In our economic system, money is the proxy for energy and materials; ecology shows us that our best chance of achieving any kind of sustainability is to direct that energy at our best solutions. Being a conduit of capital into the Next Economy is our job here at Green Alpha Advisors. But why is that important?
I've noticed a trend of folks writing about the title question recently. Scientific American recently published the article "Can ecological models explain global financial markets--and make them more stable?" and the journal Bioscience just posted "Energetic Limits to Economic Growth." The SciAm piece argues that understanding how complex ecological systems manage their own growth can help us understand how to regulate global finance. Bioscience says productive output for any system, financial or ecological, can be understood and defined as a function of the energy it has access to. My own post "Earth Itself Is Our Creditor of Last Resort" argues essentially that we shouldn't even try to separate the global economy from Earth ecology, because they're just slightly different manifestations of the same system, and yes, they therefore must obey the same laws.
Does this make sense? Totally. The authors of the Bioscience piece say they "demonstrate a positive scaling relationship between per capita energy use and per capita gross domestic product (GDP) both across nations and within nations over time. Other indicators of socioeconomic status and ecological impact are correlated with energy use and GDP." They arrived at this conclusion in a novel way, using an "explicitly macroecological and metabolic approach [that] uses new data and analyses to provide quantitative, mechanistic, and practically relevant insights into energetic limits on economic growth." Meaning they're developing proofs showing the ratios of energy availability to economic output for ecological and economic entities must be and are the same. Whether ecology or economy, the more energy put into a system, the greater its potential productive output.
The SciAm authors state: "When a new beneficial trait or tool enters the picture, if all organisms adopt it, as many financial institutions did with credit default swaps and other risky trades that led to the financial meltdown of 2007-08, a tenuous balance can be quickly upset." That is, whatever energy-to-output system is running in a given system, external shocks can quickly cause disruptions and force reengineering to restore some kind of equilibrium. If equilibrium isn't re-achieved, the system may collapse. They note that one way to immunize a system from exogenous threats is to subdivide it in to "more self-contained "nodes" as has been employed in forest management and computer networks, so that if one element takes a hit, it doesn't take down the entire system." I find this interesting as it dovetails with our vision of energy security, wherein central power generation will be replaced by a more distributed grid.
So of course the economy is an ecological system. Money in = production out, and outside things messing with this cause change or collapse. Finance is nothing more than a veneer of culture overlaid on always-present Earth systems, which in turn derive from the basic laws of chemistry and physics. It shouldn't surprise anyone that economic systems respond to the same laws and behave like natural ones. Ecological systems can and do thrive and collapse for basic fundamental reasons that are more or less understood, and we can say the same for markets.
What's new today isn't the systems; it's the scale: Earth now has 7 billion people, all of whom are striving for greater affluence. Subsequently, those of us alive today are the first humans to be testing the physical limits of Earth's total carrying capacity. Our output is capped by the total amount of commodity resources. We now, finally, after 200,000 years of human existence and 12,000 years of culture, are forced to conclude that Earth is essentially just one giant bio-enclosure, and we have to learn to live within its increasingly, relatively limited physical and material constraints. The Biosphere-2 project sustained eight people for two years in a small space. Now, our challenge is to do the same, but indefinitely and for seven billion and counting people.
How do we achieve that? There can be only one way: to simultaneously develop the technologies and approaches that have the power to address our most critical problems. I write a lot about them: energy, food security, water availability, infrastructure, transportation. The companies that practice these industries in a way that works in a resource-constrained world and/or has the power to stabilize global warming will be the huge winners of the future. In fact they may be the only companies in the future, as non-sustainable practices will have by definition failed. Investing in Next Economy companies is one powerful way forward to ensure civilization doesn't fail along with them.
Garvin Jabusch is the cofounder of Green Alpha Advisors, LLC and manages The Sierra Club Green Alpha Portfolio -- a unique blend of Green Alpha Advisors' Next Economy universe and the Sierra Club's proprietary green-investment guidelines.