Environmentalism, Sustainability, and Deregulation
I’m sure many of you have seen the inspiring video below (it has over 5 million views), in which boaters free a humpback whale from a fishing net in which it had been caught. It makes the following passage from Beyond the Limits by Donella Meadows et al all the more outrageous.
Ecologist Paul Erlich once expressed surprise to a Japanese journalist that the Japanese whaling industry would exterminate the very source of its wealth. The journalist replied, “You are thinking of the whaling industry as an organization that is interested in maintaining whales; actually it is better viewed as a huge quantity of financial capital attempting to earn the highest return. If it can exterminate whales in 10 years and earn a 15% profit, but it could only make 10% with a sustainable harvest, then it will exterminate them in 10 years. After that, the money will be moved to exterminating some other resource.”
I know there are people who favor deregulation, promoted as “getting government off our backs,” and other slogans. But I certainly don’t understand them.
[youtube http://www.youtube.com/watch?v=EBYPlcSD490]
The second paragraph of the article explained what is wrong with our method of evaluating investments.
When evaluating investments, future returns are discounted by multiple powers of the discount rate, which is less than unity. Thus, returns far in the future don’t count for very much. For certain types of investments, that method works very well. However, it fails to consider what kind of world we will be leaving for the next generation.
For those who are unfamiliar with discounted cash flow, which is a common method to evaluate investments, I shall endeavor to explain it.
You would not be willing pay $100 now to receive only $100 one year from now. If the interest rate were 10%, you would be willing to pay only $90 to receive $100 one year from now. To receive $100 two years from now, you would be willing to pay (0.9) squared times $100 now, i.e., $81, to receive $100. If you use the same process to determine how much you would be willing to pay to receive $100 ten years from now, it would be only (0.9) to the 10th power times $100, which is about $35. So, you can see that investors have little interest in what happens many years in the future. And, the higher the interest rate is, the less they are interested in returns in the distant future. That explains why the Japanese whaling industry doesn’t care if their whaling causes whales to become extinct in the future.