As humankind continues to exploit the limited natural resources, the earth has turned into a giant Ponzi scheme. In his book, Plan B 4.0 - Mobilizing to Save Civilization, Lester R Brown writes, “Our mismanaged world economy has many of the characteristics of a Ponzi scheme.”
A Ponzi scheme is an investment fraud in which money brought in by new investors is used to pay off old investors. Thus, an illusion of a successful business model is created. But what happens, essentially, is that the money paid to investors is distributed out of capital already received. Given this, the scheme continues to run till the money being brought in by new investors is more than the money being redeemed by the existing investors. Beyond that, the scheme runs into trouble.
The global economy has now become akin to a Ponzi scheme. “The functioning of the global economy and a Ponzi scheme investment 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,” writes Brown.
The world is now living beyond its means when it comes to consuming natural assets. “In a 2002 study, scientist 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 exceeded their sustainable yield capacity by nearly 30%. 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.”
This situation prevails across various natural assets. Take the case of aquifers, which are essentially geological formations that contain water. “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 feel that we’re doing 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 the aquifers being depleted, this water-based food bubble is about to burst.”
Brown points out it’s a similar situation with the melting of mountain glaciers. “When the glaciers first start to melt, flows in rivers and the irrigation canals they feed are larger than before the melting started. But after a point, as smaller glaciers disappear and large ones shrink, the amount of ice melt declines and the river flow diminishes. Thus, we have two-based Ponzi schemes running in parallel in agriculture.”
The overgrazing by cattle is another giant Ponzi scheme, as is fishery. “Three-fourths of oceanic fisheries are now 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 oceans faster than they reproduce. The cod fishery off the coast of Newfoundland in Canada is a prime example of what can happen. For long one of the world’s most productive fisheries, it collapsed in the early 1990s and may never recover,” writes Brown.
The major reason why this is has been happening is because of “the market forces, perverse incentives and poorly chosen measures of progress.” As Paul Hawken, author of Blessed Unrest aptly puts, “At present, we are stealing the future, selling it in present, and calling it gross domestic product.”
Market forces are not working properly primarily because costs are not being allocated properly. “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,” writes Brown.
Given this, products are not priced correctly, which in turn leads to overuse and hence overexploitation of natural system. Brown says one of the best examples of this massive market failure can be seen in the United States, where the gasoline pump 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…Based on a study by the International Center of Technology Assessment, these costs now total nearly $12 per gallon ($3.17 per litre) of gasoline burned in the United States. If these were added to the $3 direct cost of the gasoline, motorists would have to pay $15 a gallon for the 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.”