Denis Hayes
For several hundred years, the world has experienced occasional periods when economic valuation has borne no resemblance to reality. These periods – popularly referred to as “bubbles” – are always temporary and they usually end badly.
The South Sea Bubble
One early example of this was the so-called South Seas Bubble, which led to the collapse of the London stock market in 1720. The South Seas Company was a politically well-connected enterprise that won great favor by outbidding the Bank of England to assume half the entire national debt of England in return for its kited stock. It also bribed two of the king’s mistresses and obtained a royal charter.
It was a period of speculative fever, stoked by the promise of riches from the far corners of the earth and an end to the wars with Spain. At the end of January, 1720, the South Sea Company’s stock was selling for 120 pounds a share. By the end of March, the price was 380 pounds. By the end of May, it was at 520.
In June it soared briefly to over 1,000 pounds per share. But there was no conceivable rationale for this sort of skyrocketing price, and the end of the gigantic enterprise came quickly. By September, the value of a share of stock had fallen to 135 pounds. The number British bankruptcies quickly reached an all-time high.
Tulipmania
Perhaps the most famous bubble of all time was the 16th century Dutch tulip mania. Tulips were introduced to Holland in 1593, and they immediately became a sensation among the rich and famous. New hybrids were bred. Soon huge sums, and even houses and businesses, were being traded for the rarest bulbs. A futures market developed for bulbs that did not yet exist. Then, in 1637, a gathering of tulip merchants failed to get the usual inflated prices for the next wave of bulbs. Word spread across the land like lightening, and the market crashed overnight. Thousands of Dutch merchants, including the nation’s leading power brokers, were financially ruined. Again, there had a total disconnect between prices and any rational basis of value.
Bubbles are not, of course, limited to ancient history. They happen whenever people close their eyes to reality.
The American Bubble
In the United States, we are still trying to shake off the ill-effects of our own recent experiences with a high technology and telecommunications bubble.
The term “bubble” has a frivolous connotation that belies the importance of the problem. About $7 trillion in stock market valuation simply vanished in the United States, and much of the rest of the world was sucked into our downdraft.
$7 trillion equals about $70,000 for every American household!
This bubble was partly caused by the irrational exuberance of a segment of the population that had acquired astonishing wealth during a prolonged bull market. They decided that profits and losses were a vestigial remnant of the “old economy,” and turned to a series of much fluffier ways to measure value.
The Ecological Bubble
My thesis today is that the world is now facing a far more serious bubble.
Throughout the global economy, prices don’t reflect ecological reality. We’ve been liquidating our natural capital and not reflecting this on our books. Indeed, when we consume a natural resource, we account for this loss with an entry in the “income” column.
The accounting behind the global ecological bubble is audaciously fraudulent – it is an open lie tacitly agreed to by everyone because confronting the truth would be too painful.
As a consequence, we’ve been breaking a lot of little laws for a long time. Now the larger laws – Nature’s Laws – are catching up with us.
Externalities
Environmental externalities were of mostly academic interest a half-century ago, when distinguished economists like Ezra Mishan and Joan Robinson began writing about the topic.
However, they have now outgrown the “academic” box.
Today, costs that are universally treated as “external” to economic decision-making are often larger and more important than the “internal” factors that actually drive the decisions.
Like other recent massive accounting frauds that move expenses off the balance sheets, this economic fiction contributes to a false sense of well-being.
Ignoring environmental externalities, the global economy appears to have been an incredible triumph. Output grew from $6 trillion in 1950 to $43 trillion in 2000.
However, the so-called “external” environmental costs of various activities have grown to awesome proportions. Yet they are literally reflected nowhere in price signals that steer the world economy. This is a classic economic bubble.
You all know the litany:
- Climate change threatens to turn the world’s breadbaskets into dust bowl and inundate valuable real estate such as Florida, the Netherlands, the rice-producing river deltas of East Asia. The rapidly-expanding Gobi Desert is now an easy day trip from Beijing.
- The best biological surveys suggest that the world is experiencing an epidemic of extinction unmatched in history, except when the planet has been struck by a giant asteroid.
- Permanent top soil loss is impoverishing the world’s long-term agricultural prospects.
- Childhood asthma rates are soaring around the planet.
- Virtually every aquifer on earth is being depleted – some at alarming rates – with frightening long-term implications for world agriculture.
- The world’s rain forests are under assault, and many are disappearing permanently.
- Hormone-mimicking substances are accumulating in every food chain in the world, even the most remote, with unknown consequences for humans and other animals.
- The examples are legion.
