An economic revolution is coming if you want it or not

Excessive consumption and wealth hoarding in developed countries combined with unbridled population growth and rising consumerism in developing countries are steering our common destiny towards an increasingly inevitable cataclysmic event. The co-founder of one of the largest asset management firms in the world and legendary investor, Jeremy Grantham, euphemistically labelled such an event, the Great Paradigm Shift, when he wrote an illuminating essay on resource depletion and its potential consequences, back in 2011.

Highlights from his essay:

“We now live in a different, more constrained, world in which prices of raw materials will rise and shortages will be common.”

“Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! ”

“Rapid growth is not ours by divine right; it is not even mathematically possible over a sustained period. Our goal should be to get everyone out of abject poverty, even if it necessitates some income redistribution. Because we have way overstepped sustainable levels, the greatest challenge will be in redesigning lifestyles to emphasize quality of life while quantitatively reducing our demand levels. A lower population would help.”

“For a small window of time, about 250 years, from 1800 to, say, 2050, hydrocarbons [coal, oil, gas] partially removed the barriers to rapid population growth, wealth, and scientific progress. World population will have shot up from 1 to at least 8, and possibly 11, billion.”

“When our finite resources are on their downward slope, the hydrocarbon-fed population will be left far above its sustainable level; that is, far beyond the Earth’s carrying capacity. How we deal with this unsustainable surge in demand and not just ‘peak oil’, but ‘peak everything’, is going to be the greatest challenge facing our species.”

He uses the following analogy to illustrate his point about finite resources and growth:

“In 17th and 18th century Holland and Britain, there were small pockets of considerable wealth, commercial success, and technological progress.”

“But there was a near fatal flaw in that world: a looming lack of wood. It was necessary for producing the charcoal used in making steel, which in turn was critical to improving machinery – a key to progress. (It is now estimated that all of China’s wood production could not even produce 5% of its current steel output!) The wealth of Holland and Britain in particular depended on wooden sailing ships with tall, straight masts to the extent that access to suitable wood was a major item in foreign policy and foreign wars. Even more important, wood was also pretty much the sole producer of energy in Western Europe. Not surprisingly, a growing population and growing wealth put intolerable strains on the natural forests, which were quickly disappearing in Western Europe, especially in England, and had already been decimated in North Africa and the Near East. Wood availability was probably the most limiting factor on economic growth in the world and, in a hydrocarbon-less world, the planet would have hurtled to a nearly treeless state. Science, which depended on the wealth and the surpluses that hydrocarbons permitted, would have proceeded at a much slower speed, perhaps as little as a third of its actual progress. Thus, from 1800 until today science might have advanced to only 1870 levels, and, even then, advances in medicine might have exceeded our ability to feed the growing population. And one thing is nearly certain: in such a world, we would either have developed the discipline to stay within our ability to grow and protect our tree supply, or we would eventually have pulled an Easter Island, cutting down the last trees and then watching, first, our quality of life decline and then, eventually, our population implode. Given our current inability to show discipline in the use of scarce resources, I would not have held my breath waiting for a good outcome in that alternative universe.”

“I believe that we are in the midst of one of the giant inflection points in economic history. This is likely the beginning of the end for the heroic growth spurt in population and wealth caused by what I think of as the Hydrocarbon Revolution rather than the Industrial Revolution.”

Grantham goes on to explain the dangers of our inability to understand and internalise the effects of compound growth. He posed the following question to a bunch of experts, mostly PhDs in mathematics, about finance and the environment:

“To point to the ludicrous unsustainability of this compound growth I suggested that we imagine the Ancient Egyptians whose gods, pharaohs, language, and general culture lasted for well over 3,000 years. Starting with only a cubic meter of physical possessions (to make calculations easy), I asked how much physical wealth they would have had 3,000 years later at 4.5% compounded growth.”

“Not one of these potential experts came within one billionth of 1% of the actual number, which is approximately 10 to the power of 57, a number so vast that it could not be squeezed into a billion of our Solar Systems.” … “In 3,000 years the original population of Egypt – let’s say 3 million – would have been multiplied 9 trillion times! There would be nowhere to park the people, let alone the wealth.”

