earth

The Earth is a Closed System

Erik Financial Education, Markets, Thoughts of a Mastermind 9 Comments

THIS POST MAY CONTAIN PAID AND/OR AFFILATE LINKS.

This month, July 2018, I’ve decided to embrace my recent non-traditional and alternative thoughts on the personal finance space and talk about a number of things that I’ve been battling with internally about money, the markets and investing. This is the first post in this series, and will set the stage for the coming posts this month.

One of the principles of living with an abundance mindset is that the world is infinite in possibilities. In the 21st century here in the United States, people have never in their history had the freedom to do what we want with our time and money.

Want to go across the country tomorrow? It’s a possibility – get an airplane ticket and you are there! Something to eat? Head down to the grocery store or favorite restaurant and you’ll be fed! Air conditioning on a hot day, or heat on a cold day? Spin the dial and comfort awaits!

Why am I bringing this up?

Unfortunately, this freedom is expensive, from a monetary, environmental and energy perspectives.

This series is going to be a challenge to people in the personal finance community, economists (real and armchair), politicians (real and armchair), and anyone interested in investing. Thinking critically is so important if you are going to navigate this world successfully.

I’m pursuing TRUTH and will not stop short of it.

In this first post, I’m going to discuss a topic so frequently ignored and touch on the surface of some of the consequences of this ignorance.

The Earth is a Closed System

I’m sure this is an obvious statement to you: the Earth is a closed system.

Humans know the dimensions of the Earth (diameter of 7,900 miles) and have pictures of the entire planet from space.

In other words, you could say that the Earth is finite.

In mathematics (namely, number theory), finite sets are a collection of things which can be counted and the count of the collection is finite (less than infinity). Subsets of a finite set are finite as well, and are not infinite.

Why do I bring this up?

Something that is so frequently ignored by economists, journalists, personal finance experts, investors, and politicians is that the Earth is finite and limited.

Because the Earth is finite and limited, there are a few things that cannot be limitless: population, man-made energy, and money.

The rest of this post will be touching on population dynamics, energy, and give a preview of the rest of this month.

Population Dynamics in a Closed System

In a biology class in high school or college, you may have learned about population dynamics.

In a closed system, the population of individuals is governed by following differential equation (from Wikipedia):

The solution to this equation is the following:The picture of this equation is the following:

population growth picture

At the beginning of time, the growth is fast, and as you come up to the carrying capacity of the system, the growth slows.

The carrying capacity is a level such that the environment can sustain indefinitely, given the food, habitat, water, and other necessities available in the environment. The carrying capacity is a dynamic number based on technology, weather, and a number of other factors, but this number is always a finite number (because of the closed system assumption).

While this is great in theory, how is this playing out in the real world?

Population Dynamics in the United States

I live in the United States, so it’s natural to start with the United States.

Here’s a graph of the United States population over time:

United States population over time

Over time, the population in the United States has grown, and since 1950, has more than doubled.

If you are paying attention, you’ll recognize something that’s a little off. The United States is not a closed system.

While performing my research for this post, I found some information on immigration and people leaving the United States, but to perform a thorough analysis, I’d have to come up with some sort of cohorting methodology which would be outside of the scope of this post anyway…

What I did find is that the growth of the core population of the United States (ages 15-64) is declining and leveling off over time:

working age population united states

The population continues to go up, but the core population is going down? Well, the majority of the change and growth in the population in the past 30-50 years is due to immigration.

What does this point to? A maturing population in a space approaching it’s carrying capacity? I’m not sure the exact reasons, as I’m not an expert on population dynamics, but from our thought exercise, it would seem that the United States population has matured and has reached stability (ignoring immigration).

But why… we will get to that in a little bit. Let’s talk about population dynamics on Earth.

Population Dynamics on Earth

Since we live on Earth, and this post is ultimately about Earth being a closed system, I present below the Earth’s population over the past 500 years:

world population over time

World Population (billions)

Again, we see massive growth around 1950, and little signs of this slowing down. But again, from population dynamics, we know that Earth is a closed system, so at some point, the population should level off.

Some scientists have us leveling off at 9 or 10 billion. Most projections have us between 6 and 17 billion in the year 2100.

Are we approaching our carrying capacity in the world today? Will people be able to increase the carrying capacity of the world? What factors will affect this?

These questions are outside the scope of this post, but leads us to my next point on the discussion of Earth being a closed system.

The Most Important Variable so Often Ignored: ENERGY

When you get out of bed in the morning, what do you do?

Your muscles move in such a way that allows you to roll off the bed and stand up. How do your muscles do this?

Your muscles tap into your body’s energy stores.

Where does your body get this energy? Easy, food.

Where does this food come from? The grocery store, which got it from a farm or food processor.

How did the farm or food processor get the food?

I think you get where I’m going.

ENERGY drives everything in our world.

Since energy drives everything in our world, why do economists, politicians, “experts” and talking heads ignore it? Let’s dive in a little more.

