5 Economics: ‘Alchymists, sorcerers and charlatans’
In tracing the career of the erring philosophers, or the wilful cheats, who have encouraged or preyed upon the credulity of mankind, it will simplify and elucidate the subject if we divide it into three classes: the first comprising alchymists…the second comprising astrologers, necromancers, sorcerers, geomancers and all those who pretend to discover futurity; and the third consisting of dealers in charms, amulets, philtres, universal-panacea mongers, touchers for the evil, seventh sons of a seventh son, sympathetic-powder compounders, homeopathists, animal magnitisers, and all the motley tribe of quacks, empirics and charlatans.
This citation, from Charles Mackay’s 1841 treatise examining the human propensity to fall prey to panic-mongers and confidence men, offers a useful summary of the various types of manipulation and rhetoric that have characterized the AGW debate over the past decade and more. The refusal of the AGW theorists to acknowledge and incorporate into their model the first four “ugly facts” addressed in this paper – that it is not unusually warm; that it is getting colder; and that while temperatures do not correlate with carbon dioxide concentrations, they do appear to correlate with solar activity – might charitably be ascribed, in Mackay’s idiom, to the work or influence of “erring philosophers.” The next three cases, however – the vulnerability to market forces and outright fraud of attempts to treat “carbon” like a commodity; the portrayal by politicians and politically-motivated activists of “climate change” as a “threat”; and the repeated betrayals by the proponents of the AGW thesis of the fundamental tenets of science – are examples of what Mackay called “wilful cheats, who have encouraged or preyed upon the credulity of mankind.”
This chapter examines how “alchymists, sorcerers and charlatans” have been able to create and/or exploit past economic panics and bubbles to generate profits from insufficiently sceptical. The purpose of this examination is to provide an historical context for a subsequent discussion of the financial alchemy of carbon trading, through which one of the two gases most important to life on Earth is transformed: first, into a poison threatening global Armageddon, necessitating regulatory limits, taxation and fines; and then, through the alchemy of “carbon credits”, into a commodity, to be bought and sold in international markets with the political aim of achieving massive reductions in the production of this horribly dangerous, yet somehow marvellously profitable, substance.
Because a discussion of these subjects necessitates a review of relevant historical precedents, the following chapters are necessarily somewhat longer than the foregoing ones, which – by virtue of the topics involved – focussed exclusively on the scientific aspects of the AGW thesis. I therefore beg the reader’s indulgence as I first delve into some illustrative historical examples of what can happen when of humans make decisions – especially economic decisions – without first engaging their critical faculties.
5.1 ‘Artful managers’
John Law was born into a Scottish family of bankers and goldsmiths in 1671, and enjoyed an eclectic and somewhat chequered career as an economist and gadfly during the closing decades of the 17th Century. Insufficient success as a gambler and a surfeit thereof as a duellist (he was convicted, condemned, fined and exiled after killing a man over a lover’s affections in 1694) led to his removing to Paris, where he busied himself urging the creation of a national bank and the replacement of coins with paper currency to compensate for the declining availability of precious metals, due, inter alia, to the impact on the French national treasury of the wars of Louis XIV. Law established, in 1716, the Banque Générale Privée. In theory, Law’s bank was private – but the bulk of its founding capital consisted of government debt instruments.
The role of the government in underwriting his bank’s activities notwithstanding, Law worked his institution like a private investor, buying numerous companies and floating their stock in order to increase share prices and income. His most daring venture was the purchase of the Mississippi Company in 1717 (arguably to assist the burgeoning French colony in Louisiana) and the floating of shares in a new Compagnie d’Occident that same year. The Compagnie d’Occident was granted an exclusive franchise over trade between North America and the West Indies, making its stock enormously attractive to investors – a lure which was only enhanced when Law’s bank became the Banque Royale in 1718, meaning that its stock was thereafter guaranteed by the Crown. Law then absorbed numerous other companies, vastly increasing the bank’s holdings, and began trading shares in the Mississippi company in exchange for government debt. Rampant speculation in the shares traded by the bank led to inflation, and prices soared nearly forty-fold over the course of the year. Law issued new shares, reducing the value of existing shares – but the shares, in effect, were not backed by anything concrete. Law had offered scintillating descriptions of the magnificence of the Mississippi venture, especially its allegedly rich (“but alas”, one economist notes, “wholly illusory”) gold mines, but the reality was that there was no substance to his claims.
When investors realized this, a sell-off of stock began, confidence collapsed, and with it, Law’s bank, obliterating as well the financial underpinnings of the French government. The French regent appointed Law Controller General of Finances in 1720 (a sterling example, if ever there was one, of the unwisdom of reinforcing failure), but this did nothing to stem the tsunami. The bank’s shares lost 97% of their value when Law’s “Mississippi Scheme” imploded. Panicked investors tried to convert their stock into hard currency, only to discover that the bank had virtually none. Law was dismissed, forced to flee France, and spent the last eight years of his life wandering Europe, eventually dying in poverty in Venice in 1729.
