http://dotearth.blogs.nytimes.com/2008/10/13/growth-economics-on-a-finite-planet/
October 13, 2008, 10:03 am
Growth Economics on a Finite Planet
By Andrew C. Revkin
Over the weekend, I asked Herman Daly, the specialist in "ecological
economics" at the University of Maryland, about the recent financial
turmoil. He pointed me to a short piece he wrote that was posted on
the Oil Drum blog a few days ago and that he gave me permission to
post below. It's mostly about economic theory, but does get at one of
the keystone concepts explored here - which is how many people,
consuming how much stuff, can one livable planet support?
To Dr. Daly, the implosion after the burst of trading and investment
in high-concept paper offerings was inevitable, and simply a
reorientation of the market toward the only real economy - the one
grounded in actual assets. In the end, the only economy that can't be
gamed is one that is grounded in the way the Earth works. That is
where "real wealth," and real limits, lie, he says.
This relates to the climate challenge. The atmosphere is not an
infinite dump, so if a trading system for carbon dioxide credits -
like the recent financial bubble - doesn't actually lead to progress,
we'll know it. But the consequences are likely to be less reversible
than those from a credit crunch. Carbon dioxide, unlike the kinds of
pollution wealthy countries dealt with in previous decades, is a
persistent gas. It builds like unpaid credit card debt. The longer
societies delay action, the bigger the climatic debt. Maybe it'll all
work out and the greenhouse warming from the buildup will be on the
low end. But maybe not. The world tried a big financial gamble in
recent years and the consequences are clear now. How will the current
climate bet play out?
Another piece on the financial breakdown that is relevant to Dot
Earth is Joe Nocera's sobering "Talking Business" column on human
nature and speculative bubbles. Are we doomed to irrationality in
weighing risks and payoffs, whether financial or climatological?
Isaac Newton got taken in by a bubble.
Below you'll find Professor Daly's short piece, The Crisis: Debt and
Real Wealth:
The current financial debacle is really not a "liquidity" crisis as
it is often euphemistically called. It is a crisis of overgrowth of
financial assets relative to growth of real wealth - pretty much the
opposite of too little liquidity. Financial assets have grown by a
large multiple of the real economy - paper exchanging for paper is
now 20 times greater than exchanges of paper for real commodities. It
should be no surprise that the relative value of the vastly more
abundant financial assets has fallen in terms of real assets. Real
wealth is concrete; financial assets are abstractions - existing real
wealth carries a lien on it in the amount of future debt.
The value of present real wealth is no longer sufficient to serve as
a lien to guarantee the exploding debt. Consequently the debt is
being devalued in terms of existing wealth. No one any longer is
eager to trade real present wealth for debt even at high interest
rates. This is because the debt is worth much less, not because there
is not enough money or credit, or because "banks are not lending to
each other" as commentators often say.
Can the economy grow fast enough in real terms to redeem the massive
increase in debt? In a word, no. As Frederick Soddy (1926 Nobel
Laureate chemist and underground economist) pointed out long ago,
"you cannot permanently pit an absurd human convention, such as the
spontaneous increment of debt [compound interest] against the natural
law of the spontaneous decrement of wealth [entropy]."
The population of "negative pigs" (debt) can grow without limit since
it is merely a number; the population of "positive pigs" (real
wealth) faces severe physical constraints. The dawning realization
that Soddy's common sense was right, even though no one publicly
admits it, is what underlies the crisis. The problem is not too
little liquidity, but too many negative pigs growing too fast
relative to the limited number of positive pigs whose growth is
constrained by their digestive tracts, their gestation period, and
places to put pigpens. Also there are too many two-legged Wall Street
pigs, but that is another matter.
Growth in U.S. real wealth is restrained by increasing scarcity of
natural resources, both at the source end (oil depletion), and the
sink end (absorptive capacity of the atmosphere for CO2). Further,
spatial displacement of old stuff to make room for new stuff is
increasingly costly as the world becomes more full, and increasing
inequality of distribution of income prevents most people from buying
much of the new stuff-except on credit (more debt). Marginal costs of
growth now likely exceed marginal benefits, so that real physical
growth makes us poorer, not richer (the cost of feeding and caring
for the extra pigs is greater than the extra benefit). To keep up the
illusion that growth is making us richer we deferred costs by issuing
financial assets almost without limit, conveniently forgetting that
these so-called assets are, for society as a whole, debts to be paid
back out of future real growth. That future real growth is very
doubtful and consequently claims on it are devalued, regardless of
liquidity.
What allowed symbolic financial assets to become so disconnected from
underlying real assets? First, there is the fact that we have fiat
money, not commodity money. For all its disadvantages, commodity
money (gold) was at least tethered to reality by a real cost of
production. Second, our fractional reserve banking system allows
pyramiding of bank money (demand deposits) on top of the fiat
government-issued currency. Third, buying stocks and "derivatives" on
margin allows a further pyramiding of financial assets on top the
already multiplied money supply. In addition, credit card debt
expands the supply of quasi-money as do other financial "innovations"
that were designed to circumvent the public-interest regulation of
commercial banks and the money supply. I would not advocate a return
to commodity money, but would certainly advocate 100 percent reserve
requirements for banks (approached gradually), as well as an end to
the practice of buying stocks on the margin. All banks should be
financial intermediaries that lend depositors' money, not engines for
creating money out of nothing and lending it at interest. If every
dollar invested represented a dollar previously saved we would
restore the classical economists' balance between investment and
abstinence. Fewer stupid or crooked investments would be tolerated if
abstinence had to precede investment. Of course the growth economists
will howl that this would slow the growth of GDP. So be it - growth
has become uneconomic at the present margin as we currently measure
it.
The agglomerating of mortgages of differing quality into opaque and
shuffled bundles should be outlawed. One of the basic assumptions of
an efficient market with a meaningful price is a homogeneous product.
For example, we have the market and corresponding price for No. 2
corn - not a market and price for miscellaneous randomly aggregated
grains. Only people who have no understanding of markets, or who are
consciously perpetrating fraud, could have either sold or bought
these negative pigs-in-a-poke. Yet the aggregating mathematical
wizards of Wall Street did it, and now seem surprised at their
inability to correctly price these idiotic "assets."
And very important in all this is our balance of trade deficit that
has allowed us to consume as if we were really growing instead of
accumulating debt. So far our surplus trading partners have been
willing to lend the dollars they earned back to us by buying treasury
bills - more debt "guaranteed" by liens on yet-to-exist wealth. Of
course they also buy real assets and their future earning capacity.
Our brilliant economic gurus meanwhile continue to preach
deregulation of both the financial sector and of international
commerce (i.e. "free" trade). Some of us have for a long time been
saying that this behavior was unwise, unsustainable, unpatriotic, and
probably criminal. Maybe we were right. The next shoe to drop will be
repudiation of unredeemable debt either directly by bankruptcy and
confiscation, or indirectly by inflation.
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