pyramid of debt

Here is a good article from the newyork times, explaining the relationship between real wealth, paper money, and debt.

Key point:

Georgescu-Roegen and other ecological economists argue that wealth is real and physical. It’s the stock of cars and computers and clothing, of furniture and French fries, that we buy with our dollars. The dollars aren’t real wealth, but only symbols that represent the bearer’s claim on an economy’s ability to generate wealth. Debt, for its part, is a claim on the economy’s ability to generate wealth in the future. …

Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.

Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation.

Bingo ! What we are seeing with current financial crisis is “debt repudiation” on a huge scale and the resulting fallout.

The article actually has two very important points, only one of which is tackled clearly. The point made clear in the article is that there is an enormous pyramid of financial debt that is balanced atop the real economy.

But a more important point:

The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorbed.

What the article does not discuss in detail, is that our current real economy generating real “wealth” itself is perhaps un-sustainable in the long term because:

(a) it is sucking low-entropy energy from the environment without a guarantee that we can continue to do so in the longer term (excessive dependence on fossil energy).

(b) more importantly, our real economy generating real wealth, is spewing more high-entropy effluent than the environment can sustainably absorb.

Taken together, we have another enormous pyramid sitting precariously atop the real economy — the pyramid of ecological debt.

Just as we are in a debt un-winding phase, to bring the financial debt inline with the real economy, we may need to go through a ecological debt un-winding phase, to bring our human real economy inline with the larger realities of Nature’s economy.

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(full article follows. saved for future reference incase the article disappears off nytimes website)

Mr. Soddy’s Ecological Economy

By ERIC ZENCEY

INNOVATIVE and opaque instruments of debt; greedy bankers; lenders’ eagerness to take on risky loans; a lack of regulation; a shortage of bank liquidity: all have been nominated as the underlying cause of the largest economic downturn since the Great Depression. But a more perceptive, and more troubling, diagnosis is suggested by the work of a little-regarded British chemist-turned-economist who wrote before and during the Great Depression.

Frederick Soddy, born in 1877, was an individualist who bowed to few conventions, and who is described by one biographer as a difficult, obstinate man. A 1921 Nobel laureate in chemistry for his work on radioactive decay, he foresaw the energy potential of atomic fission as early as 1909. But his disquiet about that power’s potential wartime use, combined with his revulsion at his discipline’s complicity in the mass deaths of World War I, led him to set aside chemistry for the study of political economy — the world into which scientific progress introduces its gifts. In four books written from 1921 to 1934, Soddy carried on a quixotic campaign for a radical restructuring of global monetary relationships. He was roundly dismissed as a crank.

He offered a perspective on economics rooted in physics — the laws of thermodynamics, in particular. An economy is often likened to a machine, though few economists follow the parallel to its logical conclusion: like any machine the economy must draw energy from outside itself. The first and second laws of thermodynamics forbid perpetual motion, schemes in which machines create energy out of nothing or recycle it forever. Soddy criticized the prevailing belief of the economy as a perpetual motion machine, capable of generating infinite wealth — a criticism echoed by his intellectual heirs in the now emergent field of ecological economics.

A more apt analogy, said Nicholas Georgescu-Roegen (a Romanian-born economist whose work in the 1970s began to define this new approach), is to model the economy as a living system. Like all life, it draws from its environment valuable (or “low entropy”) matter and energy — for animate life, food; for an economy, energy, ores, the raw materials provided by plants and animals. And like all life, an economy emits a high-entropy wake — it spews degraded matter and energy: waste heat, waste gases, toxic byproducts, apple cores, the molecules of iron lost to rust and abrasion. Low entropy emissions include trash and pollution in all their forms, including yesterday’s newspaper, last year’s sneakers, last decade’s rusted automobile.

Matter taken up into the economy can be recycled, using energy; but energy, used once, is forever unavailable to us at that level again. The law of entropy commands a one-way flow downward from more to less useful forms. An animal can’t live perpetually on its own excreta. Neither can you fill the tank of your car by pushing it backwards. Thus, Georgescu-Roegen, paraphrasing the economist Alfred Marshall, said: “Biology, not mechanics, is our Mecca.”

