By setting the price of raw materials, financial markets guide our behavior towards the environment, but their logic tends to mask the real scarcity of resources. How can nature prevail in the behavior of economic agents?
Today, in a liberal economy, the speed of depletion of fossil resources, respect for forests and the animal world, and everything concerning the long term, is conditioned by the prices that determine the behavior of agents. As a result, financial markets are the global reference for guiding humanity with regard to the environment. We propose to examine this governance more precisely.
The observation of the deterioration of the living environment is no longer to be made. In terms of climate change, pollution, waste, deforestation, as well as the collapse of animal populations, insects, birds, fish, etc., what is happening today was announced by the Club of Rome in 1972 and then at the Rio Earth Summit in 1992, but thought of as threats that it was enough to be aware of in order to avoid them. However, it is clear that the divergent interests in the pursuit of growth have ignored this caution. Today, we are justified in seriously questioning the dominant economic model because it pushes companies, but also households and States, to give priority to immediate personal profit and to neglect the context and the long term.
This model is the market economy in its current phase, generally called neoliberal, marked by explicit deregulation policies during the mandates of Margaret Thatcher in the United Kingdom and Ronald Reagan in the United States and the correlative changes in the policies of the World Bank and the International Monetary Fund. But these orientations followed very important technical modifications in the functioning of the financial markets which gave them a whole new power: these markets became capable of apprehending uncertainties, by putting prices on forward transactions where chance intervenes. This is the establishment of derivatives markets in all the financial centers of the world in the 1970s-80s in application of previous work by university economists.
Without going into detail, it is essential to give the main characteristics of the functioning of these markets. They are speculative markets in that one can buy and sell whenever one wants, as much as one wants or almost. They give an instantaneous price to all the important economic quantities, shares, currencies, loans, bonds, mineral raw materials (energy, metals) and agricultural raw materials (cereals, cotton, wool, etc.), as well as to the futures products on these quantities, that is to say to the anticipations on their future prices, thanks to the quotation of negotiable contracts.
Another characteristic is that practitioners in these markets use a very learned theory to manage their risks: mathematical theory of arbitrationwhich describes as “perfect” markets where it would be impossible to make a profit without risk. Such a practice is justified by the fact that the financial markets are today close to these ideal markets and are getting closer and closer because of the free and increasingly sophisticated speculation that is made possible by the ever more efficient computer and statistical means of teams specializing in speculation. Speculation practiced professionally has the consequence of conforming the markets towards a situation where speculation is more difficult, there is nothing contradictory in that. This mathematical basis on the one hand, the enormous volumes of transactions on the other, give the financial markets a power that is both spiritual and temporal, they coordinate all exchanges by imposing their prices as references.
But we must be careful not to fall into too hasty interpretations. This better conformity to mathematical theory does not mean that mathematics describes stock prices precisely. Prices can go up, down, become agitated, calm down, and be perfectly consistent with the theory because the latter does not say everything. In particular, it does not give trends. On the contrary, it says that trends are not visible, never clear. If a trend were objectively visible, we could make a profit from it without risk, and the trend would immediately disappear from the prices. Prices can therefore express opinions, and that is what they do, opinions on possible developments, but also opinions on concerns, risks. In the latter case, uncertainties are translated by an increase in volatility and a growth in the price of derivative products.
Because it is important to understand that these financial markets are agitated, very agitated, increasingly agitated. The presence of this volatility is not an epiphenomenon but an inescapable deep structure on these organized markets. Volatility is one of the major characteristics of prices at all time scales. There is volatility to the tenth of a second, from day to day, from three months to five years, etc. The only thing that mathematical theory basically asserts is that the prices of financial markets fluctuate: there is necessarily volatility, enough so that we cannot objectively detect trends.
Volatility, a structural defect of financial markets
Where the problem lies is in price movements, the price signalwhich made the great superiority in the eyes of Friedrich Hayek of the liberal system over the planned economy. The markets erase the price signal, and this all the more so as uncertainties amplify volatility. This is what happens with non-renewable resources, minerals, fossil energy resources. Contrary to what many people who trust the economy in its current form believe, the financial markets that coordinate exchanges and optimizations of investment and production strategies, emit an inevitable intrinsic smoke: scarcity is not seen in financial markets. At least not clearly enough for economic agents, businesses and governments, to take it into account for their medium and long term policies.
