“I think Lester Brown is one of the sharpest minds out there in terms of identifying the broad spectrum of ecological issues we face, and promoting practical, sensible solutions that are both environmentally and economically sound.” – Jeff McIntire-Strasburg, Sustainablog.
Chapter 1. Selling Our Future: Our Global Ponzi Economy
Our mismanaged world economy today has many of the characteristics of a Ponzi scheme. A Ponzi scheme takes payments from a broad base of investors and uses these to pay off returns. It creates the illusion that it is providing a highly attractive rate of return on investment as a result of savvy investment decisions when in fact these irresistibly high earnings are in part the result of consuming the asset base itself. A Ponzi scheme investment fund can last only as long as the flow of new investments is sufficient to sustain the high rates of return paid out to previous investors. When this is no longer possible, the scheme collapses—just as Bernard Madoff’s $65-billion investment fund did in December 2008. 37
Although the functioning of the global economy and a Ponzi investment scheme are not entirely analogous, there are some disturbing parallels. As recently as 1950 or so, the world economy was living more or less within its means, consuming only the sustainable yield, the interest of the natural systems that support it. But then as the economy doubled, and doubled again, and yet again, multiplying eightfold, it began to outrun sustainable yields and to consume the asset base itself. In a 2002 study published by the U.S. National Academy of Sciences, a team of scientists led by Mathis Wackernagel concluded that humanity’s collective demands first surpassed the earth’s regenerative capacity around 1980. As of 2009 global demands on natural systems exceed their sustainable yield capacity by nearly 30 percent. This means we are meeting current demands in part by consuming the earth’s natural assets, setting the stage for an eventual Ponzi-type collapse when these assets are depleted. 38
As of mid-2009, nearly all the world’s major aquifers were being overpumped. We have more irrigation water than before the overpumping began, in true Ponzi fashion. We get the feeling that we’re doing very well in agriculture—but the reality is that an estimated 400 million people are today being fed by overpumping, a process that is by definition short-term. With aquifers being depleted, this water-based food bubble is about to burst. 39
A similar situation exists with the melting of mountain glaciers. When glaciers first start to melt, flows in the rivers and the irrigation canals they feed are larger than before the melting started. But after a point, as smaller glaciers disappear and larger ones shrink, the amount of ice melt declines and the river flow diminishes. Thus we have two water-based Ponzi schemes running in parallel in agriculture.
And there are more such schemes. As human and livestock populations grow more or less apace, the rising demand for forage eventually exceeds the sustainable yield of grasslands. As a result, the grass deteriorates, leaving the land bare, allowing it to turn to desert. At some point the herds of ultimately emaciated cattle also collapse. In this Ponzi scheme, herders are forced to rely on food aid or they migrate to cities.
Three fourths of oceanic fisheries are now being fished at or beyond capacity or are recovering from overexploitation. If we continue with business as usual, many of these fisheries will collapse. Overfishing, simply defined, means we are taking fish from the oceans faster than they can reproduce. The cod fishery off the coast of Newfoundland in Canada is a prime example of what can happen. Long one of the world’s most productive fisheries, it collapsed in the early 1990s and may never recover. 40
Paul Hawken, author of Blessed Unrest, puts it well: “At present we are stealing the future, selling it in the present, and calling it gross domestic product. We can just as easily have an economy that is based on healing the future instead of stealing it. We can either create assets for the future or take the assets of the future. One is called restoration and the other exploitation.” 41
The larger question is, If we continue with business as usual—with overpumping, overgrazing, overplowing, overfishing, and overloading the atmosphere with carbon dioxide—how long will it be before the Ponzi economy unravels and collapses? No one knows. Our industrial civilization has not been here before.
Unlike Bernard Madoff’s Ponzi scheme, which was set up with the knowledge that it would eventually fall apart, our global Ponzi economy was not intended to collapse. It is on a collision path because of market forces, perverse incentives, and poorly chosen measures of progress. We rely heavily on the market because it is in so many ways such an incredible institution. It allocates resources with an efficiency that no central planning body can match, and it easily balances supply and demand.
The market does, however, have some fundamental, potentially fatal, weaknesses. It does not respect the sustainable yield thresholds of natural systems. It also favors the near term over the long term, showing little concern for future generations. It does not incorporate into the prices of goods the indirect costs of producing them. As a result, it cannot provide the signals telling us that we are caught up in a Ponzi scheme.
In addition to consuming our asset base, we have also devised some clever techniques for leaving costs off the books—much like the disgraced and bankrupt Texas-based energy company Enron did some years ago. For example, when we use electricity from a coal-fired power plant we get a monthly bill from the local utility. It includes the cost of mining coal, transporting it to the power plant, burning it, generating the electricity, and delivering electricity to our homes. It does not, however, include any costs of the climate change caused by burning coal. That bill will come later—and it will likely be delivered to our children. Unfortunately for them, their bill for our coal use will be even larger than ours. 42
When Sir Nicholas Stern, former chief economist at the World Bank, released his groundbreaking 2006 study on the future costs of climate change, he talked about a massive market failure. He was referring to the failure of the market to incorporate the costs of climate change in the price of fossil fuels. According to Stern, the costs are measured in the trillions of dollars. The difference between the market prices for fossil fuels and an honest price that also incorporates their environmental costs to society is huge. 43
As economic decisionmakers—whether consumers, corporate planners, government policymakers, or investment bankers—we all depend on the market for information to guide us. In order for markets to work over the long term and for economic actors to make sound decisions, the markets must provide reliable information, including the full cost of products. But the market is giving us incomplete information, and as a result we are making bad decisions.
