When we think about capitalism we associate it with free markets, financialization and globalization which leads to better outcomes for all. In essence we forget that capitalism has been made possible by the extraction of resources from earth and our economic growth has been dictated by how productively we have transformed natural resources into products demanded by consumers. Price is a reflection of the value that any commodity provides to the consumer. Growth in capitalism has been on the basis of enhancement of productivity, new trade routes, expansion and tapping of resources across the world. However, we have resource constraints as the resources on earth are finite and its indiscriminate use also increases pollution. There is also limited scope of increases in growth by including new trade partners in the trading system as the number of trading partners is limited. So there is a cap on the resources we can use on earth also limited potential for increase in growth due to trade.
Nikolai Kardashev, a Russian astrophysicist had created a scale to measure a civilizations level of technological advancement. He classified civilizations according to the order of magnitude of energy available to them. There are three types of civilizations namely type1, type 2 and type 3. Type 1 civilization possess the capability to harness and store the energy from the nearest star which reaches the home planet. Type 2 civilization possess the capability to harness the energy of the nearest star completely. Type 3 civilization possess the capability to control the energy on the scale of the host of its entire galaxy. Currently, we are a type zero civilization and to shift to type 1 civilization we will have to develop means to directly harness and store the energy of the sun. Given the exponential growth expected in solar and wind, we may become a type 1 civilization in a few generations.
Such energy ventures will have high fixed costs, but very low marginal costs. In this scenario of energy abundance, regular price signals will be ineffective and thereby there will be required a new framework on the basis of which to allocate resources. A framework to consider would be Maslow’s hierarchy of needs which is composed of five layers. The lower two layers comprise of basic needs, the next two layers comprise of psychological needs and the last layer comprises of need for self-actualization. Economy based on pricing signals works the best when basic needs dominates. However, when energy, and hence resources are relatively abundant, the median of the economic needs will shift to self-actualization needs. On one hand, zero marginal costs make supply unlimited, and on the other hand, self-actualization demand function does not respond well to pricing signal. The current “capitalist” framework would have to be overhauled when such a situation prevails.
Michio Kaku estimates that we are 100-200 years away from being a type 1 civilization. However, on the contrary, we believe, that for all practical considerations, we are at the cusp of transition from type zero to type 1 civilization. The new inventions and social structures we observe now would have been unimaginable to those who lived in the 1900’s. Similarly, as technology progresses, we will have to take a radical look at the social structures and consequently the social contracts & economic structure under which societies operate. Unless we change these rapidly, away from both capitalism and communism, the technological progress will lead to more and more pronounced business cycles and social unrest on the back of perceived unjust distribution. In the next few weeks we will discuss various frameworks for understanding this phenomena and the portfolio adjustments that smart investors need to make to benefit from this mega theme.