What stock investors can learn from ecologists

The recent volatility on the global stock markets is leaving many experts puzzled. While there are surely many factors that influence the worth of stocks, I’d like to propose that the ecological perspective should take a more prominent place in economics in the coming decades, given the predicted increasing scarcity of resources.

Before we start, here’s a quick distinction between stock investors and stock speculators. Investors are the type that buy a share of a company and hold it for a while, which supports a cause they expect to grow. Their goal is to earn money by investing in profitable businesses. They navigate and serve the system that way, though they can also damage it if they have too much power. Speculators, on the other hand, are people who buy and sell in very short time spans, anticipating market dynamics. They amplify the movements for their own gain, and by that put others in poverty. Their role is essentially parasitical, living only for as long as they keep the system alive. Investors are those who’ll need the ecological insights.

While we arrive at the limits of the global capacity to sustain our demands, we can expect increasing scarcity of water, food, climatically stable zones and raw materials. A recent example of how this impacts markets is the El Niño effect on the global prices of numerous food products. Understanding ecological processes helps assess the economic value of scarity driven market systems, because ecosystems deal with scarcities on a day to day basis.

Just like ecosystems, economical markets encompass a number of layers of production and consumption. At the base of a vast economic pyramid are the producers of raw materials. Their produce gets bought and converted into something more valuable. That step is then repeated until the product is sold to the final consumer. Trees, for example, get converted into timber, which then gets converted into furniture and then sold to us.

Similarly, plants of an ecosystem get eaten by caterpillars, who then get eaten by birds. More plants means more bugs, means more birds. And since it takes time for each to grow, there is a delay in the growth for the next trophic layer. So: if there are many plants today, then there will be many caterpillars in eight weeks, and many birds in a few months. But since caterpillars eat plants, their food stock will decrease when their population grows, and some will starve. Having a far longer lifespan, birds will keep capturing caterpillars which then may quite suddenly go extinct, because their population no longer grows. This can cause the bird population to collapse a while afterwards.

Market mechanisms work in the same way. When raw materials such as trees are cheap, the makers of timber can earn money by buying cheap wood and selling it easily. It means that there is space to grow on the wood market, and this space will be filled by organizations who expand. That means that demand will grow, causing the price to go up. Now, since the tree processing organizations have grown, they need more resources to sustain themselves, meaning they have to work harder to attain a similar standard. They will therefore have to buy and sell more wood than before to survive, or increase their price which would cause problems for the furniture company. Thus, high availability of trees leads to high availability of timber, leads to high availability of furniture, leads to reduced prices, leads to increased demand. Like in scarcity driven ecosystems, this can ultimately backfire on the system, causing bankrupcy of one or several of the businesses in the chain. This effect becomes more pronounced if the availability of raw materials is fickle.

Recently, the availability of raw materials such as crude oil has grown enormously, which will result in cheaper production of basically everything we can buy. The fact that this effect is so strong and sudden will induce a shock through the market chain. As markets start competing for the opportunities, the availability of the materials will decrease, and the new demand it spawned will devour the market again. Thus, to stick with the tree-timbre-furniture example, investing in closets may be tempting now, but may not be a wise long-term move, if you don’t look at other factors as well.

Now, the beauty of resilient ecosystems is that they do not rely on sudden pulses of resource input, but instead constantly reuse and recycle the present nutrient stock in highly intricate ways. As such, they have stabilized their internal nutrient and water availability, meaning all consumers and producers in the system know exactly what they can expect. By working as much as possible with closed loops, ecosystems protect themselves against sudden periods of drought or decreased nutrient availability in the soil. Indeed, ecosystems prevent such deficiencies in a region. Markets can do the same thing.

To analyse the chance of stable development of chains in an increasingly volatile market, it would be recommendable to pose a range of ecologically inspired questions. How embedded are the systems in their surroundings? How do they treat their waste? How dependent are they on a single resource, or a single type of buyer? Do they moderate their growth so as not to undermine the succes of potential future partners? Do they maintain their independence from the potentially devastating global stockmarket fluctuations? How much do they look like a real, resilient ecosystem?

Depending on how formalized the process of circular economy and collaboration with regional partners will become, it may become harder to fathom the value of certain companies or regions by their numbers alone. It will require more grounded perceptions of value with a more complete, ecosystem-like outlook on organizations and their market, political, cultural and ecological contexts. An interesing development, I think, which deserves further exploration.

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