Ponzi’s Ecology, a Loaf of Bread and Late Capitalism

  Last updated July 5, 2017 at 11:59 am


Ecologists often refer to modern economies as little more than elaborate Ponzi schemes, extensive but simple frauds that reward old investors with the deposits of new players. Ponzi schemes can only ever end in their own spectacular collapse and the magnitude of that collapse is in direct proportion to their initial success. The bigger they are, they harder they fall and, according to the ecologists, modern economies are the biggest Ponzi Schemes ever created.

Are we witnessing the imminent collapse of these economies? And what would ecologists know about economic systems that would allow them to make such grandiose claims?

There are signs that economies are currently being challenged by their own success, a phenomenon known as Late Capitalism, and perhaps the studies of economics and ecology are more closely aligned than is generally realised – unwitting and unwilling bedfellows in the art of global management.

But let’s start with an introduction to this guy named Ponzi.

Who Was Ponzi?

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 distinction of 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 players. 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 in the tens of millions of dollars at that time – equivalent to hundreds of millions today.

The problem with a Ponzi scheme is that it can only sustain paying profits in its initial stages, as long as an exponentially increasing number of new investors enter the game. Once there is a decline in the growth of new investors, profits cannot be paid to the older players and the whole scheme comes undone with most investors losing their investment without seeing any profit.

From an ecological perspective modern economic systems share many features with a Ponzi scheme. This is because the ecological perspective reaches deeper into the origins of the capital in the system. From an economic perspective, the creation of capital in the first place is through the extraction and refinement of resources. The ecological view looks to the origin and limits of those resources because, ultimately, most resources originate in nature and many are finite.

Modern economic systems depend on growth, they are not structured for stasis. But growth of any system means more exploitation of limited resources which are all-too-often assumed by economists to be infinite. At some point a growth economy has to collapse because there are not enough resources to fuel it.

A Loaf of Bread

Let’s work through an example; the economics and ecology of bread. While recipes vary wildly, there’s an average of around 330 grams of flour in a loaf of bread and it takes 470 grams of wheat to produce that amount of flour. So, in round figures, you can get three loaves of bread to a kilo of flour or just over two loaves to a kilo of wheat.

As the bread-buying population grows or as the baker sells more bread to his existing customers, the baker is going to need to buy more flour. That means that more wheat will have to be grown but there are environmental limits on growing wheat.

One limit is the amount of land available for wheat cultivation. While you can clear more land, there is only so much arable land that can be turned over to wheat production. Add to this the loss of arable land due to climate change and ‘where to grow’ becomes a serious limit to the process of growing more wheat.

You could increase the wheat harvest by breeding or engineering new types of wheat that produce more flour per plant or making other improvements to your wheat-growing practices. But, as this figure shows, while the total grain yield across wheat, rice and maize have been increasing since the 1960s, the rate of yield increase is dropping suggesting that there is a limit to how far we can push this … and that we are approaching that limit.

World yield of wheat, rice and maize (arithmetic average) and the annual relative rate of yield increase between 1960 and 2010. (source)

Then there’s a limit as to how much wheat you can grow from a given quantity of soil. To grow a kilo of wheat you need a variety of nutrients (between 30 and 60 grams of zinc and around 19 grams of nitrogen, 5 grams of potassium, 3 grams of phosphorus, 1.4 grams of magnesium and half a gram of calcium) most of which are extracted by the plant directly from the soil.

Last year’s wheat harvest across Australia was a record of 35.1 million tonnes which removed something like 105.3 thousand tonnes of phosphorus and over one and a half million tonnes of zinc from Australian soils along with all the other nutrients. These nutrients are extremely slow to replenish themselves in the soil so we can only maintain these wheat harvests through regular and frequent applications of fertilisers.

