Energy as a Currency

Money these days is backed by nothing but belief. Why not use energy?

The gist of this essay is to explore the pros and cons of a currency backed by stored energy instead of just fiat currency backed by faith. In sum:

• Capitalism is a way of exploring the possible space of economic activities that maximizes the return on resources invested, and so is a kind of gradient ascent in ‘business model space’

• Energy is the most common factor of production in every good, service, or product on the planet, yet it is not consistently getting cheaper over time

• Fiat currency distorts market signals to inflate demand or suppress returns through inflation, creating the ZIRP problem of vanishing gradients in business model space

• An energy-backed currency automatically aligns economic incentives with the thermodynamics of industrial growth to maximize the availability of energy and therefore the rate of future growth

• Basic physical laws prevent manipulation of markets to ensure industrial capitalism can continue to be an effective evolutionary search algorithm through the space of possible economic activities

  

Thermodynamics of Industrial Capitalism

Capitalism is all about competition between new emerging business models that try to explore a complicated landscape of resources, customers, sales models, pricing strategies, marketing brands, and technologies. As business models evolve and grow over time, and even produce new markets and make room for new businesses, the genetic evolutionary fitness function is always the same: maximize the returns on capital invested.

Industrial capitalism as a whole is a kind of genetic search algorithm exploring the ways in which humans can interact with each other and their environment, recombining the available technologies, cultural forms, and ideas to increase the total subjective value of human society to itself as measured through price. The single most important delimiter on what kinds of economic activities are viable is the available energy supply. Before the age of hydrocarbons, most people lived in vicious poverty. Countries are rich to the extent they can produce large amounts of energy and provide it cheaply to their citizens.

While energy has been the greatest enabler of economic growth, its not actually the back propagation signal industrial capitalism uses to navigate the search space of possible business ideas, and therefore maximize its future rate of growth. Rather, returns on invested capital are denominated in fiat currency, which is backed by a circular set of beliefs operated through a circular set of institutions issuing each other debt. Fiat currency is very useful as a medium of exchange, since its perfectly fungible, digitally transferable, universally accepted, etc. However, ever since we introduced fiat currency in 1971 and left the gold standard, energy has overall become more expensive.

The Energy Economy

The problem with capitalism when the ‘capital’ you’re maximizing returns on is a fiat currency is that it can be printed at-will by any democratically elected government, and often is to subsidize the electorates interests. This defeats the role of free market competition as an effective search algorithm through the space of possible economic business models by introducing artificially inflated demand for some businesses through government purchasing, while suppressing the effective signal of financial returns from other businesses through inflation. Too much quantitative easing effectively flattens the learning gradient for new business discovery, leading to the zero-interest-rate-phenomenon era of startup financing which saw a lot of really bad companies raise huge amounts of money because there was nothing better to do with it.

Meanwhile the thing that actually enables industrial activity - energy - is something we haven’t explicitly optimized for at all, we just consider it ‘another cost’ like land or labor. The problem with grouping energy with these other costs is understanding land is finite, and so its value should go up with increasing population and land-use; and labor represents people’s time, which we also expect to go up in value with increasing quality of life and standard of living. Energy however is both abundant and constantly replenished by the sun, and across nuclear fission, solar, wind, hydro, geothermal and hydrocarbons, we’ve hardly scratched the surface of the total available energy real estate we can be occupying. There is simply no good reason that energy hasn’t gotten cheaper except for our own decision-making.

The energy sector is one of the most heavily regulated in the entire economy, and the highest density, cleanest, and most reliable forms of energy like nuclear fission are the most regulated. Governments like Germany have intentionally run their energy economies into the ground. How do we turn this all around?

Energy as a Currency

What if we made the most important input into our industrial economy the thing the industrial economy most aggressively optimizes to increase in total supply? In other words, what if we backed our currency with energy in the form of kilowatt hours, or total embodied energy. Here are some fun things to think through:

• Limits inflation: Energy cannot be created or destroyed, only collected and spent. Since energy is conserved you can’t actually create it out of thin air or destroy it altogether, you can only earn it from nature through an application of technology, or else spend it doing work, or burn it as waste heat. It is physically impossible to manipulate the incentive structures of thermodynamic industrial capitalism and eliminate the gradient of new business discovery by quantitative easing. The long-run compounding annual growth rate in energy use has been around 2% for many decades. Satisfying this rate of growth in energy in an energy-denominated economy means it also pegs GDP growth at 2%, and inflation at 2%, meaning the real purchasing power of a kWh-backed dollar is always constant.

• Optimal policy: Taxation helps optimize your economic policy, and the natural tax on energy is entropy. The loss of energy between storage formats like electrical, mechanical, chemical or thermal, or transfer through space or storage through time all manifest as entropy or waste heat. Incentivizing economic actors to minimize their tax exposure is the same as making their activities more efficient. In contrast, today we try to incentivize efficiencies by taxes in fiat currency, which can be politically influenced and therefore distort true market signals.

• Government Spending: If a government wants to raise capital for its activities, it has to supply more energy to the public, meaning it has to solve the multi-party collaboration issues around planning, developing and connecting large energy infrastructure projects. Currently governments raise money by taxing the fiat currency of people, who then vote against energy development projects in their local area, creating bottlenecks in distribution, fragility to blackouts, and regional variability in price. However governments are the perfectly situated to use federal or state land, eminent domain, or other measures to construct as much energy infrastructure as there is demand for, and are well situated to undertake the longer construction and capital intensive work required for power like fission energy.

• Incentivized Resiliency: Every consumer of energy is maximally incentivized to produce as much of their own energy as possible, and find ways of storing it efficiently and making it available for use by others. By doing this they are engaging in simple capital accumulation and savings, but, capital accumulation is only possible when the capital can actually be deployed back into the energy grid - a kWh stored where no one can use it is like a pile of money buried 10 miles underground. It’s not money you can spend.

Of course there are a lot of problems to work through with energy as a currency. The largest issue is this: we live in an economic modality where massive capital accumulation is possible essentially indefinitely. This is not possible in an energy economy - batteries will constantly self-discharge, and the best way of storing huge amounts of wealth long-term is sequestering it as hydrocarbons and burying it underground. Therefore the counter incentive against wealth accumulation actually becomes a pro-incentivize towards carbon capture and careful management of strategic energy reserves, something that our societies and economies have difficulty doing today.

Despite the difficulty in implementation, the elegance of energy as a currency is simple: to align the principles of capitalist selection and competition with the fundamentals of thermodynamics and energy use that underpin all economies growth; to replace the faulty incentive structures devices by humans with inviolable laws of nature; and ultimately, to maximize the future rate of growth of overall prosperity into the indefinite future.