Ponzi’s ecology
Paul Willis
Recently an ecologist friend of mine commented that modern capitalist economies are little more than elaborate Ponzi schemes, complicated frauds that can only end in their own spectacular collapse in direct proportion to their stratospheric success. While I’m not sure I entirely agree with this proposition, I can see what he was driving at.
Behind this almost glib comment is a deep philosophical clash between the twin studies of economics and ecology – unwitting and unwilling bedfellows in the art of global management.
Charles Ponzi (born Carlo Pietro Giovanni Guglielmo Tebaldo Ponzi, 1882 – 1949) was an Italian migrant to the USA and Canada who has the rare and dubious eponymous distinction of increasing number of new investors giving his name to a fraudulent money- making scandal. In 1918 he set up an investment scheme cashing in on the difference in value of stamps purchased in Italy and the USA – which in itself was not illegal. The fraud came in when he started to pay profits to older investors with the deposits of new investors. Initially he was promising, and delivering, 50% profits on investments over 45 days and 100% profits over 90 days.
No one has been able to calculate how much money was involved during the life of the scheme but it is suspected to have been the equivalent of hundreds of millions of dollars in modern terms.
The problem with a Ponzi scheme is that it can only sustain paying profits in the initial stages, as long as an increasing number of new investors enter the scheme. Once there is a decline in the number of new investors, the profits cannot be paid to the older investors and the whole scheme comes undone with most investors losing their investment without seeing any profit.
The problem with a Ponzi scheme is that it can only sustain paying profits in the initial stages, as long as an increasing number of new investors enter the scheme. Once there is a decline in the number of new investors, the profits cannot be paid to the older investors and the whole scheme comes undone with most investors losing their investment without seeing any profit.
As I said I don’t think my friendly ecologist was quite right in suggesting that modern capitalist economic systems are actually Ponzi schemes but there are parallels between the two with some similar elements that can lead to a confusion between them.
The ecological flaws in modern economics include the failure to account for all the resources required to fuel an economy, the lack of recognition that many of these resources are finite (and the assumption that they are infinite) and the relentless growth of the economy without regard to the limitations of resource supply. In short, modern economics suffers from the lack of scope and accounting for all the resources needed to make it work.
Usually an economy managed through modern economic theory and practice isolates the flow of capital and the exchange of resources from the context of the environment and the physical world around it. Many resources that are consumed within the operation of an economy, such as the air and soil used in the growing of crops, are not accounted for. Nor are the costs of production of unwanted by-products such as pollution of the air, water and soil. In these ways economies fail to recognise or work within some basic ecological principles.
It’s also in these aspects that there are some similarities to Mr Ponzi’s scheme; taking new investments to pay the profits of older investors in the same way that we are using resources that will be unavailable to future generations to prop up the economy of today (the concept of ‘Future-eating’ as put forward by Tim Flannery).
And there is another similarity that should cause great alarm; Ponzi schemes are stable for a short while in their initial operations but depend on unrestricted growth through finding
ever-more new investors. Ponzis have to collapse because of their growth and they can’t exist without it. So it is with modern economics; growth is the central mantra but no system dependant on finite resources can continue to grow forever.
Crudely there are two drivers of growth in modern economies. If economics is about the flow and distribution of resources through a society then population growth must lead to a commensurate growth of the economy, some- times called ‘consumption growth’.
The second type of growth within a capitalist economy is ‘capital growth’, the idea that businesses or individuals have a right to accumulate resources beyond their needs. Capital growth is enshrined within modern business culture. A corporation or business must return a profit to shareholders, a return on investment. While population-based growth is a natural consequence of the system, capital growth is optional. Yet most economic growth over the last 200 years or so has been driven by capital growth compounded by population growth.
There are very robust models for how a non-growth, steady state economy could work. Of particular note here is the work of Herman Daly, Emeritus Professor at University of Maryland and the Center for the Advancement of the Steady State Economy (or CASSE) who detail their
arguments on their website. So it is theoretically possible to have a non- growth economy but the big question is how we transition to that against the corporate interests invested in the current capital growth economy?
At this point we can observe some striking similarities between economics and ecology. Both seek to model the flow and distribution of resources within a system. Where they differ is in the scope of the systems they set out to analyse. Economics is largely restricted to human activities whereas ecology takes in the operations of all living things – thus economies are subsets of ecological systems.
Economic modelling usually occurs in very limited timeframes, often a year or two, sometimes a decade or more but rarely deeper into the future than one century. The environmental systems they are embedded within have been around for thousands or millions of years and I am not aware of any economic model that extends a similar distance into the future.
A fundamental difference between ecology and economics is that the parameters of ecological systems are set by the laws of nature, we cannot change them without severe penalties. Economies are entirely human constructs, we make the rules and have ultimate control over their conduct. We can alter the economies of the world because we made them. That is not an option for the ecsystems that our economies rely on.
It’s these broader perspectives that are the most powerful tools ecology has to offer economics as a sister study and it is perhaps only from this broader scope that economists can appreciate the inherent failures that have become built into their operational models.
There are lessons to be learnt here and they are important lessons.
Important because if left unchecked, the consequences of the current economic operations of the world will lead to its own collapse just as certainly as the demise of any investment scheme set up under the principles of Charles Ponzi.
Author: Dr Paul Willis is the Director of RiAus (Twitter: @fossilcrox), whose website is: riaus.org.au
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