The end of an exhaustible resource is necessarily a period of high instability. The price trajectory cannot end with indefinite growth, because one could arbitrate between now and tomorrow which would make the instantaneous rating rise even more. A volatility crisis necessarily occurs: the price becomes very agitated, this worries and contributes to amplifying the volatility, until, finally, the market withers because this agitation is too risky for the participants and for the rating agency. The organized market is no longer possible, each transaction modifies the price too much.
A question arises: could the new tools that are derivatives compensate for the disappearance of the price signal? What more do they give to agents? Derivatives are insurance against short and medium term risks. Entrepreneurs can acquire them to protect themselves against price fluctuations. However, you cannot run a business with insurance alone; you have to map out paths and make project choices. Consider a farmer faced with investment decisions for the coming years, whether to plant fruit trees, or to equip himself with mechanized equipment, or to increase or decrease his livestock, or to build specialized buildings. The prices of cereals are imposed on him by wholesalers who refer to the prices of cargoes which are taken from those of the financial markets. Also, the uncertainties are such that he is strongly encouraged not to embark on new practices. The same paralysis concerns the industrialist on whom Hayek based his reasoning.
More generally, this agitation prevents any ecological agreement negotiated in advance. Because it provides opportunities to the exploiters of non-renewable resources: in the frequent conflicts between environmental defenders and strictly economic logic, cost fluctuations will legitimize artificial substitutes and the irreversible destruction of sites. Consider a marshy wetland of great biodiversity value in destructive competition with a fossil energy deposit, the two rarities do not evolve in the same way. On the one hand, there are sharp and random fluctuations in the price of fossil energy, and on the other, gradual adjustments of ecosystem services calculated by experts. The deposit will one day or another be listed above the cleverly calculated estimates for the marsh. In other words, the idea of attributing high prices to the environment in order to preserve it not only runs up against divergent interests, as we see with the price of carbon emissions, but, in neoliberal logic, it is placed under the regime of strong agitation, which removes all operational effectiveness.
Provide the missing information in another way
The social and environmental consequences of this phenomenology are considerable. Agents can hedge against price risks with derivatives, but insurance is not enough to drive a company’s energy transition. Financial markets, through this inevitable agitation, mask the scarcity of exhaustible resources from which we must collectively turn away. Contingent goods markets, which were the models of today’s financial markets, were invented by economists in the 1950s, during the thirty glorious years, some twenty years before the first report of the Club of Rome. At that time, the uncertainties did not concern the exhaustion of resources or the death of bees.
Can we hope to strengthen the price signal, especially for non-renewable resources? The idea would be contradictory to free and competitive markets. Regarding the long term, in 1974 the economist Robert Solow (Solow 1974) already advocated new institutions to provide, by the most scientific and reliable means possible, the information that markets cannot give.
I don’t know if Dennis Meadows and his team had seen all the consequences of volatility; in any case their report and its update in 2004 were right to reason in terms of surfaces, masses, volumes, with non-financial indicators because they are not subject to market fever. Faced with the failures of finance with regard to the environment and the long term, the only solution is to build indicators and non-financial scientific knowledge that describe the reality of the state of the planet and its inhabitants by indicating trends in order to give economic agents and States the information that the markets do not provide. To do this, it is necessary to set up collective institutions for monitoring, collecting and disseminating information, and alerting, at all levels of decision-making, to fight against the hegemony of the markets and against the international organizations that defend the economic whole. This scientific work goes beyond an inventory: it needs to understand and broaden the means of apprehending eventualities. To do this, it must take into account subjective and intuitive fears in order to critically develop them into disinterested fears. It is no longer a science that only concerns our personal profit but a cognitive heritage to be transmitted to successive generations who will have to fight against devastation: giving priority to the commons, nature and the long term over economics in the concrete reasoning of agents.