Following Soddy, Georgescu-Roegen and other ecological economists argue that wealth is real and physical. It’s the stock of cars and computers and clothing, of furniture and French fries, that we buy with our dollars. The dollars aren’t real wealth, but only symbols that represent the bearer’s claim on an economy’s ability to generate wealth. Debt, for its part, is a claim on the economy’s ability to generate wealth in the future. “The ruling passion of the age,” Soddy said, “is to convert wealth into debt” — to exchange a thing with present-day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made. Money facilitates the exchange; it is, he said, “the nothing you get for something before you can get anything.”

Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.

Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.

It’s like musical chairs — in the wake of some shock (say, the run-up of the price of gas to $4 a gallon), holders of abstract debt suddenly want to hold money or real wealth instead. But not all of them can. One person’s loss causes another’s, and the whole system cascades into crisis. Each and every one of the crises that has beset the American economy in recent years has been, at heart, a crisis of debt repudiation. And we are unlikely to avoid more of them until we stop allowing claims on income to grow faster than income.

Soddy would not have been surprised at our current state of affairs. The problem isn’t simply greed, isn’t simply ignorance, isn’t a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. There will always be a Bernard Madoff or a subprime mortgage repackager willing to set us up for catastrophe. To stop them, we must balance claims on future wealth with the economy’s power to produce that wealth. How can that be done?

Soddy distilled his eccentric vision into five policy prescriptions, each of which was taken at the time as evidence that his theories were unworkable: The first four were to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort. All of these are now conventional practice.

Soddy’s fifth proposal, the only one that remains outside the bounds of conventional wisdom, was to stop banks from creating money (and debt) out of nothing. Banks do this by lending out most of their depositors’ money at interest — making loans that the borrower soon puts in a demand deposit (checking) account, where it will soon be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.

One way to stop this cycle, suggests Herman Daly, an ecological economist, would be to gradually institute a 100-percent reserve requirement on demand deposits. This would begin to shrink what Professor Daly calls “the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash.”

Banks would support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They would still make loans and still be able to lend at interest “the real money of real depositors,” in Professor Daly’s phrase, people who forgo consumption today by taking money out of their checking accounts and putting it in time deposits — CDs, passbook savings, 401(k)’s. In return, these savers receive a slightly larger claim on the real wealth of the community in the future.

In such a system, every increase in spending by borrowers would have to be matched by an act of saving or abstinence on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. (Of course, it would not solve the problem completely, not unless financial institutions were also forbidden to create subprime mortgage derivatives and other instruments of leveraged debt.)

If such a major structural renovation of our economy sounds hopelessly unrealistic, consider that so too did the abolition of the gold standard and the introduction of floating exchange rates back in the 1920s. If the laws of thermodynamics are sturdy, and if Soddy’s analysis of their relevance to economic life is correct, we’d better expand the realm of what we think is realistic.

The tulip month

phew .. october just flew by without a post ! What on earth was i doing ? Just two things broadly — (a) really trying to be regular about my meditation. (b) following the ongoing financial tsunami. No school can better the real time education from current events, i say. Since we live in the age of ‘homo economicus’, our handling of economy, more than anything else probably, says a lot about our priorities and state-of-the-species.

So, without further ado, let me present my thesis on state of affairs. Wait .. thats still cooking.  In the meantime, let me serve up a random email moment, and save it from being forever lost to public eye among terrabytes of archived data at google warehouses. ( not that it specially deserves the honor or anything )

Yesterday, a cousin sent me an email, about a story on how the current global bumpy-ride is affecting real estate markets (and some unfortunate players) in India ..

The story (unknown original source)

The real estate industry that was the major stepping stone for the city of Hyderabad to come into the world focus has now become a barren tale of losses, suicides, dashed hopes and what not. Given the fact that the growth rate depended mainly on the NRI funds, the economic recession in the US has shown its power and thousands of people who have literally changed their lifestyle in the real estate dream have now landed in a major mess.

