Capitalism Innovates Through Shortages

In this writer's opinion, one of the greatest attributes of the free market is the way it encourages innovation in the face of economic turmoil. Time and time again, history shows capitalism to be the system that best promotes radical change for the better. Yet this quality is often ignored by the doomsayers and cynics of the economic world, who insist on more governmental regulation lest [insert disaster here] takes place.

Take the concept of peak oil, for example. For decades, warning after warning after warning has been shouted to the public, warnings of how the earth will run out of oil in 20/10/5 years and how an immediate shift to alternative energy is necessary to Save The Planet. Yet none of these "peak oil" predictions have come true. Every time word gets around that the world will run out of oil in a specific year or time period, that time passes by without any notice from anyone not paying close attention. So why have so many researchers been wrong on the issue? Often their research and analysis is sound, but they forget to take into account that one key capitalist concept: innovation.

Whenever the global supply of crude oil begins to dwindle, the price of oil steadily increases due to the laws of supply and demand. Eventually, the price rises high enough that oil companies gain more in profit from selling the oil than they lose by having to go out and explore for new sources. Therefore, it becomes profitable for the companies to explore for more untapped oil deposits. All of this oil, newly available to the market, was previously unknown to researchers and was therefore not counted in those researcher's calculations as to how much oil the earth holds. Now that supply of crude oil has increased, prices fall back down and become more accessible to consumers. The fact that oil shortages mean higher prices further means that oil companies are motivated during times of short supply to find more oil. Hence, so long as there is actually oil to be discovered, the free market will see to it that consumers will have oil.

Inevitably, the rebuttal to this argument forms: "But what about when we really do run out of oil? All the exploring and drilling in the world won't be able to find more!" The same concept will still apply in this case as well: as oil begins to run short its prices will rise, and continue to rise as the supply grows smaller and smaller, leading consumers to consider substitutes to gasoline-powered cars and oil-based materials like plastic. As demand rises for alternatives, entrepreneurs and innovators will see to it that the demand is met, because the profits available in those alternatives will be rising as well.

In short, the market's affinity for innovation will mean that the population's needs will be met due to the profit motive. Even when oil runs out in the future, private companies will have been investing in alternatives because the price of oil with rise steadily in conjunction with the decrease in supply. The doomsday scenario of the world suddenly being left without oil and without a viable alternative simply will not happen in a free market.