Works in Progress: Grid Connection Auctions

From Alex Tabarrok.

"The latest issue of Works in Progress is superb. Every article is interesting.

Chris Gillett points out something surprising: the US has plenty of electricity generation capacity ready to go, the problem is connecting it to the grid. Grid connection is complicated because on the grid, supply must equal demand at every moment in time. Even without speeding the process, however, we could get more power connected to the grid if we rationalized the ordering of connections.

The main flaw of the interconnection process is that it uses a first-come, first-served queue. This means that high-priority requests can spend years stuck at the back of the line behind other less important ones.

In essence, we have an airport congestion problem in which small Cessnas can bump 747s. Auctions for connection rights are the solution, as pointed out for airports by Vickrey and the classic paper by Rassenti, Smith and Bulfin. Gillett also emphasizes that some loads should be allowed to connect on a flexible basis: if a data center can disconnect or use backup power during the few peak hours each year, it should not have to wait years for firm service.

Gillett also has a very nice explanation of how market prices balance electricity from different sources:

Market prices signal to power plant developers about levels of supply and demand. In the same way, prices balance different energy sources based on the strengths and weaknesses of each. For instance, as more solar panels are built, the value (and therefore price) of power during the middle of the day, when the sun is shining most, adjusts downward. From December 2020 to September 2025, maximum solar output in ERCOT increased from 4 to 29.8 gigawatts. And from 2020 to 2025, the value of power at 1pm relative to the highest-priced hour decreased from 92.9 percent to 38.7 percent. As one technology type becomes overbuilt, prices reflect that and developers react accordingly.

The evolving daily price shape in response to the abundance of solar energy was a signal that the grid needed storage capacity, and power plant developers responded. From 2020 to October 2025, ERCOT went from having almost no battery storage to a combined battery discharge of 8.6 gigawatts. The same process has played out in California and many European markets."

Is Entrepreneurialism Bad?

By David R. Henderson. Excerpts:

"Imagine a product that costs $1.80 to make and sells for $2. Imagine also that the average household in America buys one of these items per week. There are approximately 134 million households in America. That means that in a given year, US households will buy 6.968 billion units and will spend $13.936 billion on this product.

Then along comes an innovator who has figured out how to produce the item at a cost of only $1.50 per unit. The innovator would ideally like to have a patent and might well get a patent. But even if he doesn’t, it will take time for competitors to notice his innovation, figure out how it works, and implement it. Let’s say it takes a year. For products with a complicated production method, that could well be an underestimate.

What will the innovator do during that year? Cut price? Maybe a little but not much. For one year, all his competitors are using a method that costs $1.80 per unit and are charging $2.00. What the innovator could do is cut the price to, say, $1.90 per unit and take a large share of the market. Let’s say he takes half the market. Then 67 million households will buy 3.484 billion of his units and will spend $6.62 billion on his product.

On each unit, the innovator makes 40 cents, the difference between the price of $1.90 and the cost of $1.50 per unit. For that year, therefore, he will make $1.394 billion. Voila! He’s a billionaire."

"Starting a successful startup is the most common way to become a billionaire"

a 2004 study he (Nobel prize winner William D. Nordhaus) wrote for the National Bureau of Economic Research, Nordhaus wrote:

Only a minuscule fraction of the social returns from technological advances over the 1948–2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.

How minuscule? 2.2 percent. The remaining 97.8 percent of the gains from innovation go to consumers."

"Once other competitors imitate the innovator, the price falls and the unusual gains to the innovator go away. Consumers then get the benefits from the innovation year after year." 

Ozempic Sat Unused for Decades Because Invention Is Not Enough

Pfizer knew GLP-1s worked in 1990, but didn’t see their potential. The 30-year detour shows entrepreneurship matters as much as raw invention.

By Per Bylund. 

