We’re Living in a Material World

That prediction, while it could have been correct under other circumstances, proved untrue because of the Green Revolution starting in the 1960s, which increased the yields of staple crops by factors of three to five.

But it provided fuel for the views of the cornucopians, who at the other extreme believe that human ingenuity and inventiveness will always save us from environmental disasters.

Smil has little patience for either catastrophists or cornucopians. But it is on the 21st century, digital-techy cornucopians that Smil most focuses his disdain.

Disembodied information

What would you say are the four pillars of modern civilization? If you’re a modern techy, you might say something like the microchip, the cloud, the internet, and wi-fi.

Nope, says Smil. The four pillars of modern civilization are cement, steel, plastics, and ammonia.

He’s right. We are deluded about which technologies are important. Smil speaks of “the new tech crowd whose naivete compares every technical change to recent developments in electronics, and above all to mobile phones.”

But … “Mobiles, as complex as they are, are just small devices at the apex of an enormous pyramid of an industry that generates, transforms, and transmits electricity, and that requires mass-scale infrastructure to build, rebuild, and maintain.”

In other words, mobile phones wouldn’t be possible without a gigantic infrastructure underneath them composed of orders of magnitude greater quantities of cement, steel, and plastic (which comes from oil and gas) than those tiny mobiles contain. And they will never be possible without the underlying support from those colossal quantities of massive “stuff.”

I didn’t mention ammonia, one Smil’s four pillars of modern civilization, in the support system for mobile phones, but Smil thinks it is the most important of the pillars. Without the production of ammonia, which contains the nitrogen captured by the Haber-Bosch process from the air that is needed for agriculture, 83% of the U.S. population would still be occupied on farms as it was in the year 1800. Instead, it is now 2% of the population. This is primarily due to the use of fertilizers, the main ingredient of which is ammonia, and to farm machinery powered by fossil fuels. If it were not for this decline in employment on farms, the U.S. would not have had the available work force to achieve the astounding technological wonders that it has in the past two centuries.

The human labor necessary to produce cement, steel, and plastics themselves has also declined in the past 200 years due to modern technology, most importantly to the massively increased use of fossil fuels.

Smil repeatedly emphasizes this enormous and complex infrastructure upon which we have built modern technological society, relying particularly and most centrally on fossil fuels.

That is why Smil says we are dreaming if we think we are going to give them up so easily and quickly, however necessary it may be that we do give them up.

An abundance of information about technologies and the real economy

While Smil’s book will tell you little about the inventions of Silicon Valley, it tells us a great deal about the materials and processes on which the real economy is built. Here you can learn how fertilizer is made and used, the history of the development of heat engines and electric motors and electricity, and who invented what and when, and the processes of production of different types of concrete, steel, and plastics and their historical development.

But the most important fact I learned from this book, which startled me, was this: “China’s first major business deal to follow President Nixon’s trip to Beijing in 1972 was an order for 13 of the world’s most advanced ammonia-urea plants from M. W. Kellogg of Texas.”

We are used to hearing that China lifted 800 million out of poverty in the last 40 years. We are then left to assume that this miraculously happened because China freed up market capitalism, and the rest was history.

But Smil’s revelation shows that while economic reform undoubtedly played a role, the key action was to buy the right machinery – machinery made from the first three of Smil’s four pillars of modern civilization – to produce the crucial fourth pillar. China could never have brought so many people out of poverty, irrespective of a free market, without vastly increasing its crop yields using modern, fossil-fuel dependent agricultural technology.

Nevertheless, most college graduates in the United States are blissfully unaware of the all-importance of the real, material economy, and its reliance on gritty, massive, heavy, and indispensable materials. As Smil says, “The proverbial best minds do not go into soil science and do not try their hand at making better cement; instead, they are attracted to dealing with disembodied information.” The same, I expect, would not be said about China, where the best minds, and many or most of the key political leaders, are not lawyers or hedge fund managers or software app developers, but engineers of the concrete, steel, and soil variety.