A large chunk of the downfall can also be attributed to the success of K Chandrasekhar Rao and his TRS party that gave the big companies to come up with a new concept of Andhra and Telangana and start selling lands. Crores of rupees have been spent in buying the lands and today not one unit linked to the real estate stream is in a position to breathe properly.

The farmers who got used to lavish lifestyle after tasting money ended up with big loans from banks for cars and houses and now they are unable to pay up. Many youngsters who took to this field with the idea of quick money have now lost their livelihood and are on the verge of suicides and absconding. Many companies who have spent crores of rupees buying acres of land are now hunting flies unable to send a single plot. They have now compromised that a break even price is more than sufficient profit.

Hot spots like Kokapet, Narsingi, Puppalaguda, Madhapur, Shamshabad and many other places were given undue hype during the boom and crores of transactions took place by selling the ‘real’ dreams. This was the scene about an year ago and today, things have turned for the worse with not a single penny being spent and those lands that were priced at crores per acre are not finding a buyer even at the rate of few paltry lakhs.

The recession began about a year back and just when experts were thinking that it will be alright in a year or two, the financial crisis in the US market and the current political confusions have added to the woes. On the smarter side, few big companies who anticipated such things have slowly shouldered few ventures on the lesser players and have taken their cushion.

This has shown an adverse affect on the financial institutions here unable to deal with the increasing loan defaulters and their money stuck with many who jumped into the real estate stream. Even the registrations department has shown an alarming dip in the number of registrations given the present condition and there seems to be no ray of hope at least for sometime.

At this rate, it will be a long while before things will come back to normalcy and it remains to be seen how many lives get plundered in this resurrection.

My quick-and-dirty big picture response

I wouldn’t blame the politicians fully. where is people’s discretion ? People who have leveraged beyond their means to pay back, will have to suffer the consequences of their actions. People who are prudent and bought only stuff they can afford to pay even in rough times, will survive. Yes, politicians whipped up the sentiment, but there can’t be a clap without two hands. Ofcourse, there are always people who genuinely bought their first homes at high rates, because they feared they’d otherwise never be able to afford in the future. Lot of innocent people got caught up in the frenzy. Unfortunately, those innocents are the collateral damage in any bust, be it dot com, or real estate or tulip bulbs or stocks.

I agree, overall india will not be immune to the current global downturn. Although, i think it will be less impacted in the short term because various factors like high savings rate, relatively less exposure to globalization, currently low commodity prices, demographics etc etc.

Long term (and iam talking 10 20 30 years), i believe all our economies have a problem when we start to hit physical constraints of the planet — energy, resources, climate etc. The current crisis is just man-made (financial). we can get over this, given enough time. But, we ought to be very careful about not going into physical constraint crisis, without adequate restructing of economies away from consumption oriented economies to simple low footprint sustainable economies.

But i don’t see any such measures currently. If you follow the discourse in the US, its all short term thinking. They are asking banks to lend, lend, lend, repeating the same mistake, trying to stimulate the economy articially again. Who will they lend to ? How will people pay back ? The consumer is tapped out. There should be more emphasis on getting people to save and repay national debt.

my 3 cents

Financial potpourri

On Wednesday, September 10th, during a conversation with a relative visiting from the US, I said, “I feel like we are sitting on the edge of a financial precipice .. something will happen to the markets soon”. Pretty good intuition, huh ?! That very Sunday, came the news of Lehman collapse and kicked off an eventful week. This financial crisis is not something that came overnight. Some analysts (like Nouriel Roubini and Mish, who I’ve been following for more than a year ) have been crying out from their website-tops that this was coming. Its amazing that markets have caught up with reality so late. One would have thought markets would have priced-in all this information well-in-advance of everyone. But no. Only shows that with bit of judgment, its possible to see where things are headed well before the markets do. So much for ‘efficient markets’.

