Financial investments on planet Earth

Nicolas Kosoy

Outline

• Characteristics of resource and financial systems

• Status Quo – Trends and prospects for survival

• There are alternatives!!

AcknowledgmentsThis presentation draws from panel discussions and seminars at the 4th Annual Biophysical Economics Conference, 26-28th October 2012. Thanks to Dennis Meadows and George Mobus for inspiring presentations

It is called Circular flow of the economy

But it is a Biophysical process

Mobus 2012

• Energy flow through the system drives the transformation of low entropy material to high entropy assets.

• Energy is continually dissipated

Wealth and Debt

“Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." (Soddy, 1926: 70)

Mobus 2012

Factors of production

• Land, Labour and Capital (Adam Smith, 1776);

• Labour, Subject of Labour and Instruments of Labour (Marx, 1867);

• Discovery, Natural Energy and Human Diligence (Soddy, 1926);

• Labour, Capital, Natural Resources, Technological capital (Knight, 1941)

Virtual Wealth

"Psychologically, the economic aim of the individual is, always has been, and probably always will be, to secure a permanent revenue independent of further effort, proof against the passage of time and the chance of circumstance, to support himself in old age and his family after him in perpetuity. He endeavours to do so by accumulating so much property in the heyday of his youth that he and his heirs may live on the interest on it in perpetuity afterwards. Economic and social history is the conflict of this human aspiration with the laws of physics, which make such a perpetuum mobile impossible, and reduces the problem merely to the method by which one individual may get another individual or the community into his debt and prevent repayment, so that the individual or community must share the produce of their efforts with their creditor." (Soddy, 1926: 122)

Three Levels two Loops … and one extra internal loop(adapted from Meadows 2012)

+

Financial Stocks (Positive feedback loops)

Meadows 2012

Non renewable resources (negative feedback loops)

Meadows 2012

Typical behaviour of + and – feedback loop dominated systems

Meadows 2012

US debt

Meadows 2012

Global trends in EROI

Meadows 2012

How long can we continue?

• Depletion and geophysical limits – e.g., Peak Oil– Limiting supply driving up prices

• Declining EROI (mine mouth/well head) – Increasing costs of extraction (e.g., non-conventional methods)

• Decreasing rate of efficiency improvements (e.g. Carnot’s limit)

• Increasing population (with increasing expectations)– Decreasing net energy available per capita

Lead to: – Diminishing total work to produce real assets * Less wealth per

capita over time – Increasing disparity between wealthy and poor? Mobus 2012

How long can we continue? II

Mobus 2012

Current Financial systems hinder sustainability(Meadows 2012)

• Amplifies oscillations• Reduces time period of interest• Promotes indefinite growth• Increases social inequity• Devaluates social and natural capital

thanks