Ecology and Economics 201: Nature Doesn't Play Monopoly and Neither Should We.

Ecology and Economics 201: Nature Doesn't Play Monopoly and Neither Should We.

Imagine Earth with one lonely pollinator. Terrifying, I know! We wouldn't last a day without the critical service pollinators provide (that is, spreading male sex cells between flowering plants, so they can fruit, disperse seeds, and continue their immobile sex life with the help of the birds and the bees).  They are the intermediaries of plant sex, and without these critters we would starve.

For millennia, species have co-evolved to support one another, thus ensuring a diverse and stable habitat. These bats and saguaro cactus flowers are perfect for each other, but luckily, there are many more pollinators to do the job elsewhere. This redundancy of function is driven by natural selection. Nature's currency - its dollar bills so to speak - is energy. The more efficient the interaction between organisms, the more energy to go around, so the more species can fit in one place. This greater diversity means if the bat was to disappear, other pollinators, including the gila woodpecker on the right, and other birds, insects, and even rodents, would continue to perform the essential service of spreading plant sperm between cacti. Phew, disaster averted, thanks to built-in backups!

I know it's not as sexy, but let's apply this same concept to market economics. In business, just like ecosystems, monopolies reduce redundancy. Consolidation within sectors weakens stability, exposing greater risk and vulnerability. When confronted with a disturbance, such as a subprime mortgage crisis, there is less ability to rebound. Yes, the economic crash of 2008 could have been prevented if we adopted the same principles nature evolved over millions of years. Don't put all your eggs in one basket.

In Adam Smith’s village economy of yore people once upon a time acted upon their own self-interest as a baker, brewer, or butcher. In doing so, they supported the greater good of the community by trading staple commodities. Less energy was exerted by individuals, as each was focused on specializing in one task. The efficiency of a true market economy was born.

This reigning economic theory was developed prior to the Industrial Revolution, and heavily influenced by Smith's, The Wealth of Nations, in 1776. This was a time when resources appeared limitless and industrial waste had yet to pose a threat to human and environmental health.

Our economy is nested with our environment and social systems. We veer off track when we flip this notion.

Our economy is nested with our environment and social systems. We veer off track when we flip this notion.

Neoclassical economics was founded by the artificial notion that market dynamics and commerce is somehow separate from the environment it is nested within. By acting under this false pretense, we have been temporarily able to toss the garbage over the bank, but it's piled too high. What we do to our environment impacts business bottom lines.

Smith's popular theory - the foundation of capitalism - works in a village economy because costs and benefits are transparent. Externalities enter the picture when the model is scaled. The falsehood that a true market economy still exists, and the subsequent resistance to imposing regulation, has set us up for environmental devastation. We are nested within our environment, so we are inevitably going to pay for our actions.

In the last two centuries our regional economies entered the unknown sphere of global commerce. Consider the shift from diverse sectors of banks, retail, media, agriculture, and petroleum distributors into homogenized, centrally-controlled mega-institutions.

Total Number of Independent Banks   Janicki, Hubert P., and Prescott, Edward Simpson. Federal Reserve Bank of Richmond Economic Quarterly.  Changes in the Size Distribution of U.S. Banks: 1960–2005.

Total Number of Independent Banks

Janicki, Hubert P., and Prescott, Edward Simpson. Federal Reserve Bank of Richmond Economic Quarterly. Changes in the Size Distribution of U.S. Banks: 1960–2005.

Nothing prompted greater risk-taking and exposed greater vulnerabilities than the repeal of the Glass-Steagall legislation in 1999. This deregulation facilitated wild and risky speculation, as well as a rapid consolidation of banks in the U.S. - a situation ripe for economic collapse due to the lack of redundancy.

Wait a minute, I thought deregulation was good?! In a theoretical true free market, this deregulation may have been welcomed, but our current economic system is entrenched in government interventions. The Glass-Steagall Act was the teetering stilts supporting the empire. 

Natural regulations, called feedback, exist in nature. Feedback is a signal sent to reestablish equilibrium, much like a thermostat regulates room temperature. A true market economy has these feedback signals, so when a business acts inefficiently, natural corrections will put them back on track. If the business continues to consume too many resources or waste energy through competition, they tend to lose profit and investors, ending in bankruptcy. Nature weeds out similar inefficient behaviors as organisms who are wasteful are driven toward extinction.

