If you read the first part of this essay [Some Thoughts on Capitalism and Human Nature], you probably realized that there was a lot more to say on the subject. The first essay argued that unrestrained Capitalism was increasingly unsuited to the problems of the earth in the 21st Century. So what’s the solution? Re-regulation of industry? More government oversight?
That’s part of the answer, but there are some fundamental systemic problems to overcome…and a profound change in human expectations. In the early days of exploration and settling of North America, fortunes were made in timber and gold. Land was cleared and the rich soil’s nutrients were squandered. Dust bowls, polluted streams from mining operations, clear-cut forests. But people got rich. The bounty seemed infinite.
Eventually things settled down to a more systematic exploitation of oil, minerals, fresh water and timber. Businesses grew, propelling the economy; a lot of people got rich, and a lot more made a decent living. The 20th Century was the American Century. Our economy propelled us from a second-tier power in 1900 to the pinnacle…the richest, most powerful nation the earth has ever seen…by the end of the millennium.
Our ascendancy was powered by Capitalism, and the stock market was the engine. Companies issue stock, people buy it with their savings, and the money is used to expand the businesses. If a business grows and prospers, the stock price goes up, and investors can sell, pocket the profit and look for the next investment opportunity. What is a company’s stock worth? Whatever someone is willing to pay for it, and a whole new industry emerged…financial services. Investment “experts,” analyze businesses, study their operations, their balance sheet, estimate future earnings, and issue reports that investors use to select their investment choices. There are many measures of “value.” The most common is price-to-earnings ratio. (P/E) A low P/E could mean that a stock is “undervalued,” and a good investment, whereas a high one suggests that it is “overpriced.” But the earnings history and future prospects also affect the price, and both are subject to honest error or deliberate exaggeration.
The secret to successful investment is to buy low and sell high…and maybe collect some dividends in the interim. But this presupposes that there is another investor who is willing to buy at that higher price. And that would require an analyst to conclude that the stock was still undervalued. If that is true, the seller shouldn’t sell it, should he? Or he should ask a higher price. Meanwhile, the new buyer expects the stock price to continue climbing until he decides to sell it to yet another buyer who expects the same thing. The whole thing starts to sound like a modified Ponzi scheme, where each fool buys hoping to sell to a bigger fool later. The last guy holding the paper, the greatest fool, is the loser.
Stock market gurus would answer that the market is made by buyers and sellers who have different opinions of the value of a stock, and that a sale happens when a buyer and seller happen to agree on a price. So the market “value” of every stock is established by numerous transactions, and every buyer expects the company to grow and the stock price to increase. Otherwise, he would be foolish to buy it. And that brings me to the point of this description of how stock markets operate: That expectation of growth, unending growth, is, ultimately, unrealistic. Eventually, there will be a greatest fool.
Why is it unrealistic? It’s always been that way, you say. Yes, so far in the history of our nation, growth has been continuous…growth in the population, growth in the economy, growth of the businesses in which we invest. But accumulating evidence indicates that we are reaching a “tipping point,” a crucial time, not just in the history of the United States, but a climax in the history of man’s ascendancy on the planet. Population experts say that we are in “overshoot,” far above sustainable population levels. Moreover, we are rapidly depleting the easy energy sources, fossil fuels, and the combustion of them is damaging the ecosphere in countless ways. Minerals and fresh water are also being depleted at ever increasing rates.
The long-term solution is obvious. Reduced population, reduced consumption, and as a result, a near-zero-growth economy. You can argue about when it will happen, how large the population can grow, how long the nonrenewable resources will last, but that only changes the date when the inevitable happens. Eventually, we will reach a limit. We can do it gracefully, limiting population and consumption, taking control of the process of adjustment, or we can continue headlong, like a runaway train, and the results will be dire. The business community is beginning to recognize this. Businesses are “going green,” limiting energy use and ecosphere pollution in their processes. There is a lot of talk (and a little action) on development of renewable energy sources. But the realization and acknowledgement of the limits to growth have yet to be factored into the investment equation. Stocks are still priced as if growth will go on forever.
Once this sinks in to the investment community, that the expectation of growth is no longer realistic, stock prices are going to go through a truly monumental “correction,” because most of the perceived value of stocks is the expectation of growth. Take away the lure of capital gains, and stocks will be worth a fraction of their current value.
We have been living in a Capitalist fool’s paradise. We save a little money during our working life, invest it, and retire with a nest egg that far exceeds our savings. That growth in our savings was fueled largely by capital gains on our investments, which were in turn fueled by growth in the underlying businesses and the expectation of further growth. What happens when that expectation is gone, or greatly reduced?
The result will be that capital gains, the process that has built fortunes in this country over the past hundred years or so, will be largely (not entirely) a thing of the past. Our savings will grow more slowly, mainly by collecting interest on loans…if we can find anyone who will borrow money in a static economy. Mostly, our savings will be…our savings, and that’s all.
Life is going to be a helluva lot more modest for most people. Lower energy usage, lower consumption of everything. Do you really need a two-ton 300 horsepower car that gets 15 mpg to go to the grocery store? Future generations won’t have one. Do you really need to blast around the world in jet airliners? They will be the first transportation mode to go the way of the dinosaurs. Life is going to get a lot quieter and simpler. Bicycles are going to make a big comeback! And walking. That won’t be a bad thing at all for a nation suffering from a pandemic of obesity-related diseases caused by our sedentary lifestyle.
Geez, what a gloomy guy, you say. Not at all. Life will be different, but not necessarily less rich, rewarding or interesting. Riding bicycles in a local park can be just as much fun for a family as driving two hundred miles to the Colorado River, towing a 500 horsepower speedboat behind a three-ton SUV, to do a little water-skiing…with earplugs to muffle the roar from the engine. Appreciation of literature, music and the arts will flourish. Our current obsession with the accumulation of “stuff” will dissipate. Recycling will be largely replaced with re-use.
What about technology? It has always bailed us out before. Somebody will come up with an abundant, cheap, nonpolluting energy source. That could happen, but we still have to eat, and growing food takes land space. The more people there are, the less space that is available for agriculture. Land area is limited. Two thirds of our planet is covered with water. What about aquaculture? Sure, we can do “fish farming.” And desalinize water. We undoubtedly will do all of those things, even to sustain a smaller population than we have now. But all of those things just tinker with the final numbers. Those numbers have a definite limit, and we are almost certainly over that limit right now. So limitless growth will soon be over. Get used to it.
Capitalism may survive the coming changes, but it will not be your father’s Capitalism, wild and unfettered. By necessity, it will be leashed and tethered and constrained in ways that are unthinkable today. That doesn’t mean that innovation and hard work won’t be rewarded. They will, but not with fabulous material riches. Future innovators will be rewarded with the satisfaction of knowing that they have contributed measurably to the well being of the planet and its living occupants.
But that will require a change in human nature, won’t it?
Yes, and I am optimistic that it will happen.
I didn’t mention the possibility that humans may eventually develop the technology to enable interstellar travel. If that were to happen, then we would not need to remain constrained by the limitations of our planet. We could hopscotch our away across the Cosmos, and spread colonies on any habitable planets we found…assuming the local residents didn’t object. But that’s almost like believing in the Tooth Fairy…or God…to rescue us from our predicament. It’s fine to pursue that goal, but in the meantime, we had better take care of matters here on this planet…just in case the miracle doesn’t happen and Earth ends up being our permanent home.