Can we consume limited resources forever? Is economic growth just a Ponzi scheme in which we borrow from the future? Is economic growth as we know it coming to an end?

Over two centuries ago, the first-ever professor of economics, Thomas Malthus, predicted that levels of personal income would stagnate. He argued that there was a limited supply of land and that, given diminishing returns, additional farmers would produce less additional food until eventually they would not be able to feed themselves.

Why was Malthus wrong? There were two implicit assumptions in the model which invalidated its conclusion – but perhaps only temporarily. First, it assumed that there would be no technological innovation – I’ll come back to that. Second, Malthus thought that the total amount of land was finite but he was writing just before the opening up of the vast agricultural lands of North and South America and Australasia.

That opening up has come to an end – the moon excepted. (Climate change may also have an effect if the Arctic and Antarctic ice were to melt and various other things were to happen including the possibility that the  net effect of drought and sea level rises would take out too much farmland; I have never read anything on this, so I’ll leave climate change aside.)

Can we rely on technological innovation to extend the world’s supply of food? To simplify, let’s take it that the answer is ‘not enough’ and focus on some hidden assumptions.

The Malthusian farm was simple enough. Production was dependent on land and labour. Malthus implicitly assumed there would be enough water (from rain?), energy (from the sun?), minerals (from recycling?) and that any waste down the rivers would not be too problematic either. In each case the assumption may no longer true.

Perhaps they have not been true for a while. Throughout the world farmers have collected water from rain areas but eventually there are no more areas left. Today many farmers are drawing down aquifers faster than they are being replenished – sometimes much faster.

The sun’s energy may be supplemented by wind and water power, but the big draw-off has been fossilised fuels and while some are limited (oil supplemented by oil shale), the huge coal reserves are increasingly hard to recover. In any case their use adds to the greenhouse gases and global warming which is equivalent to drawing off the aquifers of the atmosphere.

Increasing difficulties of recovery also apply to other minerals. Similarly forests and fish are being quarried out.

As for waste down the rivers and into the sea, when New Zealanders are discouraged from swimming in their rivers and plastic bags are found at the bottom of the Mariana Trench we have major disposal problems. (Note that a lot of the technological innovation depends on these depletions.)

I want to use an economic model which Malthus did not know about to analyse what has been going on. In its simple form it is the Ponzi scheme most observed in financial markets.

It goes like this. One generation is able to increase its standard of living by consuming from future generations’ entitlements. The finance schemes involve each cohort paying itself a return on its deposits from the financial deposits of the next cohort, who in turn do the same until the inflow of deposits stops, the return cannot be paid, and the scheme crashes.

There is an analogy with some kinds of economic growth. Each generation raises its consumption by raiding finite resources in an unsustainable way. This means that some future generation will not be able to use their resources and so, benign technologies aside, they are going to have a lower standard of living.

Your immediate thought may be that you will be dead when that happens; but spare a thought for your descendants. There wont be a rapid crash like a financial Ponzi scheme. Many resources are involved and they will collapse at different times. More speculatively, a financial Ponzi scheme builds up over a year, say, and crashes in less than a month. The environmental Ponzi scheme has been going on for a couple of centuries (although somewhat faster recently). The unwinding is likely to take longer too.

Arguably, crashes are already underway. If you cant take your kids to your favourite local swimming hole, you have a diminished standard of living. If you cant get hold of your favourite fish or you have to pay the earth for it, you are worse off. If you are suffering from rising sea levels or storm surges, you are worse off.

Such instances do not directly affect your material standard of living by much; that may be to come. In fact, there are parts of the affluent world which have not had real income rises for decades, including New Zealand beneficiaries and parts of the American working class. The upward, and often justified, rising standards of living in poor countries probably add to these downward pressures.

This suggests most of our descendants cannot expect a higher material standard of living than ours; it may even be lower. The contrast is with our generation for which, typically, the standard of living has been higher than that of our ancestors.

That need not mean our descendants need be less happy than us. My good fortune compared to my ancestors was not that I consume more than they did, but that I had more opportunities and choice (and better medical treatment).

Nor does the above logic means that our descendants need have less. In some respects they will have more because of benign technological change. A child born today in an affluent country has a more than even chance of living 100 years. (Please, oh please, let us hope they have reduced the incidence of dementia by then.)

What to do? The list is long, so some general themes. The most important is to recognise that parts of our economic growth are a Ponzi scheme and we need to stop the unsustainable exploitation of the resources that future generations need. That is not just resources which are being exploited but also the sumps of atmosphere for our waste carbon and water for the rest.

That means that an action inhibiting economic growth need not be a bad thing any more than the government closing down a Ponzi scheme. We should use the rhetoric that the action is not stopping sustainable economic growth, but preventing plundering our descendants.

The implication is that many people cannot expect their future incomes to rise the way that their (recent) ancestors’ incomes rose. We are going to have to make do with our present affluence. Yet there are New Zealanders whose current material standard of living is unacceptably low. That means some of us are going to have to experience lower standards of living to share things out more equally. Arguably, the rich have been already living off the poor just as they have been living off future generations.

And we are going to have to accept that the same is true for many people in poorer countries – although they also have people at the top who are spending too much.

To add to the austerity, we have a pile of messes, like congestion, environmental depletion and slack workmanship we have to clean up.

I cannot guarantee that doing these things will keep future generations in the comfortable affluence that we generally experience, although if we continue to push up our standard of living it will, inevitably, be at the expense of theirs.

One final thought. There is evidence that affluent people do not demand more because the consumption directly benefits them; rather it demonstrates that they are higher in the social rankings. We need to stop equating wealth with status and success. The next time you see conspicuous consumption being exhibited relabel the consumer as ‘plunderer of the planet’.

Comments (4)

by James Green on May 23, 2019
James Green

A lot of these problems can be managed by forcing people to work less hours per year. Moving to a 32 hour work week would squeeze the labour supply so much that productivity would shoot up and wealth would get more evenly distributed.

I've spent a lot of time studying the worlds problems and I've slowly come to realise that all of them have fairly easy solutions, all that is required is the will to want to solve them.

by Pat on May 24, 2019

" There wont be a rapid crash like a financial Ponzi scheme. Many resources are involved and they will collapse at different times. More speculatively, a financial Ponzi scheme builds up over a year, say, and crashes in less than a month. The environmental Ponzi scheme has been going on for a couple of centuries (although somewhat faster recently). The unwinding is likely to take longer too."

Are you convinced of that?

A hundred years ago maybe but most societies are now so reliant upon a precarious interconnected supply chain for necessities in the required volume that any single interruption could trigger a wholesale collapse.

by Lee Churchman on May 26, 2019
Lee Churchman

Won’t happen, in part because it’s too late and in part because people would rather the world burn than give up their status. Oh well..

by Brian Easton on May 26, 2019
Brian Easton

I've read about biological collapses, Pat, like the North Atalantic cod fisheries. They happen fast and dramatically. Sadly they will continual to happen. My point is that if there is an ecologically induced collpase of the world economy it will be different. How it will happen is more diffcult to predict. Brian. 

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