. And understand that if oil supplies really are in danger of depletion, it is precisely rising prices that we need. Rising oil prices, in the absence of force and fraud (for which read "governmental interference – by any government – in the oil market"), indicate that supplies are too low to meet the consumption preferences of oil consumers worldwide. These high prices will achieve at least three changes in behavior, all of which are beneficial. First, consumers will tend to change their preferences (reduce consumption), thereby automatically conserving the resource. Second, entrepreneurs will start looking for ways to increase supply by such means as greater exploration, or technological advancements. These entrepreneurs will come out of the ranks of the industry, or they may be new players, attracted by the high prices. Did you notice the headline in today's San Francisco Chronicle? "Flush with Profits, Companies Spend Billions to Hunt for Crude and Drill More Well" Hooray! That's what we want them to do!! Flush with profits, they can now afford to hunt down oil using techniques that previously were uneconomical. Each company has to do this. Any company that decides to spend its profits on beer and chips will find some other company looking for more oil to get a competitive advantage on the next go-round. And third, it will eventually become economically rational for alternative sources to enter the picture, and they will do so without stealing from the competition through taxation, because at higher prices, their efforts will no longer be wasteful.

My advice to you is to learn more about economics before you resume tilting at windmills. You struck me as willing to do so. Study Mises.org, find other organizations that really understand the subject. You will recognize them by their commitment to liberty and consumer sovereignty.

March 21, 2006