"Led by Ozempic and Wegovy, glucagon-like peptides (GLP-1s) have become a global phenomenon, with one in eight US adults currently taking one. Those two branded compounds, both made by Novo Nordisk, emerged from attempts to develop a diabetes drug. It effectively lowers blood glucose, slows gastric emptying, and reduces hunger, leading many patients to experience profound weight loss. In a world plagued by increasing obesity, the drugs’ utility extends far beyond diabetes treatment. So why did the formula sit untouched for 30 years after it was licensed?

Ozempic is a story of pharmacological success, but also of entrepreneurial failure. The tale provides a strong reminder that inventions and discoveries mean little unless they are combined with sound entrepreneurial judgment.

According to a paper published in the Perspectives in Biology and Medicine, a startup produced a GLP compound in the late 1980s, and pharma giant Pfizer sponsored human trials that confirmed the drug’s efficacy in reducing blood glucose levels and slowing gastric emptying. One member of the startup team, Jeffrey Flier of Harvard, explained what happened next:

I was shocked when told that senior Pfizer leadership had concluded that there would never be another injectable therapy for diabetes other than insulin. What led them to this conclusion was never explained….I had been deeply impressed by their rapid decision to invest in our company, and I was equally dumbfounded by their decision to end their investment despite convincing early evidence of the program’s success.

Confident in its own conclusions, Pfizer pulled the plug on the drug in 1991. The startup folded.

Under the terms of Pfizer’s agreement, the license remained with the Boston hospital where researchers discovered GLP-1’s mechanism and conducted the human trials. It was then acquired by Novo Nordisk in 1992, where scientists used it to develop what eventually became semaglutide, the pharmaceutical sold as Ozempic and Wegovy. While it is unclear whether, as Max Marchione put it on Twitter, the GLP-1 agonist data simply “sat in a filing cabinet for 30+ years,” Pfizer’s decision to abandon the project likely delayed its development.

While it is unclear whether, as Max Marchione put it on Twitter, the GLP-1 agonist data simply “sat in a filing cabinet for 30+ years,” Pfizer’s decision to abandon the project certainly delayed its development. Had the company continued investing in the research, it might have brought the drug to patients years earlier—and captured a significant share of what has become a $190 billion market.

Clearly, mistakes were made in the development of Ozempic, but what’s notable is that the product’s success required far more than the idea. Even a great idea is not a product and may never become one — much less a successful one. Business history is filled with cases in which inventors appear to have been deprived of the rewards of their discoveries. Many great inventions were, in some sense, stolen ideas commercialized by someone other than their inventors. George Westinghouse bought patents from Nikola Tesla, and undertook illuminating the nation while Tesla, the lone genius, struggled with poverty. Elias Howe invented the sewing machine but lost most of the revenue to Isaac Singer, who was only later compelled to pay the inventor royalties. Antonio Meucci invented the telephone but couldn’t afford to secure or defend patents from Alexander Graham Bell’s enthusiastic dissemination of the device. 

Inventors frequently failed to recognize the full market potential of their ideas. Entrepreneurial outsiders notice the discovery, develop it into a desirable technology or product, and implement strategies for manufacturing, distributing, and marketing the invention. 

Some unethical behavior, fraud, exploitation, and outright stealing certainly does exist in these stories. But it would be a mistake to reduce this entrepreneurial instinct to taking advantage of or free-riding on a mistreated genius who would otherwise have realized the great benefit, himself. In a very real sense (as GLP-1 development demonstrates), what actualizes the value of an idea is the execution: operationalizing a discovery into a product or service that people find valuable. The idea has relatively little value, compared to the scalable solution built upon it. 

We typically do not learn about it much in school, but there is such a thing as second-mover advantage. This phenomenon (that the first mover is not profitable but the second mover is) is often explained in terms of avoiding the costly mistakes that the first mover makes. But cost is not the true story. Second movers recognize — imagine — a new idea’s utility to some market segment. Like Novo Nordisk and George Westinghouse, they strive to make the implementation of the idea as valuable as possible, positioning it as valuable to potential customers. The creation may be every bit as valuable as the idea, and often more so. 