China, despite its very large population, until recently had only a modest impact on the world’s consumption of resources and its generation of pollution. With your stunning economic progress, that is no longer the case. Last year, China consumed half of the world's cement production last year, one-third of its steel, nearly one-fourth of its copper, and one-fifth of its aluminum. China is now the world's second-largest importer of oil, after the U.S.
China is now becoming a sufficiently large factor in the global ecological bubble that it needs to pay serious attention to strategies to minimize its impact.
Refusing to include ecological costs in national income accounts and in corporate financial statements is every bit as misleading—and even more guaranteed to produce a catastrophe—as surreptitiously shifting debts to offshore corporations in the Cayman Islands.
Costs are costs, and sooner or later the piper has to be paid.
The ecological bubble is of a different order of magnitude than the American technology bubble of the 1990s.
It is almost incomprehensibly larger.
Biological systems can operate for a while beyond their long-term carrying capacity, but eventually ecological realities always assert themselves.
Ecological overshoots—whether of elk or prairie dogs or aphids or yeast—are analogous to bubble economies. Everything seems to be going swimmingly until suddenly, like cartoon characters, they find that they have run over the edge of the cliff.
And no matter how fast they churn their legs, they can’t avoid a long drop.
As with bubble economies, the greater the violation of the boundary conditions, the sharper and deeper the eventual collapse.
If there were any single lesson from the science of ecology that I would like to see understood by the next generation of leaders it is the huge margin by which Homo sapiens is currently overshooting the long-term carrying capacity of the planet.
A 2002 study by Mathis Wackernagel, published in the Proceedings of the American National Academy of Sciences, concluded that humans, with current populations and current levels of affluence, began consuming beyond the natural regenerating capacity of the earth around 1980, and that we are now exceeding that capacity by about 20 percent. (And, of course, for the 1.2 billion people around the planet currently living on less than $1 per day, current conditions are not very attractive.)
David Pimental has calculated that, if everyone on earth were to have the level of affluence of the average Swede or Japanese, the human carrying capacity of the planet is about two billion people. The actual population today is, of course, three times as high, and still growing about 70 million net new humans per year.
The poorest parts of the planet are showing signs of collapse already. UN demographers recently announced that the long-term, world-wide rise in life expectancy has dramatically reversed itself in sub-Saharan Africa. Largely driven by the HIV epidemic, but also by widespread draught and resource wars, life expectancy in this region has plummeted from 60 years to just 47 years. (Incidentally, within the next decade, AIDS will likely have claimed more lives than all the wars of the twentieth century, combined.)
This brings us to another glaring bubble: food.
Ever since Malthus first issued his dire predictions, farmers have been surprising us, and the population has continued to grow. But given basic boundary conditions of photosynthetic efficiency, quantities of arable land, and available water, it is hard not to conclude that Malthus is on the verge of vindication.
For example, in 2002, people and domesticated animals consumed 100 million more tons of grain than were produced—a five percent shortfall. That was the third successive year of grain deficits—reducing global stockpiles to record lows. If this trend continues, global grain stockpiles will essentially disappear by the end of this year.
Moreover, this is with 840 million people living on grossly inadequate diets; with former major food growing regions in Asia and Africa lost to erosion and desertification; with every major water table on earth plummeting faster than its recharge rate. Optimists say that farmers will find ways to fill the 100 million ton shortfall, plus enough to provide decent diets for the nearly one billion who are malnourished, plus enough to feed the 70 million net new people who will be added this year, plus rebuild our reserve stockpiles to reasonable levels—but no one seems to have a convincing strategy toward this end.
China, with an economy that, measured conventionally, is booming at an annual growth rate of 7 or 8 percent, is arguably Asia’s brightest hope.
China and the United States have roughly the same amount of land available for grazing. American environmentalists make a compelling case that we have been overgrazing fragile federal lands. But consider China. America has 97 million cattle; China has 106 million. Pretty close to parity. America has 8 million sheep and goats; China has 298 million—mostly concentrated in the western and northern provinces, which they are swiftly turning into the world’s largest Dust Bowl. But unlike the much smaller US Dust Bowl in the 1930s, which displaced 2.5 million Okies to California (as described movingly in John Steinbeck’s Grapes of Wrath) China’s dust bowl threatens to displace scores of millions. And there is no Chinese equivalent of California to which they can move.
Ten thousand years ago, Homo sapiens and his draft animals and livestock constituted less than half of one percent of the mass of all vertebrates. Today, we and our livestock constitute more than 98 percent of the mass of all vertebrates.
