On socialism’s failure; a lesson from Queensland

PCoulson1 Peter Coulson uses the failures of Queensland's solar hot water program to illustrate the failures of big-government central planning. 

In his seminal 1944 piece, The Road to Serfdom, F.A. Hayek said that the main features of socialism were the withdrawal of the means of production from private enterprise (anti-privatisation) and central-planning to circumvent the market and defeat competition. While many believe that the evil tentacles of socialism are dead, a recent example from Queensland highlights the importance of unending vigilance.

Hayek was very clear on the dangers of these types of actions. Competition, he argued, was the most efficient method of allocating resources towards meeting needs. Furthermore the use of centralised planning would require “conscious social control” – in effect mandating the use or action by the population and forbidding the freedom to contract at will. Tying into the inefficiencies of government planning is of course the unseen effects of the particular government action. This is limited not only to the opportunity cost of those taxation monies that are applied to the particular endeavour; but also to the general cost of allowing the state to assume the right to make any intervention on the private sphere. Every small incursion grants the allowance of further government intervention, just like slicing a stick of salami, until the state assumes total control.

One example of public policy in Queensland, the solar hot water program, contains a number of lessons for further policy makers and governments to consider. This example will be considered in light of the writing of Hayek and others from the libertarian perspective.

At the 2009 election, the leader of the Labor Party, Premier Anna Bligh announced a new policy designed to foster the uptake of solar power. She used the importance of overcoming climate change as an argument for impetus to make a State foray into the private market with the result of crushing competition.

Bligh announced that if re-elected, her government would enter the market and purchase 200,000 solar hot water systems which would be made available to the public for $500 each – fully installed. It was also announced that the government would bear no cost for the systems, because the economy of scale would in turn drive down the cost.

Bligh also announced that the program would prefer local manufacturers and therefore provide an impetus to a local solar hot water/ photovoltaic manufacturing industry.

Following the Bligh Government’s election in March of 2009, the program was immediately commenced; however the first hot water system was not actually installed until late November 2009 – more than six months later. In the intervening period, the market for solar hot water systems was utterly destroyed. Orders for solar hot water systems with a cost above $500 dried up as consumers waiting for the promised systems from the Government. There were no systems at that time with a market price of $500 or below.

Meanwhile, the Bligh Government had all manner of problems with sourcing a supplier who could provide the systems at the identified price. It appeared as if the Bligh Government’s promise would fail until a German supplier who until then had no market share was prepared to supply to the program for close to the designated cost. However, the supplier the Government had contracted with to supply and install the units was not actually licensed by the Building Services Authority to contract out plumbing work. Although the sub-contractors used were licensed, they operated under a contract held by an unlicensed organisation.

According to the budget estimates in July 2009, the Government was required to make a contribution to the program, for which an amount of $39 million had been identified. However, this did not cover the cost of the bureaucracy in administering the program.

The debacle was finally put to the sword in March 2010, almost a year to the day of its announcement, when the Bligh Government announced that the solar hot water program would be cancelled, and replaced with a two-tiered grant.

The failure of this policy and its authors is complete, but the fact that the program would fail was entirely foreseeable.

As Hayek said, the allocation of resources by the Government through planning designed to undermine competition and defeat the market, is grossly inefficient as compared to the market forces allocating the same resources.  As can be seen, the announcement that the Government could defeat market forces belies the utter economic ignorance of the Bligh Government’s policy makers.

The lesson for policy makers is to beware attempts to undermine market forces while in the pursuit of social benefits. This applies in two respects, firstly, the effect on the market between the announcement of the program and its actual start, a period of some eight months saw the market for solar hot water systems paralyzed while consumers waited for the promised cheaper systems.

Secondly, the assumption that direct government intervention into the market to reduce the price of solar hot water systems was proven to be a fallacy. The policy makers in the Labor Party erroneously accused solar hot water suppliers and manufacturers of making unreasonable profits, whereas the outcome of this example suggests that there were not unreasonable profits in the industry that would allow the supply of systems for the amount they wanted.

Finally, although the program did not progress to the final stages, at some point the question of demand would have been required to be addressed. The Government simply assumed that 200,000 homes desired a solar hot water system. But what would have happened had the actual demand been insufficient? It is quite likely that the Bligh Government would have mandated the use of such systems in new homes (a suggestion which has been previously mooted by members of the government). As Hayek foresaw, at some point the central planning by government would require conspicuous social control by government over private capital. To conclude this example warrants quoting Adam Smith:

The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.

Pete Coulson is a Brisbane-based student of economics at Griffith University. He is a keen observer of Queensland politics and shares his thoughts at Queensland Politics.