At roughly the same time that Law was struggling to maintain the solvency of his bank, the “South Sea Bubble” was bursting in Britain. Formed in 1711 by the Lord Treasurer, Robert Harley, the South Sea Company obtained exclusive rights to the “South Sea”, i.e. South American, trade markets. The company assumed about seven and a half million pounds worth of government debt in exchange for a perpetual annuity of about one-fifteenth that amount, and issued shares predicated upon its trade monopoly. The monopoly, however, never paid off; the Treaty of Utrecht that concluded the War of the Spanish Succession permitted the company to send only a single ship per year, and the single trading voyage that took place (in 1717) made very little profit. Deterioration of British-Spanish relations in 1718 put the future of the company into doubt. Notwithstanding these poor prospects, the company continued purchasing government debt and issuing shares.
The soaring value of the South Sea stocks prompted a nation-wide frenzy in investment; no get-rich-quick scheme seemed too bizarre to be possible. Companies went public promising everything from the mundane (“the importation of jackasses from Spain”) to the sublime (“the wheel of perpetual motion”) to the simply unimaginable (“an undertaking of great advantage, but nobody to know what it is”). According to Mackay, this latter adventurer had judged shrewdly the mood of investors:
The man of genius who essayed this bold and successful inroad upon public credulity merely stated in his prospectus that the required capital was half a million, in 5000 shares of 100l. each, deposit 2l. per share. Each subscriber, paying his deposit, would be entitled to 100l. per annum per share. How this immense profit was to be obtained, he did not condescend to inform them at that time, but promised that in a month full particulars should be duly announced, and a call made for the remaining 98l. of the subscription….Crowds of people beset his door, and when he shut up at three o’clock, he found that no less than one thousand shares had been subscribed for. He was thus, in five hours, the winner of 2000l. He was philosopher enough to be contented with this venture, and set off the same evening for the Continent. He was never heard of again.
At this point, the unscrupulous began making their influence felt; the company engaged in the wildest forms of propaganda about the value and prospects of its stock. Many members of the upper crust were enticed to participate, lending their names to the endeavour and, as a result, binding their personal reputations as well as financial interests to those of the company. The company was thereafter able to claim a certain degree of legitimacy by publicizing the identities of its high-profile investors. Speculation in, and “flipping” of, shares caused the stock price to soar, from £120 in January 1720, to seven times that six months later. Things came to a head in June 1720 when the Royal Exchange and London Assurance Corporation Act, passed the previous year, came into effect. The South Sea Company obtained such a charter, boosting its stock further, to nearly £900 per share. This precipitated a sell-off as investors tried to cash in. The Company attempted to stabilize prices by buying back its own shares.
By August of 1720, when the stock price had reached nearly £1000, the essential instability of the edifice that the company’s managers had created began to make itself felt. The collapse of John Law’s Mississippi scheme at about the same time created a crisis of confidence among investors, which in the long run is the bane of any economic bubble. The sell-off of the stock gathered momentum. The company responded by loaning money to investors to enable people to buy the company’s shares, but the falling stock price meant that people could not afford to pay back the loans other than by selling their shares. The collapse accelerated, taking down not only the company itself, but also the banks and private investors that owned its stock. A Parliamentary investigation, struck in response to public outrage, subsequently revealed widespread corruption among the company’s officers, and offered the following eloquent conclusion:
And thus were seen, in the space of eight months, the rise, progress, and fall of that mighty fabric, which, being wound up by mysterious springs to a wonderful height, had fixed the eyes and expectations of all Europe, but whose foundation, being fraud, illusion, credulity, and infatuation, fell to the ground as soon as the artful management of its directors was discovered.
In tracing the history of the South Sea Bubble, Mackay makes a crucial distinction between an investor believing in the inherent logic of a scheme itself, and believing that it will generate money regardless of its validity: “…it did not follow that all these people believed in the feasibility of the schemes to which they subscribed; it was enough for their purpose that their shares would, by stock-jobbing arts, be soon raised to a premium, when they got rid of them with all expedition to the really credulous.” This is a crucial distinction, and illustrates both the fundamental importance of the principle of caveat emptor, and the hollowness of claims that the public were duped by unscrupulous salesmen. “Nobody seemed to imagine”, Mackay concludes acidly,
that the nation itself was as culpable as the South-Sea Company. Nobody blamed the credulity and avarice of the people – the degrading lust of gain, which had swallowed up every nobler quality in the national character, or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors. These things were never mentioned. The people were a simple, honest, hard-working people, ruined by a gang of robbers, who were to be hanged, drawn and quartered without mercy.