How Energy has Affected Population Growth

Again, I’m sure this is obvious to you since you learned this in history class in high school, but it’s worth repeating.

At the start of the 1800’s, the Industrial Revolution took place and brought extreme change to the way people went about their daily lives. Innovation and new technologies allowed humans to go places faster, do more work and produce things more efficiently.

Steam powered engines, the ability to mass produce steel and iron, and advancements in agriculture allowed people to live more comfortably and build up society to do things unattainable in the past.

Because of these developments, more people were needed for growth and building, and the population started to explode.

Over the next 200 years, more technological developments and growth allowed the population to keep it’s steady pace upwards. Electricity, oil discoveries, solar, wind, and nuclear energy advancements, all of these contributed to a surplus of energy which allowed humans to research and discover new and more efficient ways to produce food, build real estate, and create the society we know today.

Here’s the thing though: while yes, there have been strides in renewable energy, we cannot ignore the fact that the majority of the world is still very dependent on oil and fossil fuels. As we know, the Earth is a finite mass, and a subset of the Earth (oil) is also finite.

If energy drives growth and productivity, and one of the main sources of our energy disappears, what will be the result?

The Interplay of Energy and Earth Going Forward

earth

While the financial media typically stays quiet about energy outside of the cost of different commodities, there is quite a bit of talk about it among academics and politicians (though not always as thoughtful or well-meaning as we may like).

Certain people argue that since humans are a dynamic species, we are adaptable to our different situations. Over time, if we run out of oil, we can find some other energy source which will fit our needs.

While this sounds great, in reality, people have been working on alternative energies for the past 50 years and these energies still aren’t as efficient as we’d like (or there is some other force blocking the widespread use – potential rabbit hole here).

Other people argue that the world is undoubtedly finite, and the rate at which we are using oil and other fossil fuels is unsustainable, and because we are so dependent on this type of fuel, we are in for a rude awakening.

Countries and businesses are spending more money, going into more debt, and getting less return on their investment for less of a yield.

Is this sustainable? Are new technologies on the rise? I don’t know.

I don’t know how the future will look, as I don’t have a crystal ball, nor does anyone else.

My point of this is to highlight that we cannot ignore something so fundamental to living and daily life in our macro projections.

Energy, population dynamics, and the environment drive the economy… it’s not the other way around

This statement is worth repeating since it’s so important: energy, population dynamics, and the environment drive the economy… it’s not the other way around.

I’ll be going into more detail in later posts in this series, but some statements which automatically fall out of this statement are worth mentioning here:

  • To grow a entity (business, government, family, etc.), energy is required.
    • Everything takes energy, and growth and progress needs a lot of it.
  • The economy is a subset of the environment and the world around us and is subject to the same rules from biology and physics.
    • Economists (with big egos and heads) think that the economy is the biggest thing, but without the environment, there is no economy.
  • The stock market will not go up forever. 
    • Infinite growth in an non-infinite system is a logical mistake. Note: this is not saying that the stock market is not a good place for investment or store of your wealth.

Again, I will touch on a number of these later on in this series, but wanted to make these statements here to get the ball rolling.

Keep these concepts in mind in the upcoming posts

As I’ve mentioned before on this blog, I’m not an expert, but want to write in such a way which will spark original and critical thought in your brain.

Considering the impact of energy on the economy, productivity, and markets is so critical and should not be ignored.

The world we live on is not infinite, and as a result, we should take care in our discussions to consider this.

In the upcoming posts, I will be talking about some concepts which are fundamental to the financial system today:

  • What is money? What is debt?
  • How do banks work? What is fractional reserve banking?
  • What does it actually mean to want to invest in a stock?

I’m searching for the truth, and while I’m not there yet, this will be a fun set of posts for me to learn more about the world, and hopefully give you some good food for thought.

Thanks for reading,

Erik

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Comments 9

  1. Going to have to weigh in opposite you somewhat on this one. I’m going to focus only on the availability of energy as pollution and trash are a whole other issue.

    The belief in peak oil or deplenishment of energy sources is largely hogwash. Why? Economic theory states that humans will use whatever energy source is cheapest. It also says supply reductions will raise the price of an item. Finally we know there is a ceiling on the cost of energy. The ceiling is the cost of sustainable energy like solar. In a worse case scenario we would get all our energy from solar and it would cost what solar does. Solar energy is an external power source. Ie the earth is not a closed system.

    Now what happens when usage shifts to an alternate source? Economies of scale and innovation drive that cost down. Disagree? What’s the difference in cost of solar per kilowatt today versus a decade ago? What about fracking for natural gas?

    But why haven’t we shifted yet? Easy, oils is still the cheapest alternative. Go back 120 years though and he same converations were had about coal. Before that wood. And yet here we are.

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      Author

      Hey FTF, I really appreciate your thoughtful response and comments as always.

      Introducing this as the first post of many this month is more to speak in general about something that is ignored.

