Using the writings of Thorstein Veblen to analyze the use of machinery in the energy industry, Veblen would say that at the heart of the problem is the human desire to “get something for nothing”.  This is how he says it works in the economy:

  • As the economy makes a come back from a recession, the markets get too enthusiastic about economic prosperity.
  • The problem is that human nature is more concerned with getting something for nothing than it is with fair value exchange.
  • As the economy comes back, the machines are put to work to meet demand.
  • Demand during these enthusiastic times is very strong, so prices are pushed up. Since the machines had previously been idle, there is a little delay in pumping up production.
  • Inflation elevates all prices, including land, plant, assets, and inventory.  That means that firms have more collateral, on paper, and can thus request more financing.
  • Veblen says that the enormous profits which firms make are not real because the balance sheet is swollen due to inflation.  The executives at the firm know this but that does not matter because human nature wants something for nothing.  More money is still more money even if it is not real due to inflation.
  • Veblen states that most of the loans are not really placed in productive investment.  He states that most of the money goes into higher salaries and the stock market, which produces more inflation since the money is not backed by tangible products.
  • As inflation moves forward, assets are worth more on paper, more collateral is available, and more loans are taken out; which then are plowed back into machinery and salaries.
  • When production finally does catch up, the executives cannot see the reality.  The need to get something for nothing is too strong.  The cycle continues until finally the business community wakes up to the fact that inventories, due to machine production, are too high.  Production is cut and jobs are lost.
  • The economy starts to decline, sometimes fast and sometimes slow; but all the same it then enters recession and the whole cycle starts all over again.

This perpetual cycle of boom and bust is chronic in the energy industry.  Anyone working in the industry and was born in the 1950’s or 1960’s knows this from direct experience.  Where do we go from here?

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