Sunday, December 14, 2008

Energy and Ponzi schemes

The recent collapse of what is believed to be the largest Ponzi scheme ever says as much about what the public believes regarding wealth and the possibilities of infinite growth as it does about the scruples of investment managers. (In a Ponzi scheme, old investors are paid off using money from new investors. Exorbitantly high but fraudulent returns for the initial investors quickly attract new investors seeking the same high returns.)

In the absence of independent contrary information, unsuspecting investors will believe in Ponzi schemes as long as their returns are high. In the same way the public will put its faith in neoclassical economic theories which claim that perpetual economic growth is possible. What most investors and many Americans want is to get rich. Most recently they were led to believe that the stock market was a one-way ticket to wealth. While the stock market as a whole is not a Ponzi scheme, the companies on the exchanges are run on the basis of neoclassical economic assumptions about growth. When those assumptions are undermined, as is happening currently, investors and corporate leaders look for villains and bailouts rather than questioning the assumptions themselves.

In an effort to challenge those assumptions, systems ecologist and energy researcher Charlie Hall has long championed a biophysical approach to economics as an alternative to neoclassical economics which he likens to a Ponzi scheme. Why a Ponzi scheme? Each new wave of lending is made based on the faith that future flows of energy will increase sufficiently to create enough economic growth to pay off the new loans.

Theoretically, given no other resource constraints, this might work for a very long time if the energy were to come entirely from renewable resources. But such is not the case. The vast majority of current energy flows come from finite fossil fuels. That means that without drastic shifts in the sources of energy for society, there will be a day of reckoning, just as there is for every Ponzi scheme when not enough new investors are brought in to pay off the old ones.

(Some people think that day may have already arrived. They posit that oil supply constraints sent prices so high last summer that those high prices brought on a depression, one that will now cause massive debt defaults. They also believe that we may have no prospect of ever returning to sustained economic growth based on increasing supplies of fossil fuels.)

The lure of wealth is so great, however, that the dream will die hard. Even now middle-class investors are being told to hang on until growth returns. And, perhaps it will. But the dream of becoming wealthy remains problematic if unquestioned. First, not everyone can get rich. The idea that anybody can become wealthy is not the same as everybody becoming wealthy. Second, although fossil fuels have made possible enormous comforts for the middle-class and even many poor people, few of them would consider themselves wealthy. Wealth is a relative concept. To be wealthy is essentially to be able to pay other people to do many things for you that most people do for themselves. If everyone were to become wealthy, it would be meaningless since wealth always implies privilege, that is, inequality. If you still have to wash your own shirts, take out the garbage and drive yourself to work, you may be comfortable, but you won't necessarily consider yourself privileged.

The unreflective view of wealth--the confusion of wealth with money, the failure to see that feeling wealthy requires an underclass--masks attempts to explain the limits of wealth. Now that the expectations of perpetual financial gain are being dashed, there may be an opening to explain those limits. If the Ponzi-like scheme that animates our economic thinking can be exposed, it could help many to see, perhaps for the first time, that the source of wealth is not the financial markets or the banks, but rather the very earth, air and sea around us.


Randall Sanderson said...

Just a note on the discussion of 'popular wealth': there is that contradiction inasmuch as being wealthy requires stratification of incomes via labor exploitation. Also, though, it's fit to mention that productivity gains to and the replacement of human labor with technology and mechanization has been a central tenet of the Progress school (as I call it) since the emergence of advanced capitalism. Whether or not we have or can develop the cultural and technical wherewithal to birth a Jetsons utopia aside, what is axiomatic to that is of course an abundant supply of cheap energy. That's the socio-economic ponzi scheme. Now, should something like over-unity generators that draw power from the quantum vaccum become commercially available, that equation would certainly change. If we had free energy, of course, we wouldn't need the monetary system as we know it - and then perhaps the wealthy capitalists in the Progress crowd would find it a good time to reevaluate what they really thought "Progress" means. In the end, us Humans are suited for abundance; not luxury. It's the need for security that really drives people to aspire to be wealthy I think.

Frank said...