The John Law and South Sea bubbles offer three lessons relevant to this study. The first, and from our perspective the most important, is that neither stock-marketers nor investors must necessarily believe in the logical feasibility of a money-making scheme; all that is necessary is that they believe that it will generate income. Common-sense questions like “does this business model/proposed technology/scientific idea really work” are ignored in favour of the more important economic question: “can I recoup my investment and make a profit?”, with the qualifying subtext, for the more practiced investor, being, “can I do so before this hare-brained scheme collapses?” In a market economy, value is relative, not absolute, and is accorded by the buyer rather than the seller. A thing has no intrinsic value; it is worth only what someone is willing to pay for it. It doesn’t matter if the thing being offered for sale is a jackass imported from Spain, an unseen and entirely imaginary gold mine on the Gulf Coast, or a share in an “undertaking of great advantage, but nobody to know what it is”; it is worth what the prospective buyer is willing to pay. What this means in a more general historical sense is that, if an idea is able to generate a profit, then the underlying validity of the idea itself is, from an economic perspective at least, entirely irrelevant. This fact is key to understanding where “carbon trading” came from, and where it is likely to end.
The second lesson that emerges from the spectacularly disastrous speculations of the early 18th Century is that they foreshadowed contemporary counterparts. The real-estate bubble of the early 1980s was the result of precisely the same sort of behaviour on the part of investors, speculators and managers as the John Law and South Sea scandals. In each case, extant financial mechanisms were manipulated by speculators to drive up share prices, while investors – obeying the immutable law, stated above, that the idea underlying a scheme does not have to make sense so long as it generates a return on investment – poured money into the mill. The real-estate bubble was the direct result of “flipping” – the rapid (and for obvious reasons, illegal) turnover of properties between investors in order to artificially inflate the price. As with stocks flipped between investors in the South Sea Company in 1720 (or between investors and the Company itself), nothing real was created; the enhanced “value” of the shares was an artefact of an entirely artificial process, used by, and feeding the lust for profit of, people willing to pay the inflated prices in expectation of further price increases. Naturally, in all cases the edifice collapsed when sellers could no longer find buyers willing to pay the artificially-inflated prices.
The same mechanism was at work in the economic crisis that precipitated the Great Depression. As Galbraith notes,
…the collapse in the stock market in the autumn of 1929 was implicit in the speculation that went before. The only question concerning that speculation was how long it would last. Sometime, sooner or later, confidence in the short-run reality of increasing common stock values would weaken. When this happened, some people would sell, and this would destroy the reality of increasing values. Holding for an increase would now become meaningless; the new reality would be falling prices. There would be a rush, pell-mell, to unload. This was the way past speculative orgies had ended. It was the way the end came in 1929. It is the way speculation will end in the future.
The same dynamic also precipitated the collapse of the sub-prime mortgage industry in the United States in 2008. That industry’s operations were predicated entirely on financing otherwise unsustainable levels of debt by assuming that property only ever increases in value – an historically ludicrous presumption. Moreover, as was the case in both the John Law and South Sea scandals, the collapse was exacerbated by the fact that the government was a major share-holder. In retrospect, of course, the fundamental instability of such systems is patently obvious, which begs the question: Why do people buy into a scheme when they know it cannot go on indefinitely? That, of course, is answered by the first lesson: they do so because they think they can always sell something for more than what they paid for it.
The third lesson lies not only in the fact that Ponzi schemes inevitably fail, but why they fail. They fail because inflationary speculation is predicated not only upon a logical impossibility – that of ever-increasing value, a proposition as improbable in historical terms as perpetual motion is under the laws of thermodynamics – but also upon an infinite progression of investors: an inexhaustible supply of people who believe that they will be able to make their money, and get out before things go sour. Notwithstanding P.T. Barnum’s contention that a “sucker” is born every minute, however, statistically speaking, the supply of credulous investors is not inexhaustible. Sooner or later – as John Law, the directors of the South Sea Company, and all speculators before and since have discovered to their sorrow – the shareholders wise up. The first to do so sells earliest and therefore suffers the smallest loss; but it is often his flight that precipitates the mass exodus which, in turn, brings the whole edifice crashing down.
The “innovative financial scoundrels” who should be called to account, by contrast, often escape judgement (occasionally because, as in the case of the author of the “undertaking of great advantage”, they managed to escape with their profits before the collapse); but when they do not, it is invariably they who are blamed for the losses. They stand condemned and vilified as “artful managers” by a “simple, honest, hard-working” people who, it often seems, are outraged not so much by their financial losses, as by the fact that their cupidity, naïveté, and greed have been exploited – and, worse, exposed.
5.2 Of Tulips and Dot-Coms
The activities of investors and speculators during the John Law and South Sea Bubble disasters – and, for that matter, in the lead up to and collapse of securities and real estate prices in, respectively, the late 1920s and early 1980s – were understandable at least in the sense that, in each case, things of alleged (if vastly over-inflated) value were being bought and sold. Other cases of peculiar economic behaviour, however, do not offer the historian even this much explicatory consolation. Two cases that illustrate this phenomenon – separated by nearly a score of generations in terms of time, but by hardly an angstrom in terms of human behaviour – are the Dutch tulip craze of the early 17th Century, and the American “dot-com” craze of the late 20th Century.
