Capitalism and Energy

DEFINITION
Capitalism : an economic system characterized by private or corporate ownership of capital goods, by investments that are determined by private decision, and by prices, production, and the distribution of goods that are determined mainly by competition in a free market

Because I'm somewhat simple-minded, I sometimes feel a need to stop pretending I know anything about a word I've long heard, but never really considered what it means.

I started with a definition above from Merrian-Webster: http://www.m-w.com

The above definition seems reasonable enough, but I'm mostly curious how debt and economic growth fit into it.

I've heard an analysis that suggests that economic growth is required for capitalism to function. AND specifically a claim the the depletion of fossil fuels will threaten to destroy economic growth and our economic success.

Probably capitalism is WIDER than such an analysis, but perhaps an accurate representation of our specific implementation of capitalism or economic conditions.

The basic idea is that I start a business and borrow money and pay interest on that loan. I invest the money in the business startup costs and hopefully business revenue will be enough to make payments on the loan and eventually pay it back with interest. The investor is taking a risk that my business may fail and I might declare bankruptsy and the principle will be lost. The risk justifies the interest payments.

So far so good. So how does this model demand economic growth? I mean I can see a new business IS GROWTH, but it need not necesarily be NET growth? We can imagine my new business offers something cheaper than before. Cheaper means the market can expand because it will be more affordable - that causes growth. For instance, reducing costs by 20% might mean a 50% increase in marketability, leaving a net gain in economic activity.

On the other hand, cheaper prices can reduce gross activity, if can I cut prices by 50% (keeping same profit/unit), perhaps sales will only increase by 25%. My profits still increase by 25%, but gross activity have been reduced. This means that consumers will have more money left over for other consumption.

Basically the capitalistic trick for cutting unit costs is to use cheaper materials and energy and mass production to minimize the proportion of fixed costs.

It would seem cheaper energy leads to cheaper material costs, cheaper product costs, allows larger profits, and allows more consumption from those profits.

I worry about peak oil, and increased energy costs, but before I go there I wonder if we can imagine simply steady-state within our economy?

If population is steady, energy prices and supplies are steady, where is the cause for growth? Partly I'd imagine it comes down to a time delay in exploiting opportunity. Steady input along with competition still encourages more consumption as long as that consumption benefits by cheap energy costs. Ultimately if you imagine a "Star Trek" universe of projected "free energy", then there's no reason at all for consumption not to continue to increase as we find new uses for it.

Thus "cheap energy" alone appears to be a driver of all economic growth. Of course population increase also drives economic growth, but cheap energy encourages population growth too. I'm just saying that "cheap energy" is the fundamental driver, even if other feedback loops exist.

Well, I think there'll always be environmental limitations even if energy and raw materials are not the limiting factor. Pollution in general can limit growth. But otherwise cheap energy can keep riding economic growth continually.

Partly I'm imagining that any given fixed cost for energy, might asymptote growth to some predictable level. If energy cost was zero, other factors would limit growth. If energy cost is very high, economic activity will be fully limited by energy. Intermediate costs will produce different potentials for growth. I'm fuzzy on the feedback forces. If energy prices half, economic potential can double, EVEN if current exploitation isn't optimized to an equilibrium.

Maybe nonsense, but if somewhat true, perhaps at our current energy costs the economic is 60% optimized - at 60% of our potential with an infinite amount of time to refine it. That means if everything stays the same, we have a 40% margin for symptotic growth.

Now if energy costs double, perhaps our economic activity potential is cut by 25%. Perhaps this cuts our economic activity itself by 10%. Then we can still grow above our previous 60% absolute level, although only if more efficient.

If energy costs continue to rise, our economic potential will continually be reduced, except by improving our potential faster.

I imagine as fossil fuels become more expensive, our economic potential must decrease, even if our actual economic activity might decrease less through efficiency.

There's a fear that higher energy prices will cause economic decline and this will destroy our system of repaying debt. Certainly higher energy prices will encourage development in new efficiency at least, but unpredictable high energy prices are bad for the economy because debt repayment plans depend on assuming costs and profit. Higher energy prices generally mean lower profits as raising prices too much will reduce consumption to a point where net profits decrease.

I can see the failure of businesses to plan for higher input costs and being left with unpayable debt payments. Business is risky enough under good conditions.

I think of my employer - small consulting and software company, growing with microcomputer power. Our power grew as we grew.

I suppose farming is a good example of failing businesses. Technical advances encouraged more food production which caused lower prices. Farmers who have high debt may be unable to make their expected payments given prices lower than expected.

Competition in the beginning encourages efforts to reduce costs which is good, but also encourages investment in new equipment and debt which saves work and encourages consolidation of small farms into larger ones.

If energy was really free, it is hard to imagine the end-game for farming technlogy, but probably in the end we'd have a fully mechanized farms where people sit in computer terminals to analyse information and make higher decisions. One "farmer" might be able to manage a million acres. Of course he likely wouldn't be able to get all the debt required, but over time consolidation would allow this. In the end the "farmer" would just be an employee, and the "owner" would be a distant company - with vast debt, but also vast ownership of property. He'd also be employing R&D on new equipment, new seeds, new fertilizers, new methods of conserving soil, etc, etc.

Cheap fossil fuel prices have encouraged such developmental direction, whether we've long past a point of transitioning to another energy source is another story.

Politicians are reluctant to interfere with farmer failures because ultimately the economic is stronger by the elimination of farmers without the resources to compete.

Well, lots of thoughts, and no clear truth in these word games. Capitalism builds empires on opportunity and dismantles them when they no longer serve. On the surface it would seem capitalism can as well reverse course if conditions return to older ones where chemical energy is more expensive. Right?

I just see that businesses succeed by accepting debt, taking risks, and that unpredictable energy prices will disrupt businesses causing failures. Failures lead to holes and new opportunity.

Perhaps the biggest thing left open from my thoughts is I imagine everyone has access to wealth and capital which is untrue. The "potential" for development is huge if you simply imagine the rest of the world is going to catch up to the U.S. consumption patterns. We live the way we do because of cheap energy, but there's no guarantee our lives can continue when everyone catches up to us.

I wish I understood more, but perhaps everyone's models are limited anyway. I wish I could predict difficulty of clearly unsustainable activity.