The World Conservation Union reports that one-eighth of all bird species are endangered; one-quarter of all species of mammals are endangered; and one-third of all fish species are endangered.
There are far more tigers today inside zoos than there are outside of zoos.
We have two options: we can begin working very hard to build a global economy, designed along ecological principles to operate within the planet’s carrying capacity. Or we can carry on with business as usual and race off the cliff of ecological collapse.
Looking back on these post-Millennium years 200 years from now, how humankind – and in particular the United States and China – address these issues will almost certainly be the most important measure by which we are judged.
The first big test, I believe, will be climate change.
A Climate of Change
Scientific support for the proposition that humans are changing the world’s climate now approximates the level of support enjoyed by the proposition that the Earth revolves around the sun, and not vice versa.
In the United States, the smartest business leaders are way ahead of the politicians on this.
DuPont has committed to keep its total energy use flat through the next ten years, to obtain ten percent of its total energy in 2010 from renewable sources, and to produce 65 percent less greenhouse gases in 2010 than it produced in 1990. The Kyoto Treaty (which apparently will finally go into effect with Russian ratification in the near future) seeks a 7 percent reduction of greenhouse gases by 2010 from the United States. DuPont is aiming for 65 percent.
Promises are cheap. But DuPont has already held its energy use flat since 1991, and it has already reduced its greenhouse gas emissions by 45 percent since 1990.
BP is now the world’s third largest manufacturer of solar cells—behind two Japanese companies—and an ardent supporter of the Kyoto Protocols on climate change. Whether or not Kyoto is ratified, BP has committed to meeting Kyoto’s greenhouse gas reduction goals for the company.
Shell is forecasting that renewable energy could meet half of all global energy demand by 2050—a market opportunity of tens of trillions of dollars.
Johnson & Johnson has also pledged to implement Kyoto whether the U.S. Senate ratifies the treaty or not. As a company, it will reduce greenhouse gas emissions seven percent below 1990 levels by 2010. This pledge covers 150 facilities in 50 countries.
IBM, which has already reduced its CO2 emissions by 20 percent from 1990 levels, has stunningly committed to further reductions of four percent a year into the indefinite future. The pledge covers its 30 manufacturing facilities in 14 countries.
Despite these exceptions, my nation is not meeting its global responsibilities, and the American environmental movement has no higher priority than shifting the nation to a super-efficient use of renewable energy sources that produce no greenhouse gas emissions.
China is exempt for the time being from the Kyoto Treaty, but that exemption will be brief. It is clearly in your interest to explicitly design your buildings, industry, and transportation systems from the ground up to minimize CO2 emissions. It is much easier, and vastly cheaper, to build it right from the start than to build an inefficient system and then try to improve it later.
Conclusion.
The whole world is quietly crying out for creative solutions to environmental problems. Whenever nations or even cities do something noteworthy in this era of instant communications, others are inspired.
(Indeed, my personal experience in seeing the concept of Earth Day spread to several hundred million people annually in 184 nations leads me to have enduring faith in the power of a good idea.)
Curitibo – a medium-sized city in Brazil – is internationally recognized for its innovative work in public transit. A constant stream of visitors from places around the world comes to study it. Similarly, Vancouver, British Columbia, and Portland, Oregon, are global models of intelligent land use.
Iceland has set itself up as a test ground for a hydrogen-powered society. It has arranged with energy companies and automobile automobiles to try out their cleverest new ideas in this unlikely sounding national laboratory – and documentary film makers from around the world are recording their triumphs and failures.
Similarly, little Denmark is the world’s test bed for wide-spread application of wind power.
In each case, the government decided it wanted to be a global leader in a particular field and then it went to bat to recruit the talent and dollars to make it happen. It was not always easy.
A great many experiments remain to be run. It would be impossible to find a better laboratory for many of them than China. With your excellent universities, dynamic businesses, and abundance of scientists and engineers, your actions are hugely influential. Accordingly, if you make the wrong choices, you will likely have impacts far beyond your borders.
Most nations – most notably my own – strive vigorously to keep their economies divorced from ecological realities. To the extent that they succeed, they are sowing the seeds of their own eventual collapse. It will be bad for them – and in the aggregate, it will be catastrophic for the world.
If China does not blindly follow all western economic models, but rather builds an alternative, sustainable model, you are perfectly positioned to play a key role in leading mankind away from the brink and toward a sustainable future. The whole planet will be in your debt.
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Denis Hayes is President of the Bullitt Foundation, an environmental philanthropy located in Seattle. The opinions expressed in this talk do not necessarily represent the views of the Bullitt Foundation or its board.