Financial wealth is based upon exploitation. Starting with the Renaissance, it was European exploitation of the "New World" and slavery. Later, it has been the continued exploitation of the natural world, and for the past two hundred or so years, fossil fuels. In effect, during this entire era we have been converting diverse biomass to human biomass at an increasing rate (until very recently). Let us hope that we, as self proclaimed intelligent beings, take the opportunity of the current financial crisis to assess our innate deficiencies in perceiving human effected slow trends within our environment. Only in this way can we understand the basis of our underlying situation and begin to address it in ways that have some chance at longterm viability. ISHK works fulltime in the area of developing human perceptions. At EntropyPawsed we have a nature linked low energy living demonstration site where we explore questions of sustainability.

Brip said...

Agree to the fullest, growth at express rate tends to downturn at same rate,

Henry Warwick said...

Theoretically, given no other resource constraints, this might work for a very long time if the energy were to come entirely from renewable resources. But such is not the case. The vast majority of current energy flows come from finite fossil fuels. That means that without drastic shifts in the sources of energy for society, there will be a day of reckoning, just as there is for every Ponzi scheme when not enough new investors are brought in to pay off the old ones.

Loans are claims on labour made at a specific monetary value (z). To pay back a loan, you work (x) hours for (A) rate of pay. Under finance capitalism, it was possible to not work at all, and let the interest of one's investments (B) pay for the loans, assuming one is making enough on one's investments. Many people used a combination of both - working and borrowing against investments, such as homes.

[(xA)+B] = total income ($).

So, a loan made against $ is a claim on A and B. If B disappears thanks to the vagaries of the markets (whether it's 1873, 1929, 0r 2008) then all that is left is A being claimed at (z) rate. So, if you then manipulate (z) so it is worthless, through inflation, you depreciate the value of labour but you also depreciate the loans themselves.

Eventually you end up with a "reset" button and A has to be valued at (z > 0)

I don't think a post-petroleum world will feature a gold based currency or a post-monetary economics.

I think there will be Ponzi Schemes as long as there is money to be made. Proof: the Dutch. they had a solar based economy but wrecked their country over tulip bulb speculations.

Pete Murphy said...

Rampant population growth threatens our economy and quality of life. I'm not talking just about the obvious problems that we see in the news - growing dependence on foreign oil, carbon emissions, soaring commodity prices, environmental degradation, etc. I'm talking about the effect upon rising unemployment and poverty in America.

I should introduce myself. I am the author of a book titled "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America." To make a long story short, my theory is that, as population density rises beyond some optimum level, per capita consumption of products begins to decline out of the need to conserve space. People who live in crowded conditions simply don’t have enough space to use and store many products. This declining per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge implications for U.S. policy toward population management. Our policies that encourage high rates of population growth are rooted in the belief of economists that population growth is a good thing, fueling economic growth. Through most of human history, the interests of the common good and business (corporations) were both well-served by continuing population growth. For the common good, we needed more workers to man our factories, producing the goods needed for a high standard of living. This population growth translated into sales volume growth for corporations. Both were happy.

But, once an optimum population density is breached, their interests diverge. It is in the best interest of the common good to stabilize the population, avoiding an erosion of our quality of life through high unemployment and poverty. However, it is still in the interest of corporations to fuel population growth because, even though per capita consumption goes into decline, total consumption still increases. We now find ourselves in the position of having corporations and economists influencing public policy in a direction that is not in the best interest of the common good.

The U.N. ranks the U.S. with eight third world countries - India, Pakistan, Nigeria, Democratic Republic of Congo, Bangladesh, Uganda, Ethiopia and China - as accounting for fully half of the world’s population growth by 2050.

If you’re interested in learning more about this important new economic theory, I invite you to visit either of my web sites at and where you can read the preface, join in my blog discussion and, of course, purchase the book if you like. (It's also available at

Please forgive the somewhat spammish nature of the previous paragraph. I just don't know how else to inject this new perspective into the overpopulation debate without drawing attention to the book that explains the theory.

Pete Murphy
Author, "Five Short Blasts"