These two cases are similar to those described above in the sense that, like the South Sea and John Law scandals, the Tulip and the dot-com frenzies each resulted in an inflationary bubble. Where they differ is in the fact that, in these latter cases, unlike in the former, investors knew precisely what it was they were buying, knew that their purchases were horribly overvalued, and knew that a bursting of the bubble was inevitable. And yet they bought anyway. A cursory review of these two cases offers further useful lessons on the nature of human economic behaviour.
The “Tulipomania” that afflicted Holland in 1636 and that was popularized by Mackay in Extraordinary Popular Delusions and the Madness of Crowds has in recent years come under more in-depth scrutiny as economists and social historians alike have attempted to glean, from scarce historical data, a better understanding of the nature of economic bubbles. Mackay alleges that the tulip craze was a classical bubble in the sense that, in the words of one economist, “people pay a crazy price and people trade like crazy.” According to Mackay, “the rage among the Dutch to possess [tulips] was so great that the ordinary industry of the country was neglected…many persons were known to invest a fortune of 100,000 florins in the purchase of forty roots.” By any measure, 2500 florins for a single tulip bulb, when the average annual wage for a tradesman at the time was something on the order of 150 florins, qualifies as a significant expenditure.
But was it “crazy”? According to Mackay’s interpretation of the events of the 1630s, “crazy” may have been too mild a term; bulbs of desirable species were allegedly sold for prices as high as 4400 to 5500 florins, while one example of a Semper Augustus bulb was reputed to have been purchased for “4600 florins, a new carriage, two grey horses, and a complete set of harness.” This sort of behaviour, of course, could not last, and when “the more prudent” (to use Mackay’s term) realized that “somebody must lose fearfully in the end”, the extravagant prices began to fall, and the tulip bubble burst.
Contemporary re-examinations (to the extent that such are possible, given the paucity of detailed economic data from the period in question) have challenged Mackay’s interpretation of events, even to the extent of arguing that the vast increase in prices was the result not of classical “bubble” behaviour, but rather a rational market response to contemporary events and regulatory changes. To a certain extent, “faddishness” is a characteristic of the wealthy, and individuals with excess disposable income are both predisposed and able to pay what others would deem “crazy” prices for luxury items, whether those items are designer dresses in Hollywood, cube-shaped melons in Japan, or grossly-overpriced apartments in trendy Manhattan neighbourhoods. Galbraith points out that affluence is a necessary precondition for the formation of an economic bubble. The desirability of certain varieties of tulip bulbs, therefore, and the relative wealth of the upper crust of Amsterdam society at the time, must account for some portion of the price increase.
Historical events may also have played a role. At the time of the mania, Europe was a generation into the 30 Years’ War. One author suggests that the Swedish defeat of a German army (under John George I of Saxony) at Wittstock on 3 October 1636 led to a revolt among the German peasantry, giving German nobles something to think about besides purchasing luxuries, and – as a result – leading to a decline in, inter alia, the price of tulip bulbs in Holland. Because contract prices were already fixed by this time, however, investors began to worry about the impact on their contracts if prices fell rather than rose. At this point, it is important to note that the tulip bulb market was in essence a futures market; the bulbs were collected and replanted in September in anticipation of delivery the following spring. The prices specified in tulip contracts were therefore by definition speculative. Moreover, at the same time, a regulatory change (possibly driven by politically-connected investors concerned about spiralling prices) transformed the nature of those contracts; in order to insulate purchasers against the effect of inflationary price spikes, those purchasers could now break their contracts by paying only a fraction of the value thereof (Mackay says 10%; others have put the penalty at 1/30th of the original contract value or 3½%).
This turned futures contracts into options contracts, leading investors – according to modern analysts – to be more willing to risk high prices, because they could escape from the contracts at minimal cost. Contra Mackay, they argue, the resulting price spikes in tulip bulb options were a rational response by the market, rather than bubble behaviour attributable to “the madness of crowds”.
Interestingly, from the point of view of the present study, Mackay’s interpretation offers fewer lessons than that preferred by the modern re-interpreters of the events of the 17th Century. If Mackay is right, then the Dutch “tulipomania” was indeed an example of how actions that may be rational on an individual level – e.g., agreeing to purchase tulip bulbs at a high price, and then reselling them to another buyer at an even higher price – can collectively turn into irrational group behaviour. This is interesting, but from the perspective of the present study, it does not offer much in the way of generalizable historical lessons.