      My point is that the resources we are using (at a rapid pace) are limited, and to ignore them in making long term statements and projections is a little short sighted. Economic theory is just a theory and based on assumptions (which may or may not be correct – something j don’t want to get in to)

      Yes, theoretically we could mine asteroids for metal and tap into a whole slew of alternatives to keep things rolling – I’ve ignored this in my article because most economic and financial models are constructed with data with assumptions which are finite, but have supposed conclusions and consequences which are infinite.

      Regarding your points on energy, I completely agree with you that humans will go towards what is cheapest and what is most available. All of your points are grounded in theory and I agree with you.

      Again, my point is that these resources are limited and to ignore them in making long term statements and projections is a little short sighted.

      Physically, the earth is not a closed and finite system, and with solar, wind, and other technologies, humans can tap into this. Having economies being highly dependent on these energy sources is dangerous in my opinion.

      Ideally, there would be a push for more sustainable living and improvements in this area.

      Thanks again for the comment. Again, at a high level, my main point is we should not forget energy and the environment when making economic statements.

  2. Sorry for the two comments but separate thought for this one. On Stock markets rising forever. I don’t believe the risk here to be energy or technology, but rather political stability. We’re a long time into one of the quietest times in human history. No world wars, no massive plagues, no massive famine, no civil wars (at least none of these on any scale in the developed world as the developing countries stock markets are not mature enough to discuss).

    What happens to the market when the four horseman rear their head again in one or more of the developed countries? How about innovation? That I believe is the more immediate (our lifetimes) concern.

    Technology stalling was one of the ideas behind Karl Marx’s communist manifesto. If technology truly stalled it would change the very fabric of society. But, all current signs indicate an increase in technological change not a decrease. We’re talking about robots and automated cars now. As short term ago as forty years almost everything done in a business was done by hand because there were no desktop computers.

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      Author

      Thanks for the second comment and again, I appreciate it.

      A follow up question: do you think that part and current wars are being fought for control over physical resources? I could be wrong, but it would seem that the US government’s involvement in the middle east has been driven by a want to establish, control, and have a favorable relationships with key players in the oil industry (hence petrodollar)

      I love your thoughts and think this will be a fun series for us to go back and forth on 🙂 I’m not an expert and still learning more and more about the world.

      In the coming posts, I want to touch on Bretton Woods and the removal of the gold standard of two key agreements which have played very big roles in today’s macro economy

      Thanks again FTF I appreciate it, have a good one

      1. I’m actually already writing up a post on my thoughts on the future of the market, so I might just follow some of your posts with a follow up and link back if you don’t mind. Bretton Woods would also be an interesting discussion.

        As for our involvement in other regions, yes and no. Is it an oil grab? Not so much as we’ve had the opportunity and not done so. But no government acts outside it’s self interest. Our best interests are in a stable middle east, and in some ways a stable wider world. Whether our stable is the best stable is a political question I won’t touch, but even outside the world of middle eastern oil the US economy and thus government benefits from stable and free commerce around the world. They act towards that goal for better or worse.

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          Author
  3. Interesting post! I totally agree with you on most points. In regards to the seeming lack of progress on renewable energy sources, you’ve gotta remember relativity. It did take us about 5000 years to learn how to mass produce things in the Industrial Revolution after all 🙂

    I think more progress will come in future years, especially once oil and gas prices rise to the point where renewable energy sources are actually cheaper. When will that time be and will it be too late for the planet at that point? That’s anyone’s guess 🙂

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      Author

      Thanks YFK for stopping by and commenting. I’m not an expert and don’t claim to know the answers. I’m all for sustainable energy and think it could certainly be a solution.

      I’m having a slight identity crisis and actually would consider going back to school for an electric engineering degree to help with this work. If you have a truth, why not follow that truth?

  4. The greatest mistake of my life was taking Paul Ehrlich seriously. He wrote “The Population Bomb.” Less than a year after my daughter was born, I was surprised to learn my wife was pregnant with my son. The mistake was to stop at two children. (It is a vulgar movie, but Idiocrasy shows where this sort of thinking leads.) My children are both successful adults and yesterday I became a grandfather. The next generation is in better hands than mine. The world would be better had I had more children.

    Malthusian prophesies are falsified by the simple expedient of shifting between alternate resources. Running out of whale oil for your lamps? Invent incandescent lights. Running out of electricity? Invent LED bulbs. Or nuclear power. Theoretically, the Earth is limited, but we’re nowhere near those limits. And there’s a completely empty solar system full of resources to develop.

    Elon Musk is a good example of what can be done when you refuse to accept the wrong answers provided by the likes of Paul Ehrlich then get to work building better answers yourself. He demonstrates optionality by swinging for the fences, striking out, and hitting home runs. My 2nd greatest mistake was accepting less than this from myself. The Savior speaks ill of people who bury their talents in the ground while praising their peers who put those talents at risk and redouble them.

    I hope you learn from my mistakes.

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