2. Theory
At present, most energy planning activities and their associated economic analyses are based on a neo-classical economic para- digm, in which a detailed analysis of concrete market institutions and their effects on the general economic development in a specific country and period of time is neglected. Instead of analysing the concrete institutions of society, neo-classically inspired economic thinking describes societal institutions at a very aggregated level and, in the economic models, subordinate them to the basic assumptions that the economy will always establish a balance between the supply and demand of goods and production factors, and will generate a growth process that optimizes economic welfare and thus establishes an optimal use of resources, i.e., “the best of all worlds”.
These balance and optimization assumptions are only (partly) valid, if it is assumed that consumers and producers optimize their individual profits on a market with the following “free market” institutional characteristics: Many mutually independent suppliers of a product; many mutually independent buyers of a product; full information regarding quality and prices of products available;
agents in the market, acting with rational behaviour; sellers who maximize profits and buyers who maximize utility.
Therefore, despite the fact that neo-classical economy does deal with present-day societal institutions (although at an aggregated level), these basically represent the dog’s tail, with the dog being the above “free market” institutional conditions. As a consequence of being subjected to the above balance and optimization criteria, the feasibility studies inspired by neo-classical economy have, amongst others, the following characteristics:
From the premise that society is characterised by an optimal allocation of resources (the best of all worlds), we can deduce that any change away from this optimum represents socio-economic losses to society. For instance, any policy implemented to reduce greenhouse gas emissions is regarded as causing extra costs to society in all computations. In these econometric models, system- atic institutional mistakes in the economic process do not exist. Meanwhile, in real life, this premise is wrong.
Moreover, the calculation of employment and public finance
effects of alternative energy scenarios is not relevant, as the economy per definition will reach an optimal balance.
The neo-classical approach is increasingly obsolete, as there is a need for a basic technological transformation from fossil fuel e and nuclear technologies e to energy conservation and renewable energy technologies, and this change requires fundamental changes in the concrete institutions that design the future technical systems.
Therefore, it becomes increasingly necessary to develop economic thinking and economic models that can analyse the concrete institutions in which the market is embedded. Conse- quently, it is necessary to see the economy as an institutional economy, in which the present institutions may very well not generate the optimal economic situation. The necessary technical changes require new organizations and new institutions. An economic paradigm should, therefore, include the understanding that any market is embedded in a number of concrete market institutions that differ from one country to another and change from one period to another as a result of decisions and actions made both by the Parliament and actors on the market. These institutions are essential both for the generation of technological winners and losers on the market and for the outcome of feasibility studies used in planning procedures.
When studying the market institutions in detail, it becomes clear that the “real market” does not fulfil the institutional preconditions of the “free market” of the textbooks. The interplay between the “real market” and the “free market” is often one of ideology, in which the strongest actors on an oligopolistic “real market” use the ideology of the “free market” to argue for no public regulation, without removing their own private regulation of the market. In the real world, the argument “let the free market decide” is synonymous with the sentence “let us decide”. “Us” means the strongest actors on an oligopolistic market with a few dominating companies. This description is especially valid, when dealing with energy markets.
Even if the market was “free” in the sense of the textbook on economics, the market would still not be free, due to the losses linked to individual optimization. This is described in game theory, which shows that an equilibrium based on individual decisions (NASH equilibrium), in many cases, does not lead to maximum welfare, or the Pareto optimum, for society. As a consequence of this, organisations, such as for instance the state, municipalities, etc., have been introduced to minimize the above losses linked to a “society” with 100% individual optimization on a market.
2. TheoryAt present, most energy planning activities and their associated economic analyses are based on a neo-classical economic para- digm, in which a detailed analysis of concrete market institutions and their effects on the general economic development in a specific country and period of time is neglected. Instead of analysing the concrete institutions of society, neo-classically inspired economic thinking describes societal institutions at a very aggregated level and, in the economic models, subordinate them to the basic assumptions that the economy will always establish a balance between the supply and demand of goods and production factors, and will generate a growth process that optimizes economic welfare and thus establishes an optimal use of resources, i.e., “the best of all worlds”.These balance and optimization assumptions are only (partly) valid, if it is assumed that consumers and producers optimize their individual profits on a market with the following “free market” institutional characteristics: Many mutually independent suppliers of a product; many mutually independent buyers of a product; full information regarding quality and prices of products available; agents in the market, acting with rational behaviour; sellers who maximize profits and buyers who maximize utility.Therefore, despite the fact that neo-classical economy does deal with present-day societal institutions (although at an aggregated level), these basically represent the dog’s tail, with the dog being the above “free market” institutional conditions. As a consequence of being subjected to the above balance and optimization criteria, the feasibility studies inspired by neo-classical economy have, amongst others, the following characteristics:From the premise that society is characterised by an optimal allocation of resources (the best of all worlds), we can deduce that any change away from this optimum represents socio-economic losses to society. For instance, any policy implemented to reduce greenhouse gas emissions is regarded as causing extra costs to society in all computations. In these econometric models, system- atic institutional mistakes in the economic process do not exist. Meanwhile, in real life, this premise is wrong.Moreover, the calculation of employment and public financeeffects of alternative energy scenarios is not relevant, as the economy per definition will reach an optimal balance.The neo-classical approach is increasingly obsolete, as there is a need for a basic technological transformation from fossil fuel e and nuclear technologies e to energy conservation and renewable energy technologies, and this change requires fundamental changes in the concrete institutions that design the future technical systems.Therefore, it becomes increasingly necessary to develop economic thinking and economic models that can analyse the concrete institutions in which the market is embedded. Conse- quently, it is necessary to see the economy as an institutional economy, in which the present institutions may very well not generate the optimal economic situation. The necessary technical changes require new organizations and new institutions. An economic paradigm should, therefore, include the understanding that any market is embedded in a number of concrete market institutions that differ from one country to another and change from one period to another as a result of decisions and actions made both by the Parliament and actors on the market. These institutions are essential both for the generation of technological winners and losers on the market and for the outcome of feasibility studies used in planning procedures.
When studying the market institutions in detail, it becomes clear that the “real market” does not fulfil the institutional preconditions of the “free market” of the textbooks. The interplay between the “real market” and the “free market” is often one of ideology, in which the strongest actors on an oligopolistic “real market” use the ideology of the “free market” to argue for no public regulation, without removing their own private regulation of the market. In the real world, the argument “let the free market decide” is synonymous with the sentence “let us decide”. “Us” means the strongest actors on an oligopolistic market with a few dominating companies. This description is especially valid, when dealing with energy markets.
Even if the market was “free” in the sense of the textbook on economics, the market would still not be free, due to the losses linked to individual optimization. This is described in game theory, which shows that an equilibrium based on individual decisions (NASH equilibrium), in many cases, does not lead to maximum welfare, or the Pareto optimum, for society. As a consequence of this, organisations, such as for instance the state, municipalities, etc., have been introduced to minimize the above losses linked to a “society” with 100% individual optimization on a market.
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