This is unfortunate – for the United States. As we have seen in the pandemic – in which personal protective equipment such as face masks for healthcare workers were in desperately short supply because all of it came from China because of a lack of factories in the U.S. – this lack of knowledge and expertise in the material sciences and engineering put us at a disadvantage and reduced our resiliency.

What common sense tells you once you know what the real economy is

This knowledge and understanding of the real economy led Smil to conclusions that required only simple common sense.

One of them is that it will be extraordinarily difficult to replace, in a mere 30 years, the entire fossil fuel infrastructure on which the developed world (and most of the developing world) has increasingly relied over the course of 200 years, as “net zero” climate goal-setters imagine we will do. Smil paints a very clear picture of just how deeply embedded fossil fuels – oil, gas, coal – are in everything we produce, most importantly the high-yield agriculture that feeds the world.

Smil says about the Silicon Valley mindset, which is rife with enthusiastic, cornucopian projections of a world run by artificial intelligence, “many of these data worshippers have come to believe that these electronic flows will make those quaint old material necessities unnecessary”; however, “The real wrench in the works [is that] we are a fossil-fueled civilization whose technical and scientific advances, quality of life, and prosperity rest on the combustion of huge quantities of fossil carbon, and we cannot simply walk away from this critical determinant of our fortunes in a few decades, never mind years.”

Smil on the use of models – and the implications for finance

Smil’s book reviews the history of predictions that there will be climate change because of the buildup of carbon dioxide (and other greenhouse gases) in the atmosphere. He finds that those forecasts were right when made by the early scientists who first called attention to the climate problem – John Tyndall (1822-1893) and Svante Arrhenius (1859-1927) – and they have not become substantially more right since. Those scientists’ projections were made long before the development of the complex climate forecasting computer models on which so much attention now centers.

Of those models, Smil makes a comment that I recognized as akin to something I have been saying about models in finance for a long time.

He says, “All of these models should be seen mainly as heuristic exercises, as bases for thinking about options and approaches, never to be mistaken for prescient descriptions of our future.”

In other words, these models should be viewed as thought experiments, not precise forecasting tools whose accuracy can be believed in, nor prescriptions for the immediate application of practical solutions. This is not to say that thought experiments are of little value – they can be of great value (Einstein used them all the time) – but that they should not be mistaken for something that can be pervasively used in practice.

This is the problem with the use of models in finance, such as the efficient frontier model and the capital asset pricing model, and other theoretical models. They can be a great help in illuminating insights, sometimes simple ones: in the case of the efficient frontier model the insight “don’t put all your eggs in one basket”; in the case of the capital asset pricing model “there’s no such thing as a free lunch.”

But the instinct of the hasty and unscientific finance world has been to draw the implication that these are things to immediately put into practice. For example, the CAPM was interpreted (quite illogically) as dictating that an investor should choose an asset allocation at a risk level (e.g., a beta) suitable to that investor’s risk appetite, and then rebalance to keep that asset allocation constant.

The CAPM itself says no such thing. But the urge to claim that investment strategies are based on sophisticated mathematical theory (and the financial rewards accruing to that claim) led the investment world to premature conclusions. Eventually, after the thought experiments percolated and evolved, they led to the valuable though simple idea that a market index fund would serve an investor as well as any other while minimizing cost.

Too much importance has been placed on complicated, or complicated-looking, models, in non-financial field fields as well. That over-importance may be because of how well placing over-importance on them did for those in the finance field. But models have varying usefulness in different fields. In the climate science field, their probabilistic versions are helpful guides to possible futures under alternative sets of assumptions.

The finance world, as many in science already understand very well, should understand its models to be merely heuristics, or thought experiments. And if we were to be honest with our clients, we should impart that understanding to them too. Although a few professionals in the finance world do impart that understanding to their clients, I may be hoping for a more widespread shift for quite some time.

Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, managing partner and special advisor at M1K LLC, and a research associate of the Edhec-Risk Institute. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.

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