So the whole of my last week is consumed in following the events as they unfold, and Iam in no mood to give my serious two cents on the whole thing. Instead, some sunday humor, anyone ? How about a Letterman’esque Top-10 ? . In the spirit of upholding free markets, and the principle of ‘comparative advantage’, I’ve out-sourced and open-sourced this compilation. As I waded through the financial blogs and discussions, I’ve captured some nuggets from people who still kept their sense of humor alive through the whole thing. Hat-tip to those anonymouses.

Without further ado, lets start the top-10 wisdom-of-the-crowds take on the financial crisis !!

Here we go …………..

BONUS ) Dubya Bush: “The SEC is also requiring certain investors to disclose their short selling, and has launched rigorous enforcement actions to detect fraud and manipulation in the market. Anyone engaging in illegal financial transactions will be caught and persecuted “.

GGhhrmm.. (clearing throat) .. Mr.President, i think “prosecuted” might be the word that the writers have actually written for you to read.

Number teennnn) On the ban on short-selling financial stocks, somebody in the street cried out …

“Isn’t this sort of like canceling gravity because the helicopter is out of fuel?”

Number niiiineee) On putting Lehman on the chopping block but bailing out AIG. Any lesson to be learnt ? Yes. Be “too big to fail” .

Today’s lesson from the Fed and AIG:
Never steal small sums.

Number Eiiiiiigghhht) Somebody astutely observed that Bank of America CEO Ken Lewis might actually be literally hiding behind this “too big to fail” theme.

Ken Lewis is thinking ahead. If it wasn’t before, BofA, with Countrywide and Merrill under its belt,
has got to be too big to fail now. Brilliant stroke, Ken.

while on the topic, someone suggested that ..”merged result of Merril Lynch and Bank of
America should be called Lynch America“

Number Seeeveeennn) well, climate change has to be tucked in somewhere, isn’t it ?

The good news is that the sitting guvmint does not believe the world’s ice sheets are too big to fail because their failure will be conveniently deferred to 30-50 years from present. Happy  motoring.

Number Siiiixxxxx) A pragmatic taxpayer ponders what’s in it for him from the AIG bailout..

So let’s say I’m down in the financial district and I gotta take a piss. As a part owner of AIG, can I walk over to HQ and use the facilities? Do I at least get that much out of the deal?

Number Fiiiiiiiivvvveeee) Lets give the mother-of-all-bailouts plan a decent acronym, shall we ?

The Securitized Home Investment Trust (S.H.I.T) shall cure all ills… All in favor say aye…

Number Foooouuuurrrr) Surgeon general advise: Positive frame of mind is good for your health.

Let’s Look on the Bright Side
After the Fed bails out GM and winds up owning 80% of GM, you can go to the Fed, buy a car and
insurance from them all at the same time!
Federal Gov’t – the one stop shopping for mortgage, insurance, autos…

Number Thrrreeeeee) There was a rumor floating around that terrorists might actually be shorting stocks from their bases in London and Dubai, to bring down the US financial empire.

Aren’t the firms going under, the real financial terrorists .. strap themselves with toxic debt and threaten to blow-up the whole economy up if the govt din’t pay ransom bailout …

Number Twwwoooo) A mastercard moment …

a bottle of cheap wine: $10
a plasma television set: $2,000

watching the global financial tsumani: priceless

for everything else… the US Federal Bank

Ladiiieesss, and Gentleeemannnn , now the top wisdom-of-the-crowds take on the financial kablooi …

Number ONNNNEEEEEE) should i pay in dollars, euros, yen or …..

Newspaper clip: “Lawyer suspended for accepting nude dances”

Now there is a man ahead of the curve, why take worthless dollars when you can get something of real value.

… la la la la lala …. ta ta tara ta ta …. na na na na nana ….. ho ho ho…..

vote with your money – part 2

(continuation from part 1)

Apparently, the trend now-a-days is to look at things from the perspective of the “whole” , and the representative mantra of this wisdom seems to be “The whole is more than sum of the parts”.