If, on the other hand, the modern economists are correct, then the increase in prices for tulip bulbs in Holland in 1636 demonstrates how government intervention in the market can have unintended consequences. As one analyst puts it, “contract prices soared to reflect the expectation that the contract price was now a call-option exercise, or strike-price rather than a price committed to be paid for future bulbs.” The transformation of tulip contracts from futures to options was designed to insulate investors from the adverse consequences of making bad predictions, but the result was a price spiral in the tulip market, followed by a price crash. The latter would no doubt be seen in some quarters as an “adjustment” of the price of tulip bulbs towards something more representative of their actual market value (in the sense of “what someone was actually willing to pay for them”), and of course it was. But what is interesting is that it came about not in response to market pressures, but rather as a result of government intervention in the market.
The rise and fall of the first wave of internet-based businesses in the mid- to late 1990s offers another perspective on the phenomenon of economic bubbles. The “dot-coms” (a euphemism for internet-based companies, generally with evocative names followed by the suffix “.com” to complete the website uniform resource locater) began to take off in 1995 in tandem with the explosion of the internet. The rapid expansion of this new industrial sector was fuelled by a combination of web-based services and a concomitant boom in the high-tech sector, which saw vastly increased sales of the communications and computer equipment necessary to support the internet explosion. Over the next five years, the tech-heavy NASDAQ Composite Index gained nearly six-fold in value, with 50% of the increase coming in the period 1999 to 2000. On 10 March 2000, however, the bubble burst; and by mid-2003, the NASDAQ had fallen back to 1996 levels – roughly a quarter of the peak it had achieved at its height.
The explosion of the dot-coms in the mid-1990s was largely the result of two concurrent phenomena: a massive and sudden technological transformation (the internet coupled with, and created by, continual improvements in processor speed and the capacity of electronic memory), and the availability of large amounts of venture capital as a result of a particularly strong economy in the US. The phenomenon was characterized by the emergence of a new business model: to run a new business at a loss, concentrating on growth rather than return on investment, on the assumption that revenue generation would follow once a given company was “big enough” to “dominate” whatever sector it had set its sights upon. As in any Darwinian environment, those who succeeded were vastly outnumbered by those who perished, and estimates for the number of business failures suggest that as many as 90% of all internet start-ups in the 1990s ultimately failed. Those who survived the Darwinian winnowing did well; the bubble left behind a number of sector-dominating giants, notably Google and Amazon.
This period of extraordinary growth produced a new business term: “burn-rate”, where non-revenue-generating growth – i.e., how fast a new start-up went through its allotment of venture capital – was deemed a measure of success. It also loaded the market with high-tech jobs, especially in the programming and communications fields, many of which were lost when start-ups failed. The initial public offerings of stock in many of these companies were eagerly snapped up, netting enormous paper sums, and generating vast enthusiasm and excitement for the industry – precisely as the stock offerings for the Mississippi company had done in the early 1700s. Indeed, the peculiar obscurity of many of the areas of endeavour during the dot-com boom bears a remarkable semantic similarity to the “undertaking of great advantage, but nobody to know what it is”, stock options for which were heavily subscribed in London in 1720. In many cases, the venture capital expended during the 1990s by these “men of genius”, to borrow Mackay’s phrase, disappeared into the ether just as assuredly as if an unscrupulous fly-by-nighter had decamped with a satchel full of guineas.
The dot-com bubble emerged, evolved, expanded and imploded in exactly the same way as its predecessors. Confidence – in the booming economy, as well as in the promise of new technologies – fuelled investment, which in turn led to speculation. Share prices soared in a self-reinforcing spiral. The hard technology companies contributed their own share to the dynamic, posting record profits as businesses and governments hastened to upgrade their communications infrastructure in order to ensure that they didn’t miss out on the coming “information economy” (an expression which, along with “paperless office”, “telecommuting”, and “networking”, came into vogue at about this time). Equipment sales, installation fees and the like at least represented a solid investment in tangible goods and services, differing from inflated share prices in at least two significant ways: first, they were real; and second, they were periodic, and had an expected lifespan. This latter characteristic proved to be a problem for the hardware industry, which (like any industry) thrives on continual sales. Once an upgrade is complete, another may not be needed for several years. After feast, comes famine.
Analysts conducting a post-mortem of the dot-com collapse point to a number of key factors that, taken together, launched, sustained and eventually sank the industry. At the strategic level, the economy, after running very hot for three quarters of a decade, was beginning to slow down; the Federal Reserve, in order to prevent inflation, had implemented a number of interest rate increases between 1999 and 2000, putting a damper on the availability of low-interest venture capital. Another possible influence included the issuance, on 5 November 1999, of findings of fact by a Federal judge in United States vs. Microsoft, asserting that Microsoft constituted a monopoly in a landmark anti-trust case. This sent a shudder through the high-tech industry. The judge’s ruling was due to be handed down on 3 April 2000, and anticipation of a sell-off is thought to have played a role in influencing buy-sell decisions on technology stocks in the weeks leading up to that date. Some analysts have also argued that a confluence of pre-programmed sell orders for technology stocks triggered other computerized trading orders programmed to begin selling in a falling market to minimize potential losses (a thoroughly logical precaution from a profit-maximization perspective, but one which, in practice, equates to trying to stop a flood by opening the fire hydrants). Finally, it has been suggested that the non-event of Y2K after years of build-up and doom-mongering predictions about the impending collapse of world-wide computing and communications infrastructure may have played a role in the collapse of technology stocks. Businesses and government had spent much of the late 1990s upgrading their technology to prevent Y2K, with the result that no further upgrades were necessary for some time after the dreaded date had passed. This led to a precipitous drop-off in equipment purchases, and a resulting decline in the value of tech stocks.