And there are limits to the supply of those fertilisers. Superphosphate, the principle source of phosphate for agricultural uses, used to come from various guano (bird poo) deposits around the world but those deposits have been severely depleted or completely worked out. In recent years production of superphosphate has switched to treating phosphate rocks with acid. With the world’s known reserves of phosphate rocks at around 68 billion tonnes and, given current usage and assuming no growth in demand, that’s enough to supply the world with superphosphate for the next 250 years.

For an economist, 250 years into the future may be of no consequence but, for an ecologist it’s an end point, a limit to the supply of a finite resource. And similar problems lay behind the supply of most of the other nutrients needed to grow the wheat that gives us the flour so you can have your daily bread.

If you’re in the business of making bread, you are compelled to grow your business by selling it to more people and/or selling more bread to the people who you already sell to – your business is driven by supply and demand. You do not care where all that extra wheat comes from and have no interest in where it’s grown, the limits to increasing grain yield or declining soil fertility. Put simply, that’s just not your business.

Isolating Resources

Typically modern economies are managed by isolating the flow of capital from its resource origins and fail to account for the lack of those resources being extracted from the environment. We’ve just seen how deep the resource trail goes for a loaf of bread but we could also look into the unaccounted for natural resources such as air, water, mineral and biological products consumed in every production cycle in every modern economy. Nor are the costs of production of unwanted by-products such as pollution fully accounted for in modern economies. And the cost to other biological and production cycles incurred when you extract a resource are similarly not seen as a production cost in modern economies. In these ways modern economic theories fail to recognise or work within some basic ecological principles.

It’s in these aspects where 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 to prop up the economy of today that will be unavailable to others or future generations (the concept of ‘Future-eating’ as put forward by Tim Flannery).

And there is another similarity that should cause concern; Ponzi schemes are stable for a short while in their initial operations but depend on unrestricted, exponential growth through finding ever-more new investors. Ponzi schemes 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.

Why Growth?

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 that economy.

The second type of growth within a modern 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 in excess of investment. While population-based growth is a natural consequence of the system, capital growth is optional. Most economic growth over the last 200 years or so has been driven by capital growth compounded by population growth.

Is there an alternative to growth economies? While we could conceive of how to limit capital growth, a growing economy will have to continue as long as the population grows. So surely, while we might be able to reduce the rate of economic growth, as long as the population grows, there must still be some growth of the economy?

There are very robust models for how a non-growth, steady state economy could work. A lot of these ideas are bought together on this site over at Stanford University. So it is theoretically possible to have a non-growth economy but the big question is how we transition to that against the entrenched belief in growth.

Economics V Ecology

There are other similarities and differences 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. Ecologists contend that economies are subsets of ecological systems. Ultimately the baker is dependent on soil quality and availability even if they are not considerations of their business plan.

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 a 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 ecosystems 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.

Late Capitalism

In recent years, the term Late Capitalism has gained coin to describe the absurd excesses of modern growth economies. A history of Late Capitalism is discussed in The Atlantic, giving a very US-centric view of the term and phenomenon. Here in Australia we can see Late Capitalism in the growing divide between rich and poor, the dwindling ranks of the middle class, the loss of intergenerational equity in education and housing and several other phenomena that are corroding our society. Some have opined that this are exactly how a growth economy is supposed to work out. With the distribution of limited resources driven by individual greed rather than societal need, we have to get to a point where there are not enough houses that the next generation can afford or the cost of higher education excluding younger Australians. Once again, it’s Ponzi Economics and it’s all coming to a logical conclusion.

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. It will be a failure of the art of economics over the science of ecology and we will all be the victims of that failure.

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About the Author

Paul Willis
Paul is a respected leader in the science community with an impressive career in science. He has a background in vertebrate palaeontology, studying the fossils of crocodiles and other reptiles. He also has a long history as a science communicator, with a career spanning as Director of The Royal Institution of Australia, presenter and host for Australia’s Science Channel, working for the ABC on TV programs such as Catalyst and Quantum as well as radio and online. He’s written books and articles on dinosaurs, fossils and rocks and is finding new ways to engage the people of Australia with the science that underpins their world. Follow him on Twitter @fossilcrox.

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