So why not we look at economic systems from this point of view ?

The message of this diagram is quite simple. The individual is part of a larger whole — a social community and a wider natural environment. Both are important realities. The whole cannot exist without a collection of individuals. The individual cannot survive when the whole is chronically unhealthy. A healthy economic system is one that recognizes and nurtures both the part and the whole.

So how do the popular economic systems fare in this aspect ? The communists ignored individual freedoms and rights, and were too tilted towards the “community” aspect. It was due to over-zealous altruism and in most cases, it was really for dictatorial control over economies, under the guise of altruism. Individuals had very limited property rights. Decision making was all centralized. It was a deadly combination — individual freedom and creativity were not nurtured and at the same time community sense was forced involuntarily onto the people. Under the weight of this serious mistake, economic communism collapsed.

On the other side of the spectrum, we have capitalism where individual rights are sacrosanct and any community wellbeing is an after-thought. Infact, it is based on an express principle that when individual rights are perfectly taken care of, community automatically gets all-right. Take care of the part, and whole will be all-right. It has proven to be only partly right. The economic pie definitely got bigger, but how is that pie shared within the social community ? There is certainly some trickle-down of wealth, but there is much stronger force of trickle-up that naturally seems to operate in a capitalist economy. This is evident from the frequent news bits we see about “top-x percent of people having y percent of wealth”. ‘x’ generally being much less than ‘y’. Thats the social aspect. On the environmental community aspect, capitalism as-we-practice today has been disastrous. The chief reason being that we simply failed to recognize and assign an intrinsic value to the natural environments. When little or no value is assigned, our economies simply converted the natural capital into goods that are valued. Conversion of natural capital to consumer goods and man-made capital. (I’ve discussed this aspect more here).

Anyway, coming back to our point, a healthy economic system is one which nurtures both the individual and community aspects .. because one could not survive without the other. Communism failed because it failed to recognize the individual and forced community responsibility onto the people. Capitalism does recognize individual rights, but has failed to formally recognize the community responsibility .. and so the social community is weak with massive inequities and environmental community is extremely unhealthy.

The whole problem with capitalism as-we-practice today is that it doesn’t directly address glaring economic inequities and is also leading to a serious deficit of natural capital. My solution is pretty simple. Lets preserve capitalism with its protection of individual rights, but let there be a voluntary trickle-down of capital into building social and environmental capital. As i’ve discussed in part-1, this would be achieved by cutting unnecessary personal consumption, and consciously investing in programs which build social and environmental capital. Ala, sage of Omaha Warren Buffet, who donated significant wealth to charity. Buffet says he was “wired at birth to allocate capital”. Precisely what we need. Voluntary reallocation of capital. I just gave the most glaring example, but as i said in part-1, this principle applies to everyone of us and not just Buffet’s of the world.

I must admit that all the fifteen hundred word discourse above is a fancy way of saying that people should spend wise and give more . All this is fairly obvious and makes sense without invoking any mysticism and philosophy. But whenever there is talk about individual vs universal, i can’t resist putting up a plug from Yoga. So, here’s a relevant and weighty quote from Sri Aurobindo’s work “Synthesis of Yoga”:

“The acceptance of the law of sacrifice is a practical recognition by the ego that it is neither alone in the world nor chief in the world. It is its admission that, even in this much fragmented existence, there is beyond itself and behind that which is not its own egoistic person, something greater and completer, a diviner All which demands from it subordination and service. Indeed, sacrifice is imposed and, where need be, compelled by the universal World-Force; it takes it even from those who do not consciously recognize the law, — inevitably, because this is the intrinsic nature of things. Our ignorance or our false egoistic view of life can make no difference to this eternal bedrock truth of Nature. For this is the truth in Nature, that this ego which thinks itself a seperate independent being and claims to live for itself, is not and cannot be independent nor separate, nor can it live to itself even if it would, but rather all are linked together by a secret Oneness. Each existence is continually giving out perforce from its stock; out of its mental receipts from Nature or its vital and physical assets and acquisitions and belongings, a stream goes to all that is around it. And always again it receives something from its environment gratis or in return for its voluntary or involuntary tribute. For it is only by this giving and receiving that it can effect its own growth while at the same time it helps the sum of things”.