As is always the case, the bursting of the “tech bubble” was followed by layoffs, consolidations, bankruptcies, mergers and closures as the decline of the dot-com “sector” accelerated. By some estimates, when the dot-com bubble burst, more than $5 trillion in “paper value” was wiped out (this figure was estimated by looking at the NASDAQ, which stood at $6.7 trillion in March 2000, and $1.6 trillion 30 months later). Much, if not most, of this figure may represent inflationary value, but it also included enormous amounts of start-up venture capital that fell victim to the unprecedented “burn rates” that were the inevitable by-product of the get-big-quick business model. A great deal of capital, both real and inflationary, was volatilized when the dot-coms went under, leaving in their wake an economic landscape littered with out-of-work employees and angry investors, and hordes of analysts and economists arguing about why it had happened.
All they had to do was look at the past. The dot-com bubble was nothing more than yet another iteration of a classical economic bubble in which investors, flush with money due to a booming economy, were prepared to pump large quantities of capital into projects that promised an enormous rate of return to whomever could, in the words of Nathan Bedford Forrest, get there “firstest with the mostest”. As with the South Sea Bubble, having a proposal to invest in seemed less important than the rationality of the proposal itself; all that mattered was the prospect of achieving a huge return on investment. There is something ironic in the fact that people tend to weather difficult economic times, preserving wealth by being sceptical about investment opportunities, whereas – pace Galbraith – one of the features of bubbles is that they tend to occur in strong economic times, when investors are more likely to be profligate in pursuit of even greater wealth – and, as a result, often end up poorer than before.
At time of writing, it appeared that the second internet business revolution was under way. Venture capital, in response to the strong performance by internet giants like Google and Amazon, and upstart businesses like Wikipedia, eBay, Youtube, Facebook and MySpace, was once again becoming available. Some industry analysts were wondering whether the second wave of internet businesses would have a higher success rate, noting that, on average, the Western countries had ten times as many internet users as in the mid-1990s. If a second revolution is indeed underway, it will probably be lower-key and far more cautious than the first. We cannot rely on investors remembering the grotesque excesses of the 1990s and the horror of the dot-com collapse, because – as history demonstrates – memory weighs light in the balance against the prospect of the “next big thing”. It is more likely that risk calculations will be dampened by the constrained financial climate in the wake of the collapse of the sub-prime mortgage industry in the US, the clamour for “bailouts” and “stimuli” reaching into the trillions of dollars, and the uncertain future of large corporations and taxation schemes at the hands of the Obama administration. These considerations are likely to make even the most ardent and venturesome of capitalists protective of their remaining wherewithal.
Like the John Law scandal and the South Sea Bubble, the Dutch tulip craze and the collapse of the dot-coms offer a variety of lessons relevant to the present study. The first is that bubbles tend to occur during relatively strong economic circumstances, when investors have excess capital, are looking for opportunities, and are willing to tolerate riskier ventures. Constraints on investment capital tend to make investors more cautious and lest prone to risk-taking. The second lesson is the same one that emerged from the crises of 1720 – that economic bubbles result from the expectation of profit, rather than from any conclusion, based on objective assessment, that a proposal is rational or even possible. And the third – as demonstrated by the Dutch government’s attempt to stem the tide by changing the laws regulating the purchase of tulip “futures”, turning agreed sales into “options contracts” – is that government intervention to stem a crisis can have unintended consequences, and can worsen an emergency instead of mitigating it.
As the world begins to flirt with the widespread trading of “carbon credits”, all of these factors are present, and in spades.
5.3 ‘Innovative financial scoundrels’ 
With him there rode a noble Pardoner
Of Rouncival, his friend and his compeer;
Straight from the court of Rome had journeyed he.
His knapsack lay before him in his lap,
Stuffed full with pardons brought from Rome all hot.
Well could he read a lesson or a story,
But best of all he sang an offertory;
For he knew well that when that song was sung,
Then must he preach, and all with smoothened tongue.
To gain some silver, preferably from the crowd;
Therefore he sang so merrily and so loud.