One of the best examples of this massive market failure can be seen in the United States, where the gasoline pump price was around $3 per gallon in mid-2009. This reflects only the cost of finding the oil, pumping it to the surface, refining it into gasoline, and delivering the gas to service stations. It overlooks the costs of climate change as well as the costs of tax subsidies to the oil industry (such as the U.S. oil depletion allowance), the burgeoning military costs of protecting access to oil in the politically unstable Middle East, and the health care costs of treating respiratory illnesses from breathing polluted air. 44
Based on a study by the International Center for Technology Assessment, these costs now total nearly $12 per gallon ($3.17 per liter) of gasoline burned in the United States. If these were added to the $3 direct cost of the gasoline, motorists would pay $15 a gallon for gas at the pump. In reality, burning gasoline is very costly, but the market tells us it is cheap, thus grossly distorting the structure of the economy. 45
A similar situation exists with food. If we paid the full cost of producing it—including the true cost of the oil used in producing it, the future costs of overpumping aquifers, the destruction of land through erosion, and the carbon dioxide emissions from land clearing—food would cost far more than we now pay for it in the supermarket.
In addition to ignoring indirect costs, the market does not value nature’s services. This became abundantly clear in the summer of 1998 when China’s Yangtze River valley, home to nearly 400 million people, was wracked by some of the worst flooding in history. The resulting damages of $30 billion equaled the value of the country’s annual rice harvest. 46
After several weeks of flooding, Beijing announced a ban on tree cutting in the Yangtze River basin. It justified this by noting that trees standing are worth three times as much as trees cut—the flood control services provided by forests were far more valuable than the lumber they contained. In effect, the market price had been off by a factor of three. 47
The market does not respect the carrying capacity of natural systems. For example, if a fishery is being continuously overfished, the catch eventually will begin to shrink and prices will rise, encouraging even more investment in fishing trawlers. The inevitable result is a precipitous decline in the catch and the collapse of the fishery.
Today we need a realistic view about the relationship between the economy and the environment. We also need, more than ever before, political leaders who can see the big picture. And since the principal advisors to government are economists, we need either economists who can think like ecologists—Sir Nicholas Stern and Herman Daly, a pioneer in ecological economics, are rare examples of this—or more ecological advisors.
Market behavior—including its failure to include the indirect costs of goods and services, to value nature’s services, and to respect sustainable-yield thresholds—is leading to the destruction of the economy’s natural support systems, our own version of a Ponzi scheme. At some point the deteriorating relationship between the economy and its natural supports begins to take a political toll, contributing to state failure.
37. James Bandler and Nicholas Varchaver, “How Bernie Did It,” Fortune, vol. 159, no. 10 (11 May 2009); “The Madoff Affair: Going Down Quietly,” The Economist, 12 May 2009.
38. Angus Maddison, “Statistics on World Population, GDP and Per Capita GDP, 1–2006 AD,” at www.ggdc.net/maddison, updated March 2009; Mathis Wackernagel et al., “Tracking the Ecological Overshoot of the Human Economy,” Proceedings of the National Academy of Sciences, vol. 99, no. 14 (9 July 2002), pp. 9,266–71; Global Footprint Network, WWF, and Zoological Society of London, Living Planet Report 2008 (Gland, Switzerland: WWF, October 2008), p. 2.
39. Author’s estimate based on previously cited figures for China and India, as well as other countries such as Saudi Arabia and Pakistan where water tables are falling due to overpumping.
40. FAO, The State of World Fisheries and Aquaculture 2008 (Rome: 2009), p. 7; Ransom A. Myers and Boris Worm, “Rapid Worldwide Depletion of Predatory Fish Communities,” Nature, vol. 432 (15 May 2003), pp. 280–83.
41. Paul Hawken, “Commencement Address to the Class of 2009,” speech at University of Portland, Portland, OR, 3 May 2009.
42. Eric Pfanner, “Failure Brings Call for Tougher Standards: Accounting for Enron: Global Ripple Effects,” International Herald Tribune, 17 January 2002.
43. Nicholas Stern, The Stern Review on the Economics of Climate Change (London: HM Treasury, 2006).
44. DOE, EIA, “Weekly Retail Gasoline and Diesel Prices,” at tonto.eia.doe.gov/dnav/pet/pet_pri_gnd_dcus_nus_w.htm, viewed 5 June 2009.
45. International Center for Technology Assessment (ICTA), The Real Cost of Gasoline: An Analysis of the Hidden External Costs Consumers Pay to Fuel Their Automobiles (Washington, DC: 1998); ICTA, Gasoline Cost Externalities Associated with Global Climate Change (Washington, DC: September 2004); ICTA, Gasoline Cost Externalities: Security and Protection Services (Washington, DC: January 2005); Terry Tamminen, Lives Per Gallon: The True Cost of Our Oil Addiction (Washington, DC: Island Press, 2006), p. 60, adjusted to 2007 prices with Bureau of Economic Analysis, “Table 3—Price Indices for Gross Domestic Product and Gross Domestic Purchases,” GDP and Other Major Series, 1929–2007 (Washington, DC: August 2007); DOE, op. cit. note 44.
46. Munich Re, Topics Annual Review: Natural Catastrophes 2001 (Munich, Germany: 2002), pp. 16–17; value of China’s wheat and rice harvests from USDA, op. cit. note 6, updated 12 July 2007, using prices from International Monetary Fund, International Financial Statistics, electronic database, at ifs.apdi.net/imf.
47. “Forestry Cuts Down on Logging,” China Daily, 26 May 1998; Erik Eckholm, “China Admits Ecological Sins Played Role in Flood Disaster,” New York Times, 26 August 1998.
Copyright © 2009 Earth Policy Institute