Pretty strong words from the sage of Bengal. To my mind, the massive reallocation of capital away from needless consumption, into social programs and towards environmental sustainability, may be considered as an aspect of Yoga itself. Whether individually and societally we engage in this Yoga, is going to be important in the next few decades, as scientists warn us that we are fast approaching limits to mindless consumption.

vote with your money – part 1

I wanted to do a post on economics of spending for a while now, and i’ve finally found the catalyst in this discussion at Atanu’s blog on Mukesh Ambani’s home. So brace yourself for a crash course on chaitanya’s economic philosophy.

Start with a question. Whats the surest and easiest way to get your voice heard … your opinion really counted. Voting in a public election ? well, you may be on the losing side, in which case, your opinion isn’t really implemented. Camp at a busy intersection with a loud speaker and make your voice heard directly to janta ? well, who knows, for most people, your sermons might be going in through one ear and coming out through the next, with the three pound gray matter busy processing more mundane concerns. Whats to rescue ? Is there no universal justice to afford an individual with the right to be heard ? There is. Remember the good old detective line .. “follow the money” ?

Yes, me thinks, your money is the surest and easiest way to get your voice heard. Courtesy, an invisible super computer known as the “Market”. No matter how small or how large the amount you spend, the market faithfully includes this choice in the supply-demand equation, and spreads the signal ever so silently through the market-o-sphere. The signal is never lost. And surely, the message gets to all the right places, and depending on the strength of the signal, will affect future production, pricing and demand.

Our spending signals are a reflection of our values and priorities, and our signals collectively taken, have a major impact on our economy, society and environment. With his billion dollar home Mr.Ambani is sending a signal into the market-o-sphere, that the best way he can think of to spend this money is on such things as hanging hydroponic plants, crystal chandeliers, man-made snow flurries and LCD monitors. Oh well, its his money, right ? But for arguments sake, lets note the “opportunity cost” here. By choosing to spend money on trivia, we are implicitly letting go of the opportunity to spend it on useful social programs, say an education program. What an opportunity lost !

My way of thinking about this is rather simple. At any point of time there’s limited amount of monetary capital in the world. We can either spend it on personal consumption or invest in programs for collective benefit which build up long term social and environmental capital. Its a question of consumption vs infrastructure spending on a societal level. The more we use for personal consumption above and beyond necessities, the lesser we allocate to programs that are good for long term health of society.

Some would argue that any consumption is good, as it generates jobs for people and keeps the economy going. Sure. But again, one has to look at the opportunity cost. The choice is not between employment of LCD makers versus un-employment. The choice is between employment of LCD makers versus (say) employment of teachers and fountain pen makers. Over the long term, sending the proper signals will simply shift employment and production patterns, reflecting our priorities.

What does this all mean to us personally ? My personal spending logic is pretty simple. Before i buy something, the question i ask is not just “can i afford it” ? . But also,

(1) Do i really need it ? If i don’t really need it and still buy it, i am wasting precious capital and sending a wrong signal into the market place that there is someone who values the product.

(2) Is there an alternative option that can provide me similar service, but at the same time is environmentally and socially responsible. Lets say i need to travel from Vizag to Mumbai. Why wouldn’t i reject air travel for train, and at the same time (a) spare the air of some co2 (b) contribute my share towards delaying peak oil (c) avoid sending a part of my money to the Saudi’s and so keep the money circulating within India where its definitely more needed. (oh.. i hear you. And my answer is that i doubt 90% of air travellers are really that “time constrained”).

But what about people who choose to spend on such things as man-made snow flurries , and personal jets ? Its their money, right ? Or should the big brother tax away the money and spend on social programs for collective benefit ? This brings us to broader questions about right to private property, right to spend, taxation etc. All these questions have been debated to death in the last few centuries, but i will try my level best to bring out a slightly unique perspective. Over to the next part.