Henry Ford, for another historical example, was not the inventor of the automobile, but the innovator of the affordable car. Existing manufacturers of automobiles did not recognize the potential appeal of their horseless vehicles. Henry Ford did — and made it happen. Far from the first mover, or even the second mover, he was the first to recognize what a mass market of ordinary people wanted from a car. The other producers did not. Ford transformed a toy for the wealthy into practical transport for the ordinary.

The same type of story can be told about many successful innovations. The invention (the new thing) might have limited value, until its utility is captured, marketed, and made available to people. Entrepreneurs and investors look for the value proposition in new ventures: what would make buyers want this new thing? They ask not “is this a new thing?” but “is this new thing generating value someone is willing to pay for?” The questions may have the same answer but often do not.

The story of Ozempic is one of failed entrepreneurship, but also of its eventual success. Pfizer, judging from how the story has been told, did not recognize the value of the drug. Viewing GLP-1s as a treatment for diabetes, and nothing else, Pfizer execs failed to imagine how other consumers might value these clinical effects. 

Perhaps they were right — from the perspective of treating diabetes, another injectable may not be necessary. But they were wrong regarding the value of the drug, which arises from a different use by a different market segment. 

The Ozempic craze of today is not driven by diabetics seeking to manage their disease, which Pfizer viewed as its only potential application. Millions of non-diabetics now choose the compound for other reasons. Pfizer completely missed that value proposition."

Industrial Policies

By Jeffrey Miron and Emily Bronckers.

"Industrial policy — government effort to favor certain sectors, technologies, or firms — has a long history. Far from a fringe idea, politicians across the spectrum have promoted such policies for centuries. But the results are far more problematic than its current popularity suggests.

The pattern appeared early. Federal land grants built the transcontinental railroad and delivered real economic development — alongside spectacular corruption, fraud, and overbuilding. That combination has recurred often. Republican administrations have imposed tariffs and subsidized fossil fuels; Trump’s 2018 steel tariffs protected a narrow producer class while raising costs across industries that use steel, on net destroying jobs. Democratic administrations built the Tennessee Valley Authority — which brought electricity to rural Appalachia but became a major coal-burning polluter — and invested in green energy under Obama, producing high-profile failures like Solyndra alongside modest successes at considerable taxpayer cost. Biden’s CHIPS Act commits hundreds of billions to semiconductors; it is too soon for a full verdict, but early reports show significant cost overruns.

Proponents point to South Korea, Japan, and Taiwan as proof that industrial policy can work. But for every South Korea there is a Brazil or India, where decades of protection have produced inefficiency rather than competitive industries. Some economists question the Korean case even more directly: the industries the government subsidized were not the ones most correlated with growth, suggesting the policy may have been targeting the wrong sectors. Economists also debate how much credit belongs to government direction versus stable macroeconomics, high savings rates, and openness to foreign technology.

It helps to place industrial policies on a spectrum, with targeted subsidies and trade protection at one end, and fully planned economies at the other. The Soviet Union and Maoist China were the paradigmatic examples, and their failures were catastrophic — chronic shortages, misallocation, and collapse. Defenders of modern industrial policy argue that targeted interventions are different from central planning, and formally that is true. But the underlying problem — that officials lack the information markets generate and face political pressures that distort allocation — does not disappear because the intervention is more modest."

China’s Last Moonshot

China’s ghost cities are like a mocking glimpse of the Chinese century we were told to expect, and for which we are still waiting.

By Aaron Sarin at Quillette.

"Our rockets can find Halley’s Comet and reach Venus.
But our fridges don’t work.
~Mikhail Gorbachev 

In the hills of northeast China, the “State Guest Mansions” sit empty and silent, like the well-preserved ruins of some lost civilisation. There are 260 of these mansions, huge but tediously uniform, each of them close to completion. The project was abandoned a couple of years after launch in 2010. Now local farmers plough the surrounding land. Cattle roam the villas, along with the occasional feral dog. Inside, urban explorers climb through the open jambs and fly their drones down marble hallways, creating creepy home movies.

