Why Capitalism is Unsustainable

GDP of US in Trillions of US$ - data taken from WolframAlpha

In capitalism a part of the produce is reinvested to increase productivity, either by increasing scale or by improving efficiency. For example, if a weaver has some extra money, then he/she would buy a more efficient loom, probably a powered one. A growing company would increase its employee base, expand its markets and open new factories or offices. This would increase the productivity (rate of production), which can be considered to be proportional to the amount of capital invested. As the productivity of a system (company, state world...) increases, the amount of new capital invested will also increase. For example a large MNC would consider investing billions of rupees whereas a start-up would find an investment of Rs. 1 lakh to be a huge expansion. This means that the rate of increase of rate of increase of productivity will also increase.

While it is difficult to prove how the productivity/capital investment will grow without making some assumptions about the amount of produce reinvested, the above graph confirms the hypothesis that productivity grows exponentially. I chose to take data from the US as they have always been almost purely capitalistic (see my post “Free Market Hypocrisy”), which is a crucial factor in studying capitalism!

Now, a quantity that grows exponentially can outgrow anything that is fixed. Thus, soon we will be consuming all the energy that we receive from the sun. At this point the law of conservation of energy and the law of entropy predict disaster unless we find a method to get more energy, like increasing the surface area of the earth or inhabiting another planet. Thus, capitalism seems to have a fundamental flaw in its very definition. Let’s try to see if there can be a solution to this problem.


Increase in Productivity need not result in Increase in Entropy
Most industrial growth leads to an increase in energy usage. For example, we now have more mining sites, bigger power stations, larger factories and items like FMCG’s and electronics are manufactured at a larger scale. In services too, larger loads are transported and more people work in more comfortable offices.

But this need not be the case.  Higher productivity need not mean bigger or more goods produced and greater amount of services carried out. Productivity can also be increased in terms of the value of the produce produced. For example, a graduate earns more than a matriculate because the labour performed by the graduate is more ‘valued’ and took a longer time to obtain. Investing in education would therefore lead to greater productivity without causing greater energy consumption. But if companies were to invest in improving human skill rather than hiring more of them or giving them better tools, the humans would have to agree to be in a bond with the company. For example, if I join a training programme subsidised by a company, the company would expect me to work for them, as otherwise their investment would have been wasted. While such a set-up would enable the company to invest capital without increasing energy consumption, it could lead to a loss of freedom and is a dangerous solution. Companies may also choose to make machines more ‘clever’ or ‘efficient’ rather than bigger. This would also lead to an increase in productivity without leading to an increase in energy consumption, and is thus an agreeable solution.

Energy consumption of the US (10¹⁸J/Yr) – data taken from WolframAlpha

From the graph it is evident that such improvements in efficiency have been happening as the graph of energy consumption is not increasing exponentially like GDP. But it is still increasing and could lead to environmental problems.

Thus, one should try to increase investment in areas which improve the efficiency and value of the production and discourage investments which would result in an increase in the size and/or quantity of production. While in the short term such a measure may be against the interests of the entities which implement them, in the long term this will help decrease energy costs. Such energy cost considerations are probably the reason why the energy consumption (see graph) has not grown exponentially like GDP.

It might thus be beneficial to promote those industries which improve efficiency and value of production. Examples of such industries include: IT, mass transport, research (patents are economically beneficial) and communication. The government could also take loans from the private sector to invest in education. This would ensure that the value of production goes up while reducing capital availability for entropy increasing investments.

Thus, while capitalism in its current form is unsustainable, careful planning and action might prevent disaster. This does not mean that I am in favour of capitalism. This post is just to indicate that one of the problems with capitalism may be solved within its own framework.