Environment and the South Seas Bubble: “nature will demand payment”Mar 13, 2023
Three hundred years ago, Britain narrowly escaped a disaster. Trapped inside a bubble, they needed radical changes to escape. There are parallels to our world today, where the logic of failure is woven into the very fabric of civilisation. We too, are trapped inside a bubble, but one is of far greater significance. The question is, can we avoid collapse? The first step is to accept that we have a problem.
In 1711, Britain was going broke. Embroiled in yet another war in Europe (actually two wars), it was struggling to pay their soldiers. Their immediate problem was how to pay the £300,000 bill for the next quarter. Their first attempt was a couple of lotteries, but with a difference as we know them. Rather than being paid immediately, prize winners received their money over several years as fixed annuities. That worked well for a while, but it wasn’t enough.
When the South Seas Company was floated in January 1711, directors Robert Harley and John Blunt cooked up a plan to earn a tidy profit while paying off government debt. Their idea relied on imagined future earnings from slave trading and whaling. The trouble was, their business model was broken from the start. Their grand scheme was never going to end well.
Over the next nine years they built a baroque tangle of shares, stocks, bonds and derivatives that became ever more detached from reality. The value of money had always been a somewhat arbitrary notion, but at least it was tied to a physical substance (silver and then gold). But as the scale of debt became so large, the government struggled to supply coins, so they recruited Isaac Newton to improve production at the Royal Mint.
The further abstraction of the notion of money was both a boon and a disaster. It allowed Britain and the South Seas Company to launch into a bubble that was driven entirely by circular logic where growth fed upon imagined growth. Shares soared from the opening £100 to an entirely unrealistic £1000. To pay promised returns they need to recruit more investors and even more impossible profits. Curiously, they even used the term “bubble”, but without the obvious conclusion of what happens to a bubble when it can no longer sustain itself. This made it one of the first Ponzi schemes.
The South Seas Bubble was the brainchild of people who traded short term profit while ignoring the fact that it was not sustainable. Accompanying them were grifters, shysters and a long trail of people hanging on for the ride. There were cases of insider trading and huge bribes were paid to parliamentarians, while fake news stories were injected into an already overheated market. Even the parliamentarians who were not bribed, invested heavily and thus compromised. The machinery of government itself was co opted in what we’d now call state capture.
One imagines that at some level they knew failure was inevitable, and yet they hung on in a parasitic relationship, hoping for yet more profit. By June 1720, John Blunt started sneaking away from the flailing edifice. Instead of the £3,000 in shares that directors were expected to purchase, he invested a nominal £500 and, over the next few months, he sold roughly £100,000 worth, walking away with a tidy profit.
If there’s a hero in this story, it’s Archibald Hutcheson who produced carefully reasoned models of what the South Seas shares were actually worth. His conclusion: at £200 the company would struggle to pay investors. At £1,000, it had no hope. Yet, in spite of his writings that pointing this out, he was ignored.
In August 1720, the inevitable happened when the bubble crashed into the real world. The fantasy inside the bubble could no longer sustain itself and, as it collapsed, threatened to bankrupt the entire country. Stock prices plunged from £1,000 to £100, taking many people with it. With so many parliamentarians embroiled, it threatened to bring down the government. Even King George I was affected, having been an investor. One might’ve thought that Isaac Newton would know better, but he too lost money. The knock on effects across Britain were severe as businesses couldn’t afford to pay their creditors. There were bankruptcies and suicides as disaster spread.
As we now know, Britain not only avoided collapse, it thrived to become globally dominant. How it did that is a complex question, but part of the answer lies in what it learned and how it responded. Although Prime Minister Robert Walpole was no saint and was not the main architect, he led Britain towards an enduring solution. They radically restructured government debt while retaining the powerful financial measures employed by the South Seas company, modified to restrain their most dangerous excesses.
Three hundred years later, we too are living in a kind of bubble. It’s a different sort of bubble, but a bubble nonetheless, and on a much larger scale. Today’s bubble is driven by an internal logic that is also predicated on remorseless growth that is ultimately disconnected from physical limits. It assumes that resources are infinite and ignores the irreparable damage to the biosphere we are now inflicting. The existential threat of climate change is seen as a side effect rather than something embedded within the system itself; something that can be fixed with a bit of technology and a few tweaks rather than fundamental change.
Among Archibald Hutcheson’s counterparts today, are the scientists producing mountains of evidence that civilisation is on the path to collapse. And yet, like Hutcheson, the urgency of their messages are largely ignored or given only token acknowledgement. While a positive sign is the growing recognition that change is needed, we seem trapped inside the bubble, unable or unwilling to act quickly enough.
If the timeless human urge for some to make a killing will never go away, at least we can moderate it. The United States imposed tough new regulation after the GFC, which were unwound again in 2016, doubtlessly influenced by the state capture of corporate forces. The lessons of the South Seas Bubble are as relevant today, and show what can be done when the will is there. This time however, the consequences of failure are almost unthinkable because this bubble is on a global scale.
The human enterprise is now demanding about 1.7 times what the Earth can sustain. And, in doing so, we are running up a debt that will not be forgiven, because ultimately Nature will demand payment in a time and a manner of its own choosing. While Nature has been exceedingly generous, it has no interest in human affairs and doesn’t care about political allegiance. It doesn’t care about love, art, science or any of the fine things that humans do. Ultimately it will be more brutal than the worst loan shark unless we radically change course.
Mark Diesendorf and I discuss these themes in our book The Path to a Sustainable Civilisation, soon by to be published Palgrave Macmillan.