The Chicago Climate Exchange, headquartered on South LaSalle Street in the Windy City, bills itself as “North America’s only cap-and-trade system for all six greenhouse gases”. The Exchange operates in conjunction with the “Chicago Climate Futures Exchange”, “a landmark derivatives exchange that currently offers standardized and cleared futures and options contracts on emission allowances and other environmental products.” In essence, the Exchanges provide North American businesses the opportunity to voluntarily purchase “carbon credits” in a futures market, much as one would purchase oil futures, pork belly futures, or even tulip futures. The trading of “carbon credits” is, naturally, subject to a brokerage fee, and the trading agency also sustains itself from the delta between buying and selling prices.
(The scientific credibility of the Exchange’s business model, incidentally, may be judged by the fact that water vapour – which is by far the most prevalent greenhouse gas in the atmosphere, and is roughly four times as effective a greenhouse agent as carbon dioxide – is not one of the “six greenhouse gases” traded. This is perhaps not surprising, as establishing a cap and trade regime for steam could adversely impact the price of a decent cappuccino.)
What, exactly, is a “carbon credit”? In essence, it is permission, purchased in advance, to emit a given quantity of gaseous carbon dioxide as a result of combustion or other industrial process. The sale of “carbon credits” has existed for some time; Europe has established a large carbon trading market, and websites in Canada and the US offer “carbon credits” (generally called “carbon offsets” when sold on a retail basis) for purchase. Examples of offset retailers include: Offsetters.ca, carbonzero.ca, climatecare.org, greenlife.com, carbonneutral.com, climatetrust.org, self.org, nativeenergy.com, betterworldclub.com, terrapass.com, carbonfund.org, carboncounter.org, climatemundi.fr, vanrenewable.org, targetneutral.com, livclean.ca, carbonpassport.com, co2balance.com. These, incidentally, are only the “carbon credit”-peddling organizations listed on the website of environmental activist David Suzuki.
What, exactly, do you get when you buy a “carbon offset”? According to carbonpassport.com, a UK website, buying carbon offsets is “a responsible way to neutralise the carbon emissions we cannot avoid creating at home, when travelling or in business.” An internal flight within the UK, the site informs us, can be “offset” for “as little as £3.” The site further advises that “when you offset your carbon footprint with Carbon Passport you can choose to buy a car sticker or fridge magnet and will receive a personalised offset certificate” signed by the Director of Carbon Passport Limited, and showing how many “tonnes of greenhouse gases” the purchaser has “offset.”
Carbon credits have been derided by many in the community of global warming sceptics as “selling hot air”. This is not precisely correct; someone who purchases a carbon offset or carbon credit under a mandatory trading scheme is purchasing permission to emit carbon dioxide, while someone who does so in a voluntary regime is purchasing absolution for doing so. The surreal nature of the “carbon credit” concept is explicable only in terms of a number of inter-related phenomena. The first of these is the principle, outlined above, of relative value, in which there is no such thing as “intrinsic worth”, and value is established only when someone buys something, thereby establishing a price. This is the foundational principle of market economics, and it applies to greenhouse gases as much as it does to gold or grain. In 1989, the National Gallery of Canada bought a famous painting, “Voice of Fire” by Barnett Newman, for $1.8M. Critics of the purchase argued that the work – an enormous canvas consisting of three vertical red and blue stripes – was not “worth” that much. Such arguments fly in the face of economics; “Voice of Fire” was worth $1.8M because the Gallery had paid that much for it. The value was set by the act of purchase. In the same way, when trading closed at the Chicago Climate Exchange on 27 January 2009, a metric tonne of CO2 was worth $2.05 USD – not because CO2 has any intrinsic value, but simply because that’s what buyers were paying for it.
Like 17th century tulips, 21st century carbon dioxide can be bought in a futures market as well. At the same close on 27 January 2009, carbon credits for December 2009 were going for $2.15, while credits for December 2013 were going for $12.25. If the permission to emit a tonne of carbon dioxide is indeed a commodity likely to be valuable in the future, then why not treat it like one? Brokers, after all, buy oil futures today, betting against the likely future cost of a barrel of oil; why not do the same thing with carbon credits, betting against the likely future cost of a tonne of carbon dioxide?
The answer, of course, is because the price of a “future tonne” of carbon dioxide depends entirely upon the continued validity of the theory that anthropogenic carbon emissions are the main driver of climate and the principle source of planetary woe. That thesis, as demonstrated above, has failed. Value, however, is based not on theory but – as seen in past bubbles – on confidence. When confidence finally collapses, so too will the price of a tonne of carbon dioxide. All of the money spent buying “carbon futures” will have been wasted. It will not, however, have been “lost” (just as the golden guineas paid to subscribe stock in Spanish jackasses were not “lost”), because with the exception of the brokerage fees charged by the trading house, the money paid to buy “carbon futures” will have gone to the individuals and organizations “selling” the credits – in many cases, foreign governments who, like Russia, have “carbon credits” to sell because the target dates for emissions reductions set in the Kyoto Accord ante-dated the economic collapse precipitated by the dissolution of the USSR. In other words, the money paid for carbon credits will have gone to governments and businesses in other countries. I leave it to the reader to ascertain how this benefits the Western nations, governments and citizens out of whose pockets this money came. Or, for that matter, how it benefits the planet.