Scale of Economy

If the world stock markets are any indicator, the world economy is booming. Never before in the history of homo-sapiens, such wealth is produced and consumed. Never before in history, did human economy impact the ecology of the planet, as much as it is doing now. Is there a connection between scale (local, regional, national or global) of economic activity and the ecological damage caused ?

I came across this article recently, an example of the tensions between human economy and ecology, which are becoming commonplace today: Factory may destroy natural wonder.

I would not like to go into this particular case, without knowing the full details. But we can be rest assured such cases are in thousands across the world. It is useful to look at this phenomenon in terms of a generalized pattern — The players involved and the processes that take place.

The actual resource in question may be anything — timber or soda ash or bauxite ore or land for Dam construction. The pattern is very similar.

Players

Who are the players ? What is their level of dependence and connection to sites of production ?

• Investors: How many investors actually see the resource sites and ponder over the activities on those sites ? We can perhaps count on fingers. How many investors actually see the production facilities ? Very few. Most investors don’t even see the offices of the corporation they are investing into. Infact, many are short term investors or traders, who move capital around, at the click of a button. The only thing that matters to most investors is a “returns” number. Most investors are not accountable for the acts of corporations. Most investors don’t have a direct dependence on the sites of activity. Most investors have no emotional connection whatsoever to the places where their money is going.

• Corporations: Corporations are not dependent long term on the sites of activity. If the resource is exhausted, they can simply scour the globe for next cheapest source of resource.

• Resource guardians: This is the Achilles heel. If the guardians happen to be government, the future of the resource and surrounding ecology depends on the priorities of the government (and in turn, people) or the effectiveness of the whole government machinery in implementing existing policies. If the guardians happen to be local people, it depends on the priorities or the political strength of the local people. Is it a coincidence that lot of resource controversies take place around powerless local people ? From mines, to dams, to land-grabs ?

• Consumers: Modern industrial processes are so complex, most consumers have very little awareness on what goes into producing a particular product. Most consumers have very little direct dependence on the sites of production activity, and no emotional connection to the ecology of the sites.

In the globalized economy we have today, it is entirely possible that the players may be located in different parts of the globe. The investors may be in western Europe, the corporation may be registered in China, the resource may be in Tanzania, the production facilities may be in middle east, and the consumer may be anywhere in the world.

Processes

What are the processes ? What are the policy choices we make in driving these processes ?

1) Global capital mobility

• Policy driver: Global investment liberalization, including institutional investment through capital markets.

2) Global direct investment

• Policy driver: Direct investment liberalization.
• Enables establishing of operations by foreign corporations.

3) Resource movement

• Policy driver: “free trade” agreements.
• Enabler: Cheap oil which does not incorporate environmental costs.

4) Consumption

• Policy driver: cheap money supply to stimulate consumption.

• Driven by excessive marketing.

Immunity from consequences

There is no question that globalized economy creates efficiencies, and increases the overall wealth of the people. However, we need to take a note of the flip side as well. It disconnects important players — the investors and the consumers — from the ecological realities of economic activities. How many of us switching on electricity, are dependent on the land submerged for hydroelectric dam ? How many of us using aluminum products, are dependent on the sites of bauxite mining ? How many of us are connected to the ecology of the place ? How many of us using timber products, are dependent on the forest it comes from ?

The distancing of important players from the consequences of impact, clearly provides no incentive for those players to protect the ecology of the place. The integration of our economies on a regional level, national level and more recently, global level, simply intensifies the scale of distancing.

Hunter-gatherers live in the forest, agriculturists live adjacent to but within striking distance of the forest, and urban-industrial men live away from the forest. Paradoxically, the more the spatial seperation from the forest, the greater the impact on its ecology, and the further removed the actors from the consequences of this impact. (M.Gadgil, R.Guha in: This fissured land — An ecological history of India)