written 14 August 2022
published 21 August 2022
Price inflation is the result of changes in three factors: currency value, demand, and supply.
In 1963, my mother bought a 3 bedroom, 2 bathroom tract house in San Diego for $14,000, which Zillow values today at $688,800, almost a 5,000 percent increase. Despite being remodeled over time, the house is still the same basic structure on the same sized parcel as it was in 1963. Some of the increase in the price is due to the steady decline in the value of the dollar since 1972.
Demand is the second factor affecting pricing. In the 1940's, there were 2 billion people on the planet, and we will hit 8 billion this November. California has experienced the same four fold increase. But demand has increased even faster than population growth would indicate.
The entire economy had shifted to massive war time production during World War 2, and there was concern about returning to recession after the war. To avoid this, the government changed us from "citizens" to "consumers", pushing everyone to buy more goods to keep the economy humming. The GI bill funded education and low interest home loans, making the transition relatively painless. Everyone was eager to start families and live the American Dream.
Because capitalism defines itself in terms of growth, demand must increase even if the population is stable. US consumers take a quarter of the global economy, while making up less than 5 percent of the global population. Since we advertise our standard of living all over the world, everyone wants to live more like an American, making hyper-consumption a global force. Unfortunately, we live in the real world, with finite boundaries and resources.
Supply is the third factor in pricing. One of the flaws of capitalism is the assumption that the "free market" balances everything out. When demand exceeds supply, the price goes up, reducing the demand. This is satisfactory for some items, but is unacceptable for essentials, such as clean air, potable water, healthy food, adequate housing, or affordable health care. When the demand for these exceeds the supply, people begin to die, or go to war.
For millions of years, Earth's annual biological productivity supported all life forms. In the 1970's, when global human population hit 4 billion, we exceeded that productivity limit. Since then, we have begun consuming the fundamental biosphere of the planet, in addition to the declining annual harvest. We have increased our population and per-capita consumption by driving other species to extinction, and now risk our own extinction as well. At today's level of consumption, we use 1.75 times the annual productivity of the planet. If everyone consumed like Americans, it would take 5 Earth's to support us. Part of the denial of capitalism is that there is little value assigned to the future, so this over consumption is not factored into the pricing structure until part of the system crashes completely. We are beginning to see the economic consequences of a system long out of balance with reality.
Take the recent rise in the price of gasoline as an example. Oil is a limited resource, but we assume we will always "find" more when our current supply diminishes. Most of the land based "conventional" oil has been found in about 120 large fields, which have produced for decades. But new discoveries fell behind consumption rates over 50 years ago, and most of those large fields are now in steep decline or are already depleted. Newer, "unconventional" oil is found in much smaller quantities, where production declines in a few years, demanding new developments and increasing costs.
Conventional oil production peaked in 2005. To fill demand, US fracking boomed, despite increased costs. Money poured into fracking on the hope it would "turn around", but $30B was lost in a decade. By 2018, all oil production had peaked. The recent sanctions from the Russian invasion of Ukraine cut about 10 percent from the global market. Prices rose abruptly because no other country could increase production to cover that loss. We have a limited supply of our most common energy source. The issue is not really price, but availability.
Like a naive spendthrift, we have been burning through our finite inheritance of stored solar energy. If we are lucky, we will make the shift to prudent living on our annual solar income, but time is running out.