Similar sights can be seen all over the country, of course, in China’s famed “ghost cities” (or sometimes “ghost districts”). The skyscrapers in Tianjin’s Binhai New Area may rise no higher than in any other major city, but the silence and emptiness of the surrounding neighbourhood makes the buildings feel truly enormous: looming, forbidding, watchful. In his 2024 book Vampire State, Ian Williams describes a “ghostly conurbation” on the other side of the country, near Dongguan, that boasts the world’s largest shopping mall:

Cavernous dusty halls, layer upon layer of meandering marble-lined walkways beside the shells of hundreds of shops, but not a soul to be seen. Wires hung from ceilings like an infestation of snakes. An artificial river wound through the complex, its water stagnant and dark green.

These vast monuments to state folly provide an apt picture of the Chinese economy: the speed and scale, the single-minded vigour, and then the waste left behind. The latter feature is partly due to China’s modern problem (communists with their central planning) and partly due to China’s ancient problem (a kowtowing mandarin culture that rewards impressive visible display over efficiency).

The rot spreads far beyond the ghost-city phenomenon. Georgetown professor Ning Leng carried out research in fifteen cities across China. She found that local governments had prioritised the building of expensive wastewater treatment plants over the construction of underground sewage pipes and drainage systems. They had focused on big treatment facilities because these looked more impressive to their bosses in Beijing. Without a vital subterranean root system of pipes and drainage, the treatment plants were operating far below capacity, and pollution was pumping into rivers and lakes.

And so on, and so on. China’s vaunted high-speed rail network piled up a trillion dollars in debt; most lines now run at a loss. In 2024, 90.6 percent of the country’s regional airports had fewer than one flight per day on average. Something similar is even happening in the wake of China’s protracted real-estate downturn, as the CCP tries to rescue the Chinese economy by pouring billions into a small handful of strategic industries—AI, robotics, chips, green energy.

This bold strategy is the Communist Party’s last great moonshot (itself actually the name of a major Chinese AI startup). The fear is that if Beijing can’t dominate in these industries then it will become technologically dependent on foreign powers. The hope is that high-tech sectors can replace the fallen giant of real estate and together constitute a new driver for the Chinese economy, while simultaneously enabling Beijing to “seize the commanding heights of technological competition and future development,” leapfrogging Washington into the position of global hegemon."

Poland's GDP took off when they adopted economic freedom

Tweet from Alex Stapp.  

 

When Schools Try to Cover Up Their Failures

Social promotion and efforts to ban standardized tests are ways of shielding adults from accountability

By Jason L. Riley. Excerpts:

"Among 13-year-olds in nearly every demographic group, test scores in math and reading were flat (since 2022). And most youngsters continue to lack proficiency in both subjects."

there is "pressure on teachers to pass students regardless of classroom performance or even attendance"

"The result is a school system full of children unable to perform academically at even the most basic level."

"many teachers said that they were discouraged or forbidden by their principals from flunking students, or that they have given out failing grades that were overridden. Others said failing students was permitted if justified, but the administrative burden to rationalize failure, even for students who did not show up to school, is onerous or impossible.”"

"An Education Department study in 2024 found that 1 in 4 young adults are functionally illiterate, even though more than half received high-school diplomas."

"many of today’s high-school grads function at or below a middle-school level of education. Eliminating standardized tests wouldn’t change that reality"

"it isn’t expensive to teach children reading and arithmetic, something that was done competently for many decades on budgets much smaller than what educators have at their disposal today." 

"empirical studies have shown that smaller class sizes have minimal effect on student learning. Countries that consistently outperform the U.S. on international tests, including Japan and South Korea, have larger classes on average. So do many high-performing charter schools."

"the best-performing students in the U.S. tend to be of South Asian and East Asian heritage. They are among the groups least likely to be taught by someone who looks like them."