The Age of (Irrational) Exuberance

The concept of irrational exuberance came to me in the bathtub one morning as I was writing a speech.

Alan Greenspan, 2007[1]

Human population, organized into industrial societies and blind to the temporariness of carrying capacity supplements based on exhaustible resource dependence, responded by increasing more exuberantly than ever, even though this meant overshooting the number our planet could permanently support. Something akin to bankruptcy was the inevitable sequel.

William Catton, Overshoot, 1980[2]

US Federal Reserve Chair Alan Greenspan delivered a “shot heard round the world” speech in December 1996 when he posed the rhetorical question, “how do we know when irrational exuberance has unduly escalated asset values”?[3] In other words, are stock prices ballooning toward an inevitable pop? It took another three-plus years for the market bubble, driven by enthusiasm over “dot-com” stocks, to burst. But burst it did, on March 10, 2000 — as did the predatory mortgage bubble later that decade.

The past four centuries of magnificent progress were made possible by two non-repeatable achievements: (a) discovery of a second hemisphere, and (b) development of ways to exploit the planet’s energy savings deposits, the fossil fuels. The resulting opportunities for economic and demographic exuberance convinced people that it was natural for the future to be better than the past. For a while that belief was a workable premise for our lives and institutions. But when the New World became more populated than the Old World had been, and when resource depletion became significant, the future had to be seen through different lenses.[4]

Prof. Catton defines the “Age of Exuberance” commencing with the discovery of the “New World,” which (temporarily) relieved population (or more accurately, carrying capacity) pressures. However,

the world reentered an age of population pressure. Its characteristics had to resemble, in certain ways, the basic features of the Old World of pre-Columbian times. Except that now there were ever so many more human beings, all parts of the planet were in touch with each other, per capita impact on the biosphere had become enormously amplified by technology, depletion of many of the earth’s non-renewable resources was already far advanced — and the inhabitants of this post-exuberant world had acquired from the Age of Exuberance expectations of a perpetually expansive life.[5]

According to Catton, the paradigm of economic growth is a core tenet of the “Age of Exuberance,” which humanity has since transcended to enter a “post-exuberant” era when we reap the consequences of our culture of carrying capacity overshoot. (Catton defines “carrying capacity” as “maximum permanently supportable load” and “overshoot” as “growth beyond an area’s carrying capacity, leading to crash and die-off,” as we will explore in more depth later. To illustrate these concepts, he cites the common example of yeast in a wine vat, which exuberantly consume the abundant stock of sugars until they “eventually die from the accumulation of alcohol and carbon dioxide they produce.”[6]) As if presaging the Nordhaus Nobel some four decades later, Catton opined:

The idea that mankind could encounter hardships that simply will not go away was unthinkable in the Age of Exuberance. This idea must be faced in the post-exuberant world.[7]

Applying Catton’s logic, “irrational exuberance” is not an anomaly, but rather a core feature embedded in humanity’s operating system for more than half a millennium. During the Age of Exuberance, humanity navigated a series of successions of transcending carrying capacity, and each time managed to postpone collapse by artificially enlarging localized carrying capacity through “borrowing” capacity from elsewhere in the system (e.g. outsourcing, among other processes). This, we call “progress” through technological innovation and other “developments” (chasing efficiency gains, outsourcing and globalization, externalizing negative effects, etc…)

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