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■ Ecological Economic Explanations ofFinancial CrisisUnfortunately, none of the theories described so far fully explains the subprimemortgage crisis, the Latin American debt crisis, the Tequila crisis, orthe Asian flu. In particular, these theories fail to explain why there was solittle warning of the crises and why they spread as rapidly and extensivelyas they did. Though decidedly less influential to date than the schools ofthought previously described, ecological economic theory extends the FinancialInstability Hypothesis to recognize both biophysical constraintson financial sector growth and the inherently complex and unpredictablenature of ecological economic systems.In terms of biophysical reality, financial assets are abstractions, but theyentitle their owners to a share of the real wealth that society produces.They, like IOUs, can be exchanged for real wealth, and like IOUs are ameasure of debt. Let’s say that, as in Chapter 15, we measure our wealth assome farmers once did, as the number of pigs we own. As abstractions, financialassets can be measured in negative pigs and hence can increasewithout limit in the short run—that is, they don’t depend on the biophysicalrealities of actual pig production and are unconstrained by food supply,digestive tracts, gestation periods, places to put pigpens, and places toabsorb waste. Real wealth, in contrast, is concrete, positive pigs whose rateof increase is limited by those factors. The unlimited negative pigs constituteliens on future positive pigs. There will not be enough positive pigs inthe future to redeem the negative pigs. The production of real wealth islimited by biophysical realities—the availability of raw materials providedby nature that can be transformed into market products, the availability ofenergy to power the transformation, and the availability of ecosystem services,including waste absorption capacity, that are ultimately needed to sustaineconomic production. When real estate prices boom, as happened inThailand and the U.S., the flow of services from land and existing housesdoes not increase, and there is no new source of biophysical value to matchthe increase in debt. The same is true when stock market prices soar withno underlying increase in productive capacity.When the value of present real wealth plus biophysically constrainedproduction capacity is no longer sufficient to serve as a lien to guaranteethe exploding debt, the debt must implode. To reiterate the words of FrederickSoddy, “You cannot permanently pit an absurd human convention,such as the spontaneous increment of debt [compound interest] againstthe natural law of the spontaneous decrement of wealth [entropy].” 18 Fora time growth in financial assets can sustain the illusion that the economyChapter 20 Financial Globalization • 40118 F. Soddy, Wealth, Virtual Wealth and Debt, Sydney: George Allen & Unwin, 1926, p. 20.