The fantasy of perpetual compound natural growth

If resource extraction and economic growth compounds, sooner or later something on earth has to give

The fantasy of perpetual compound natural growth

Dr. Nate Hagens, a professor at the University of Minnesota, is fond of alerting us to aspects of the future most of us would prefer NOT to attend to.

Hagens has an interesting background: his Masters’ Degree was in finance from the University of Chicago. He spent considerable time on Wall Street cold-calling millionaires to try to sell them financial services. He later left to study “our human ecosystem, which consists of the interrelationships between biology, ecology, energy, human behavior, and economics.” He went on to earn a Ph.D. in Natural Resources from the University of Vermont and for some time contributed to the fascinating web-site (now disbanded) devoted to energy called The Oil Drum.

Hagens argues that our vast productions of energy and our profligacy in its use will, in our lifetimes, peak and decline. Given the almost identical statistical trajectories of energy use and economic growth, decline in the former may cause us considerable grief through decline in the latter.

Sensing more doom-saying about the future of the kind we have become familiar with, we might respond with a resounding, “Ho-hum.” For now, the fresh vegetables keep rolling in from California in January, and the Dow-Jones Industrial Average is near all-time highs. Life is good, so why worry?

The world runs on some powerful truths. One of these is that mathematical compounding works. (Compound interest fascinated Einstein, who called it “the eighth wonder of the world.”) We are happy to make use of compounding in financial prediction and analysis, but less content to examine some of its downsides.

According to Hagens, last year’s global economic growth was approximately 3.5 per cent, chugging along, business as usual. Compounding that growth rate into the future would require doubling the throughput of materials and energy drawn from the natural world in just 25 years! In a world without limits, such expansion would prove no problem. Given our finite planet, however, sooner or later something has to give.

How can we double sources of natural capital that have already been stretched to their limits?

Humans have extracted the easily obtainable resources first. We’re now reduced to mining bitumen or to drilling for oil miles beneath the ocean to access what used to burst out of the ground in gushers. Mining bitumen provides far less “free energy” (energy that remains after expending energy to extract the oil) than we have come to rely on.

Scientists now observe poleward shifts in many plankton and fish species, away from traditional harvest areas. Billions of people worldwide live near the oceans and rely on fish for protein. Yet climate change is reducing the productivity of phytoplankton, leading to a likely reduction of the fish populations we have been accustomed to exploit commercially.

Large food-growing areas around the world rely on “water mining” (removal of non-replenishable ground water) to water their crops. Gigantic aquifers such as the Oglalla underneath the western plains, and those beneath the Central Valley of California, the North China Plain, and the region surrounding the India-Pakistan border are being systematically depleted. What happens when they hit bottom?

Yet we imagine compound growth continuing. Every financial planner and government economist relies on its “certainty.”

It’s difficult to conceive of a future fundamentally unlike our present of ongoing expansion and innovation. Yet such a tense, imperfect future may be just around the corner.