December 01, 2011

Daly dose of fun

Every day hundreds of newsletters circulate the world giving stock-picking advice - for free. From the point of view of rational investment they are nonsense. If someone has a real clue about sound stock-picking the last thing he or she will do is to freely share it with strangers. Those newsletters only make sense, and money, for brokers earning trading commissions. That's why brokers write and publish them - to persuade clients to trade.

Herman Daly, the Pope of Ecological Economics, offers investment advice in the journal Ecological Economics (Growth, debt, and the World Bank). Unlike common stock-picking advice, which consists of random, superficially plausible just-so stories, this one is based on a patently wrong, implausible just-so story. Either that or you follow Daly's advice and get rich.
Consider. What limits the annual fish catch—fishing boats (capital) or remaining fish in the sea (natural resources)? Clearly the latter. What limits barrels crude oil extracted—drilling rigs and pumps, or remaining accessible deposits of petroleum—or capacity of the atmosphere to absorb the CO2 from burning petroleum? What limits production of cut timber—number of chain saws and lumber mills, or standing forests and their rate of growth? What limits irrigated agriculture—pumps and sprinklers, or aquifer recharge rates and river flow volumes? That should be enough to at least suggest that we live in a natural resource-constrained world, not a capital-constrained world. 
Economic logic says to invest in and economize on the limiting factor. Economic logic has not changed; what has changed is the limiting factor. It is now natural resources, not capital, that we must economize on and invest in.
I am not running to my broker to invest in natural resources because it seems to me that oil extraction is limited by extraction technology, the fish catch by aquaculture technology, irrigated agriculture by pumps, sprinklers and such, and fish catch, irrigated agriculture and cut timber by deficient private-property institutions. To increase the output of these industries we would have to invest in capital, including social capital. Not that I am suggesting you to do so - I don't know whether there will be enough demand for fish, oil, food or timber to justify more private investment.

Daly also says:
The claim [of economists] that capital is a near perfect substitute for natural resources is absurd. For one thing substitution is reversible. If capital is a near perfect substitute for resources, then resources are a near perfect substitute for capital—so why then did we ever bother to accumulate capital in the first place if nature already endowed us with a near perfect substitute?
Because what other capital "endows" us with is cheaper than what nature "endows" us with.

Daly says many more things - that atomic bombs will be thrown because of natural resource shortages, that the fact that we now live better than ever before should not count as evidence against his idea that economic growth "makes us collectively poorer, not richer" (an argument that is as good now as it was two hundred years ago and as it may be two thousand years from now), that countries "think" and but don't think very well because we can see that they don't act "in their own best interests," and on and on and on.

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