“The bottom line really, though, is that no compound growth can be sustainable.”

He also rubbishes the claim that human ingenuity and intellect will be our saving grace:

“Many other civilizations, despite being armed with the same brains as we have, bit the dust or just faded away after the misuse of their resources. This faith in the human brain is just human exceptionalism and is not justified either by our past disasters, the accumulated damage we have done to the planet, or the frozen-in-the-headlights response we are showing right now in the face of the distant locomotive quite rapidly approaching and, thoughtfully enough, whistling loudly.”

To the reality of a world with dwindling resources – oil, metals and agriculture (the latter due to finite supplies of water, arable land and fertilizer) – Grantham adds two more ingredients to get us to his Great Paradigm Shift: weather anomalies due to climate change and China’s structural imbalances. Droughts and floods caused by climate instability are already affecting global food supplies. China’s problems – an unprecedented rise in wages that is reducing its competitive strength, an unsustainable 50% of GDP going into capital spending, rapidly growing debt levels, housing bubbles and a large quantity of bad loans – could just be the hair that breaks the global economy’s back.

Now bear in mind that the above insights do not come from some economist lackey or a finance journalist who has never built or created anything, has never run a successful business and whose own financial security does not hinge on their nebulous predictions and analyses. No, it comes from a hugely successful captain of industry. Someone with actual gravitas, who deals with global resources on very large scale.

The answer to a sustainable and equitable society does not lie in infinite growth as expounded on by compromised economists. Growth per se is only in the interest of a minority with vested interests. A small number of very wealthy shareholders are relentlessly pushing for ever more unsustainable growth at great cost to the environment and society. In the first instance, it is does not make any logical or mathematical sense as pointed out by Grantham. Secondly, it shifts our communal attention away from what should be our focus: population growth (in effect, the educational and reproductive rights of all women), sustainable consumption of resources and a restructuring of the wealth distribution and financial systems.

This perfect storm of limited resources versus the relentless pursuit of unsustainable growth was also highlighted by George Monbiot in an article in The Guardian.

“It was neither capitalism nor communism that made possible the progress and pathologies (total war, the unprecedented concentration of global wealth, planetary destruction) of the modern age. It was coal, followed by oil and gas. The meta-trend, the mother narrative, is carbon-fuelled expansion. Our ideologies are mere subplots. Now, with the accessible reserves exhausted, we must ransack the hidden corners of the planet to sustain our impossible proposition.”

Two environmental disasters in the making illustrates his point:

In Ecuador, Petroamazonas, a company with a record of ecological destruction, has been allowed to drill for oil in the heart of its Yasuni national park, one of the most bio-diverse places on the planet, in which a hectare of rainforest is said to contain more species than exist in the entire continent of North America. While, in the Democratic Republic of Congo, UK oil firm, Soco, wants to start drilling in Virunga, Africa’s oldest national park and one of the last strongholds of critically endangered wildlife such as mountain gorillas, okapi and forest elephants.

One thing is certain; increased disparities, not only between individuals, but also between countries and regions will have serious consequences. What form the revolution will take is anyone’s guess. Will it be in a relatively structured way via a capital wealth tax as proposed by Thomas Piketty, or are we heading towards the tumultuous and murderous upheavals as seen during the first half of the twentieth century? The big and very frightening difference would be that it will unfold much, much faster than at any other time in history.

As a group with access to information and the ability to affect constructive change, the uncritical and co-opted global consumerist middle class need to heed the warning signs and realise that they may be dumped together with the oligarchs and financial speculators come judgement day. Predatory capitalism will only be defended by those with much to lose, which should definitely not include you and I with our mortgage bonds and credit card debts. However, if we insist on keeping our heads firmly stuck in the sand, the eventual price will be paid by us as well.

The Russian bourgeoisie also believed till the very last moment that they were not in danger of being strung from lampposts and trees.