Dangerous exponentials

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 “Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist”. Kenneth Boulding

By Leith van Onselen

Earlier today, The Prince published a thought provoking article questioning the economy’s addiction to population growth.

It’s an issue that I have been pondering since reading the below Strategy Insight from Dr Tim Morgan, Global Head of Research for Tullett Prebon, entitled “Dangerous Exponentials”, as well as reading Chris Martenson’s Crash Course, which explores issues around exponential population growth and resource use (amongst other things) in great detail.

In the Strategy Insight, Dr Morgan presents a series of “dangerous financial and non-financial exponentials” that are not sustainable and ultimately risk destroying the economy, environment, and overall living standards:

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We believe that an exponentials analysis can alone explain an impending collision between an economic system which, by its nature, must grow, and a finite resource set which, ultimately cannot grow. When this collision eventuates, it is likely to be one of the most important changes in the lifetime of anyone reading this report.

Key amongst Dr Morgan’s concerns is the world’s population growth, which has grown exponentially to the point that human’s demand for resources is pushing against capacity constraints on what the earth can actually provide:

In fig. 3, we set out the population of the earth from 2000 BC through to projected numbers for 2050. At the beginning of this period, historians estimate the world population at 170 millions, and this number increased only gradually thereafter, reaching 254 millions by 1000AD…

Thereafter, population growth accelerated markedly. Whilst it had taken thousands of years to reach the first billion, the second billion was achieved in the 1920s – that is, adding the second billion took about ninety years. The third billion was added much more quickly – taking about thirty years – whilst the fourth was added in less than twenty years.

From the mid-nineteenth century, the population growth chart turns into a characteristic exponential ‘hockeystick’ shape. The current population total is about 6.7bn, and this is expected to increase to 7.6bn by 2020, and 8.8bn by 2040.

Anyone who is mathematically inclined might point out that any compound progression chart, if projected forward far enough, will take on a hockey-stick shape, and that this doesn’t particularly matter unless the progression begins to hit physical parameters. Moreover, current calculations suggest that population could top out in the middle of the century at somewhere between nine and ten billions, since the global average fertility rate is declining rapidly with improvements in living conditions in the developing world.

But the earth’s resources – such as land, food production capacity, energy and, perhaps most important of all, water – are not infinite, and some specialists believe that the earth’s ‘carrying capacity’ may be limited, with estimates varying between perhaps 8.5bn and 11bn. This range is superimposed on the chart.

If a physical constraint is imposed in this way, the vertical axis becomes referenced, and the hockey-stick trajectory takes on far greater significance. And this observation is by no means confined to the population explosion.

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Dr Morgan then turns his sights to the world’s consumption of hydrocarbon energy, which has displayed a similar degree of exponential growth:

From an economic perspective – and beyond intuitive questions about whether the world really can support the projected numbers of people – two things are striking about the population trend.

The first, to which we shall return later, is that the rapid up-tick in the curve began in the mid-nineteenth century. And this, coincidentally – or, in our view, not coincidentally at all – was also when the use of hydrocarbon energy began to expand rapidly.

Chris Martenson contends – and we wholly concur in this belief – that the current population of the earth is sustainable only because of an abundant supply of hydrocarbons, and principally of oil. This is surely obvious enough when we bear in mind the vast scale of hydrocarbon energy inputs employed in modern intensive agriculture…

Agriculture itself was made vastly more efficient, initially through the use of motive power and latterly through the introduction of hydrocarbonbased fertilisers and pesticides. Within a hundred years of the first use of steam-power, the proportion of the populations of most developed countries engaged in farming had fallen to less than ten percent. Specialisation had arrived, courtesy of the harnessing of the energy contained in fossil fuels.

…all of the economic ‘exponentials’… are energy-dependent… we are all, as Mr Martenson puts it, “living like kings”, and both the lifestyles of individuals and the specialisations of societies are made possible only by exogenous energy, derived overwhelmingly from fossil fuels…

Dr Morgan also discusses the exponential growth of the money supply and debt, which are equally unsustainable, but those are secondary (in my opinion) to the predicament of exponential population growth / resource use in a finite world.

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There is a follow-up Strategy Insight by Dr Morgan, entitled “End-game”, that I will look at tomorrow.

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www.twitter.com/Leithvo Dangerous Exponentials – Tullett Prebon

About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.