Humans have removed regulations, or feedback, both in nature and our economy. When feedback mechanisms, are removed in nature populations explode and collapse, resources are exhausted, and pollution is rampant. Similarly, when governments try to control financial markets by artificially subsidizing entire sectors, mergers and monopolies form. Diversity and resiliency is lost, and risk surges.

In the early 2000's, the government and banks loosened policies on lending, which skyrocketed the demand for houses. This was the start of the housing bubble. Burton Malkeil, author of A Random Walk Down Wall Street explains,

Fueled by easy credit, house prices began to rise rapidly... which in turn encouraged further mortgage lending, which led to further price increases in a continuing positive feedback loop. The cycle of increased leverage involved loosening credit standards and even further increase in leverage. At the end of the process, individuals and institutions alike became dangerously vulnerable.... When the bubble bursts, the feedback loop goes in reverse.

When Lehman Brothers fell in 2008 it triggered a tsunami of financial failures on a global scale. Revered names; names that stood for strength and resiliency; names that Americans entrusted with their life's savings - Merrill Lynch, Bear Sterns, Fannie Mae, Freddie Mac, and AIG; teetered on bankruptcy as their total worth plummeted to near zero in a matter of days. In a panic, our government artificially bailed out failing banks with taxpayer dollars, thus removing us even further from Adam Smith's true free market. In his 2008 article, 'The Three Weeks that Changed the World,' business correspondent Nick Mathiason reveals, 

Not since 1929 has the financial community witnessed 12 months like it... The bankruptcy of the Wall Street giant forced traders everywhere to think the unthinkable - no firm, however venerable, was too good to fail.

People once believed the Titanic was too big to fail, and the same psychology applies a century later. The five mega-banks that emerged out of the Debt Crisis - JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs - now represent 56% of the U.S. economy. Compare this to 1960 when the ten largest banks were equal to only 21%.

The decline in the number of these institutions aligns with the concentration of wealth in our country. Rising income inequality is clearly evident when the top 0.1% hold the same wealth as the bottom 90% in the United States. In other words, according to Forbes, the 400 wealthiest Americans have more wealth than half of all Americans combined. 

Vulnerability, inefficient behavior, externalities, wealth disparities, endless competition - we've managed to remove ourselves from nature's laws. A true market economy, in the conventional sense, does not exist. Ecologist Tom Wessels poses the question,

Which model would you bet on for long-term sustainability: the model life on Earth presents, which has successfully sustained itself for at least 3.5 billion years through coevolved specialization, integration, redundancy, and efficiency; or our present corporate model, which has functioned for little more than a century through competitive exclusion and inefficiency?

To prove just how convoluted government and finance are, not shockingly in the wake of the 2008 global economic collapse, very few reforms were enacted and just one unlucky financier was held accountable and served a 30 month prison term. 

Clearly congress was not going to bit the hand that feeds them, so someone took measures into their own hands. A new digital currency, known at Bitcoin, emerged around the same time. Driven by efficiency, this new species filled a void and established a new niche in our market. It experienced rocky growth for the last seven years, as Mt Gox (a currency exchange) held upward of 75% of all Bitcoin available. Inevitably, the monopoly Mt Gox collapsed three years ago, and now no single entity controls more than 10% of the market.

This is big. YUGE. We have witnessed the emergence of a self-regulated financial system - one that is truly a free market - in the last decade. Bitcoin's rapid growth in value in the last six months suggests a bubble, but this course is uncharted. Online natural selection is underway.

We live in a fascinating time when our conventional economic paradigm is challenged like never before. Now when you look out your window, thank hummingbirds, bees, and butterflies for pollinating your flowers, but also pay attention to interactions that make sense for redesigning global finance. Nature does not play Monopoly.

ATM: Always Taking Money.

ATM: Always Taking Money.

Responsible Investing: Can I Put My Money Where My Mouth Is?

Responsible Investing: Can I Put My Money Where My Mouth Is?