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Last Updated: Jul 9, 2008 - 8:25:54 AM |
The age of oil has been a period of rapid and rapidly rising production
of goods, services and wealth. The ability to harness technology-driven
productivity and output enhancement has transformed the world in wave
after wave. The vast quantities of wealth produced and the enormous
increases in human population, food output, longevity, literacy and
health all attest to this. Abundant and price-competitive energy was
substituted for human physical labor in industry after industry, nation
after nation.
The very success and extent of this process has created the demand
increase that is partially driving oil, coal and natural gas prices
today. There are implications for the relations between capital and
labor, wages and profits.
Abundant, reliable and cost-competitive new technologies must be run on
abundant, reliable and cost-competitive energy inputs. The length and
scale of present energy price increases threatens to begin to alter the
profitability and desirability of marginal-production processes.
Most commentators don't focus on substitution between capital and labor
in the face of energy price increases. The longer prices stay high, and
the higher they go, the more important this area is to explore.
Skill-biased technical change and globalization have influenced the
split between wages and profits. Rising productivity has created the
possibility of rising wages and profits. Sometimes this possibility
becomes reality, sometimes it does not. Lately, in the US and abroad,
the gains to productivity have gone more toward profits than wages.
This makes clear that abundant, reliable and affordable energy has
allowed greater wealth to be produced and a greater share of that
greater wealth has been captured by profits. Rising energy prices could
pressure this in two ways.
Energy prices are, directly or indirectly, input costs into most goods
and services production. Sustained and significant energy cost
increases eventually become higher food and living costs. We are
already at least nine months into a significant acceleration in
expected energy and food-price increases. If wages don't rise, an
increasing portion of incomes will be redistributed to food, energy and
costs related to food and energy.
This will act like a wage reduction to the extent that it is difficult
for consumers to find suitable and stable-priced substitutes for food
and energy. Systematic wage increase demands cannot be held off
indefinitely. Rising unemployment may reduce demands but costs of
living apply persistent and acute pressure.
Meanwhile, companies' costs of inputs are pressured up by rising prices
and by increasingly strained basic operational planning and design born
of assumptions about cheap, reliable energy and labor. Past imbalances
between profit and wage gains from productivity are likely to increase
demands for wage hikes. Further massive substitution of technology for
labor will be more difficult as consumers struggle under high food and
energy costs as firm costs rise.
Production processes with significant energy and labor cost components
should be expected to be hit hardest and first. Here we might take
airlines as the canary in the coal mine. We might also look hard at a
Chinese economic model that relies on abundant, inexpensive labor and
energy with a voracious appetite for distance-shipped raw materials and
final products.
The long-term massive substitution of technology-driven innovation,
fueled with cheap wages and energy, may be at increasing risk. Rising
energy costs are hard to substitute around. Labor is an obvious
substitute in relatively few cases. That may change on the margin. More
broadly, high and rising energy prices may begin to pressure the
divisions between wages and profits through direct business costs and
wage demands.
The past three decades in America have been defined by rapid
technological change, profit-biased output growth and generally cheap
and abundant energy. Clearly, the world will not change overnight and
energy prices have not attained - nor will they likely in the near
future attain levels - sufficient to decimate major structural pillars
of modern economies. It may nevertheless be getting toward a point
where we entertain discussion of the implications of energy prices for
inflation, wage rates and profits on a macroeconomic level.
Source:Ocnus.net 2008
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