French economist, writer and politician Frederic Bastiat (1801 – 1850), in his treatise That Which Is Seen, and That Which Is Not Seen, observes that actions by governments, organizations and individuals have consequences and repercussions far beyond the immediate, obvious or intended.

In fact, rather than a single effect, actions tend to produce a succession of effects. The first effect usually occurs simultaneous with or soon after the original action, and is easily seen, or foreseen. The remaining effects unfold in succession like ripples on a pond, and usually are not seen, meaning not foreseen.

Moreover, Bastiat points out, "… it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come at the risk of a small present evil."

The wise economist, says Bastiat, will take into account not just the immediate (the foreseeable) consequences of a potential action, but will also it through well enough to foresee and consider the not-so-obvious consequences.

In practice, economics is interpreted through the filter of political policy, and the goals of politics do not always agree with sound economic principles. Politicians are often concerned with immediate and short-term effects which will occur quickly, be highly visible, and stand them in good stead with voters – even when subsequent effects, which may occur long after the politicians are no longer in office, may be quite unfavorable.

Bastiat's work helps us put the California energy crisis of this decade into perspective, and understand how politicians' attempts to intervene in the electricity market, while holding down immediate electricity prices for Californians, ultimately made electricity more expensive than ever, caused shortages, diminished reliability, and opened the door to market manipulation.

The inherent lesson pertains not just to California regulators and politicians, or even just to electricity, but also to any government which has considered disrupting or contravening the natural relationship between supply and demand for any good or service.

That Which Was (Fore)Seen

Rising electricity costs in California led the politicians to impose upper limits on the prices at which electricity could be sold to consumers. The immediate effect was that prices stopped rising – good for consumers, the state, and the politicians.

That Which Was Not (Fore)Seen

Electricity prices were rising for a reason. Years of discouraging utilities from building power plants in the state had created a capacity shortage, meaning that electrical utilities had to go outside the state to buy the electricity they needed to satisfy their customers' demand.

Wholesale electricity prices rose because demand exceeded supply, which is what normally happens in free markets. Retail prices, however, were kept artificially low by government mandate.

California utilities were forced to pay higher and higher prices for purchased power, while consumers, insulated from the market's signals that supplies were tight (i.e. rising prices), did little or nothing to conserve electricity. In fact, they increased electricity consumption (demand), thereby exacerbating the shortages and further driving up wholesale prices.

As the gap between supply and demand continued to widen, utilities were finding it difficult to purchase enough capacity to meet peak demands on their systems. The results were brownouts, voltage sags, frequency anomalies, network stability problems, and blackouts.

These after-effect consequences got the attention of politicians; the problems not only hurt citizen consumers, but also businesses, resulting in lost business revenues and, potentially, lost jobs, lost tax revenues and lost political races.

Utilities, forced to sell electricity at sometimes less than half what they paid for it on the wholesale market, became insolvent and began to seek protection in bankruptcy. This devastated their credit ratings and made wholesalers wary of selling electricity to them on credit.

Unscrupulous market manipulators began to exploit the situation in ways that further increased wholesale prices, reduced reliability and exacerbated the shortages. The California energy market was by this time in extreme crisis.

To relieve the crisis, the governor stepped in with state money and began buying the electricity which wholesalers were reluctant to sell to the utilities. The strategy provided temporary relief and even helped the governor get re-elected, but eventually resulted in enormous state budget deficits and debt levels. The citizens of California held a recall election and fired the governor for mismanaging state funds.

In the End

Did Californians pay less for their electricity? Initially, yes. The price controls seemed to have been successful. That was the foreseen result. Whether actual electric bills were ultimately lower than they would have been without the price controls is debatable.

But when higher tax burdens resulting from the action are added to consumers' electric bills, Californians in the end paid far more for electricity under price controls than they would have under market-based pricing. That was the unforeseen, as were numerous other adverse consequences.

As Bastiat had observed over 150 years before, the favorable immediate consequences were followed by disastrous ultimate consequences.

Fluctuations in supply, demand and prices are natural consequences of a free market. Ultimately, the market will seek equilibrium as buyers and sellers balance supply and demand by agreeing on what a commodity or service is worth and how much is wanted. Long-term, prices will be optimized.

Market excursions, whether natural or man-made, tempt us to look to government intervention for relief. Such relief may help for a time, but the ripples which will continue to be felt long after the initial benefits have passed can ultimately become tsunami-like waves, inflicting damages far exceeding the value of the initial benefits. This Seen and Not Seen principle has played time and time again, but we seem to be slow to learn its lessons.

The blackout of 2003, higher electricity and gas costs, rising oil prices and other issues facing the energy industry today have brought cries for government intervention from some quarters. Politicians, like air, will always rush in to fill a vacuum. And the actions they may take could possibly even be beneficial. But at what cost? With what long-term consequences?