Thursday, April 2, 2009

Infinite Growth in a Finite World

We're all aware of the Bernie Madoff Ponzi scheme. He used money from new investors to pay unreasonably high, consistent rates of return to his old investors.

Two recent articles by Thomas L. Friedman, The Inflection Is Near? and Mother Nature's Dow ask if we are engaged in a global Ponzi scheme of accelerating consumption and growth.

Most for-profit companies I've worked with as an advisor or Board member measure their success in quarter per quarter growth percentages.

In the economy of a bygone era, local businesses were considered successful when they made a high quality product, maintained the livelihood of a few employees, and built relationships with customers. There was a focus on service to the community rather than endless growth in value for shareholders.

Just as Bernie Madoff promised double digit returns, the US economy experienced rapid growth (likely unsustainable) via credit cards, speculation, and mortgaging our children's future.

If our resources are finite - we have a limited amount of fresh water, a fixed set of raw materials, and a cap to the population that can be sustained in the environment - infinite growth is not possible.

I believe that the era of "growth is good" is coming to an end. It is my hope that the era of quality, employee retention, customer satisfaction, and sustainability will replace it.

Call me old fashioned, but does it make sense for hedge fund managers, venture capitalists, and option traders to make such high returns without really contributing to society? Do they create new ideas, innovative products, or value added services? Or are they no better than sophisticated speculators in a global Ponzi scheme? The vast sums of money they make come from somewhere and we're all paying the price now for their creation of derivative investments that were based on the notion that home prices and businesses would have infinite growth in a finite world.

As I approach 50, my view of the world and my own needs have changed significantly. In my 20's I measured success by the amount of stuff I owned, the size of my house, and the speed of my car. Now I measure my success by the amount of stuff I do not have, the smallness of my house, and the carbon footprint of my car.

If we all endeavor to focus on the quality of life, the sustainability of our environment, and the future of our children rather than endless growth, the world will be a better place.


Healthcare IT Guru said...

Hi, I have followed your blog for a little while now. I agreed with you on this topic. I wish more people especially executives type of people share your value. By the way, I enjoyed reading your blog because myself also works in Healthcare IT.

Anonymous said...

I can agree that one may lose focus on important things due to greed. It is also reasonable that otherwise rational people will believe they can get something "too good to be true." These are aspects of humanity that are as old as we are, I fear. Ponder the infamous Holland Tulip Bulb mania of the 1600's to see how some things never change (sadly).

However, I question the central premise of natural resources as finite. I say so because I believe the capacity of our one truly important natural resource - the human mind - is infinite. One example that I have recalled fondly from some economics discussion was sand. We have loads of it and it wasn't worth much for the majority of human history. Then one day Silica became useful for the guts of computers and humble grains of sand became the underpinnings of a new industry that didn't exist before.

Lumps of stone that made photo-plates blur later became the stuff of both nuclear medicine and nuclear weapons as the ever-curious human mind tried to figure out what made that rock different.

Or, someone looks at mold in a petri dish one day and ponders why it retards the growth of bacteria.

While simple examples, they point to the immense capacity of the human mind to problem-solve and create new resources out things like sand and moldy bread.

A mundane example: You wear fabrics that didn't exist a short time ago, which have replaced the "natural resources" of leather and cotton in much of your wardrobe.

The vehicle you drive owes some of its fuel economy to the replacement of the natural resources of metals with light-weight plastics. Yet, modern synthetic plastic materials have only been around for a century now (starting with Bakelite).

So long as the infinite potential of the human mind is cultivated and - most important of all - left free to wonder and think, I believe we have the capacity to create our own natural resources along the way.

Hoots said...

Very good observations (though I'm puzzled how two comments bear a date before the date of the post - now that's what I call prescient).

Seriously, you and Friedman are among a growing number of observers pointing at a naked emperor. Unfortunately that number is still too small and growing slowly. Old habits are hard to kill.

I worked for a company in the food business that went through a metamorphosis that reflects what has happened to the economy over the last thirty years.

As an old-fashioned cafeteria the company began in the forties with an old-fashioned attention to quality, consistency and a level of customer loyalty that companies today could never dream about. The margin was tight because cafeteria patrons were parsimonious offspring of the Great Depression who would rather stand in line, buy every serving a la carte and sit in a crowded dining room rather than pay more to eat in a full-service restaurant... with the expectation of a TIP! The only tips we saw in the seventies were occasional coins (and none for the servers or rest of the staff).

Sometime in the late eighties the mood changed. Growing numbers of the public expected table-cloth service at cafeteria prices, but became more generous with their tips, so much so that when the company went to "tip wages" in the dining room no one quit because they were already getting so much in cash tips that their paychecks had become part of their discretionary income!

That shows how the public changed, but here is the real kicker: This privately-owned company "went public" about the same time which changed the whole dynamic of how the business operated and profits were figured. The market price of the stock became more important to the administration than the actual profit line.

As you pointed out, quarterly profits and percentage increases became the new metric and the rest of the story has a sad ending. There were, of course, other factors, but Chapter Eleven lay at the end with growth stopped, pensions shedded to PBGC, holidays, vacations and other already skimpy "benefits" trimmed, and body parts being sold off one at a time by a private investor.


At the heart of our problem lies an over-use of credit.

Credit is a means of using tomorrow's money today. When my wife and I bought a refrigerator last Independence Day with no obligation to pay for it for a full year we were taking advantage of a truly stupid way that retail sales have been pumped in America for some time. I don't approve, but heck, if someone is throwing cash into the street I'm not crazy enough to keep walking. I'll pick up some of it like every one else and forget the stupidity of the waste.

One of Friedman's articles quoted an Onion piece making fun of the American predilection to buy any kind of garbage. The point is well taken. But when the mentality changed from "Can we afford it?" to "Can we make the payments?" a point of no return was reached.

I'm watching the unwinding of credit that is a slow-motion train wreck as promised dollars that will not come into existence in our lifetime burst like soap bubbles. We have not seen the bottom yet, but when we do let's pray that credit will never again get out of control as it has over the last two or three decades.

Medical Quack said...

The post makes some very good and true points. The value of the "stuff" we have today is not as important as what values we have had in the past, I feel it too.

The business models of the past for profit simply don't fit with the way health care technology is growing today, too much focus on risk management in an area of R and D, Science, that can't be controlled and contained, otherwise we all suffer.