Thought Experiment on the Economy
The other day I was driving to Snoqualmie with Steve Kuhn to take our respective children to their ski lesson. All week I had been considering a thought experiment: what happens to the economy if energy was placed under Moore's Law.
Presume that technological advancements in solar, wind, and nuclear energy encounter massive investment such that the price of energy begins to fall over the next 20 years the way that the price of computing power has fallen over the past 20 years - what happens?
The first conclusion was that our standard of living would dramatically rise. Free energy = free heating for the house. Free transport costs = no longer having to burn a gallon of gasoline to buy a gallon milk. Free transport costs = no longer having to burn gallons and gallons of milk to transport milk from the farm to the dairy. Free energy = lowered costs of producing the feed required to raise a cow.
Ok, but what does that really mean for the economy? Assume nearly all of the energy costs are pulled out the economy, what happens to the manufacturing, transportation, and agriculture industries, among others.
When I got home that evening the McKinsey Quarterly arrived with a potential answer: power curves. The argument is that larger firms have increasing returns as the scale. The example is that over the past 30 years the biggest banks have gotten bigger as they have acquired smaller firms and used their resources to out compete the remaining firms.
The exhibit shows how much bigger the big firms are (or were).
This tendency has been repeated in other industries. In fact, in industries where access to capital but creativity is the constraint then the tendency to have dominant firms is even more pronounced.
So what does all of this mean if energy is subjected to a kind of Moore's Law? I think the answer is in the article
Power curves are also promoted by intangible assets—talent, networks, brands, and intellectual property—because they can drive increasing returns to scale, generate economies of scope, and help differentiate value propositions. ...the more labor- or capital-intensive sectors, such as chemicals and machinery, have flatter curves than intangible-rich ones, such as software and biotech.
If the cost of energy is no longer the chief constraint on goods and services, then the only thing left to differentiate on is creativity. Factor in additional conditions such as low cost of capital and the ability to harness creativity/organizational development becomes THE critical competitive advantage.
Presume that technological advancements in solar, wind, and nuclear energy encounter massive investment such that the price of energy begins to fall over the next 20 years the way that the price of computing power has fallen over the past 20 years - what happens?
The first conclusion was that our standard of living would dramatically rise. Free energy = free heating for the house. Free transport costs = no longer having to burn a gallon of gasoline to buy a gallon milk. Free transport costs = no longer having to burn gallons and gallons of milk to transport milk from the farm to the dairy. Free energy = lowered costs of producing the feed required to raise a cow.
Ok, but what does that really mean for the economy? Assume nearly all of the energy costs are pulled out the economy, what happens to the manufacturing, transportation, and agriculture industries, among others.
When I got home that evening the McKinsey Quarterly arrived with a potential answer: power curves. The argument is that larger firms have increasing returns as the scale. The example is that over the past 30 years the biggest banks have gotten bigger as they have acquired smaller firms and used their resources to out compete the remaining firms.
The exhibit shows how much bigger the big firms are (or were).
This tendency has been repeated in other industries. In fact, in industries where access to capital but creativity is the constraint then the tendency to have dominant firms is even more pronounced.
So what does all of this mean if energy is subjected to a kind of Moore's Law? I think the answer is in the article
Power curves are also promoted by intangible assets—talent, networks, brands, and intellectual property—because they can drive increasing returns to scale, generate economies of scope, and help differentiate value propositions. ...the more labor- or capital-intensive sectors, such as chemicals and machinery, have flatter curves than intangible-rich ones, such as software and biotech.
If the cost of energy is no longer the chief constraint on goods and services, then the only thing left to differentiate on is creativity. Factor in additional conditions such as low cost of capital and the ability to harness creativity/organizational development becomes THE critical competitive advantage.
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