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Fingerprinting the Invisible Hands

Opaque markets inflate power prices.

Fortnightly Magazine - July 2009

In the administered North American electricity markets, a high level of secrecy concerning bids, bidders, and computations is currently the norm. The decision to maintain such secrecy has little discussion and the impacts of secrecy on prices and efficiency have never been comprehensively studied. One of the very few surveys of transparency in this area, a CRA report prepared in 2007, concludes that “[f]ew, if any, of the markets had evaluated information disclosure explicitly for its effects on competition or market efficiency.” 1 In practice, the issue of transparency has been left to Adam Smith’s “invisible hands.” Recent statistical analysis from the Texas independent system operator indicates that the benefits from additional transparency may be considerable.

In 1776, in his book, The Wealth of Nations , Adam Smith made an offhand reference to “an invisible hand.” Since few of us have ever read the book in its entirety, it’s useful to observe by his words that Adam Smith wasn’t nearly as naïve as legislators and federal regulators who have done away with checks and balances over the past 16 years with such catastrophic consequences:

He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It’s an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. 2

Interestingly, the only mention by Smith of an invisible hand occurs in this passage warning the reader against those who claim that their activities are for the public good—almost the exact opposite of the usual interpretation.

Adam Smith was not a strong supporter of secrecy in business, correctly fearing that such arrangements tended to raise prices above their natural level:

But though the market price of every particular commodity is in this manner continually gravitating, if one may say so, towards the natural price, yet sometimes particular accidents, sometimes natural causes, and sometimes particular regulations of police, may, in many commodities, keep up the market price, for a long time together, a good deal above the natural price. When by an increase in the effectual demand, the market want of general price of some particular commodity happens to rise a good deal above the natural