A recent article in Der Spiegel illustrates how, in obedience to the law of unintended consequences, carbon credits may in fact be working counter to what they were intended to achieve. Germany is making great strides in adopting wind power as an alternative energy source, and is, at present, the world leader in the field, with over 22 GW installed capacity. The increasing availability of wind-generated electricity is allowing German fossil-fuelled power plants to lower production. However, the total number of EU-issued emissions certificates remains the same; thus, widespread adoption of wind power in Germany means that more “carbon credits” are becoming available, leading to lower prices. This allows other, older, less environmentally-friendly electrical generating stations in Eastern Europe to purchase credits to allow more generation – and, therefore, in addition to more “carbon emissions”, a good deal of real pollution as well. Thanks to the EU emissions-trading scheme, Germany’s installation of wind turbines amounts a “license to pollute” for Soviet-era coal-fired power plants in places like Poland and Slovakia. The immutable laws of the marketplace – which dictate that the price of a good is inversely proportional to its availability – are making it easier and cheaper for high-output polluters to purchase absolution in the form of carbon credits than it is to invest in cleaner production technologies.
Will carbon prices collapse? In Europe, this is already happening; over the past six months, the price of a tonne of carbon dioxide has plummeted from €31 to €8.20, a decline of close to 75%. Could the same thing happen to carbon “prices” in the US market? To answer this question, one need only look at what is holding them up. The only reason a “credit” to emit a metric tonne of carbon dioxide is worth anything at all is because the present climate panic attributes global warming, as it is defined by the alarmist lobby, to anthropogenic greenhouse gas production. Companies that emit greenhouse gases are hedging their bets, buying carbon credits at today’s “low prices” in order to offset anticipated future emissions, when carbon credits – according to the same companies that are selling them – are expected to be more expensive.
All of this makes perfect economic sense – or it would, if there were any evidence that human-produced carbon dioxide had any measurable impact on climate. The fact that it does not has still not been acknowledged by Western governments, most of which, in obedience to political strong-arming by the alarmists, continue to flirt with the idea of imposing carbon taxes and carbon trading schemes. Do carbon taxes actually reduce emissions? In 1991, Norway became one of the first countries in the world to impose a tax on GHG emissions. Since then, Norway’s GHG emissions have risen by 15%. According to the US Energy Information Administration, America’s untaxed carbon dioxide emissions grew by 16% percent over the same period. It is difficult to see what Norway achieved – other, of course, than to significantly increase the cost of energy to consumers. Simply put, the European Union’s experience with carbon taxes and carbon trading has seen market price collapses and a transfer of emissions from relatively modern Western European power plants to ‘dirty’ Eastern European power plants. By any measure, it has been an utter fiasco.
What happens to “carbon markets” when word about the failure of the AGW thesis gets out? The facts about the insignificance of anthropogenic carbon emissions in the climate equation will eventually reach a wider audience. When they do, the price of CO2 will collapse, reverting to its actual value (nothing). By then, of course, it may be too late; the money spent on carbon taxes and carbon credits will be gone, and those whose investments have evaporated will decry, as they always do, the “gang of robbers” that bilked them – forgetting that any con game has two players: the artist running the scam; and the dupe who allows himself to be taken in by it.
How much money have companies already spent to purchase carbon credits and carbon futures? How much money have well-meaning but ill-informed private citizens spent to “offset” activities like driving to work, picking up groceries, or taking the kids to soccer practice? How many pension fund managers have bought into the carbon market, on Al Gore’s personal assurance that the price of hot air is only going to rise? Where has that money gone? How much of it has ended up in the pockets of individuals and corporations established solely for the purpose of profiting from the economic opportunities offered by the climate panic? How much will disappear when the whole ridiculous edifice comes crashing down, as – in accordance with the historical behaviour of all economic bubbles – it eventually must?
Who – if anyone – will be held accountable for creating the carbon bubble in the first place?
On 6 April 2008, Generation Investment Management, a private equity fund chaired by Al Gore, bought a 9.5% stake in Camco International Limited, a company billed as a “carbon asset developer.” Camco at the time had one of the world’s largest portfolios of carbon credits, and according to its prospectus, “generate[s] carbon credits” and then arranges their sale and delivery “to international compliance buyers and into the voluntary market.” This is not a difficult dynamic to understand: as a result of this stock purchase, Al Gore stands to benefit, personally and substantially, from the growth of the carbon credit market, and from any increase in the value of carbon credits.
It is interesting, in view of this fact, that Gore, testifying to the Senate Foreign Relations Committee on 28 January 2009, made the following statement:
Quickly building our capacity to generate clean electricity will lay the groundwork for the next major step needed: placing a price on carbon. If Congress acts right away to pass President Obama's Recovery package and then takes decisive action this year to institute a cap-and-trade system for CO2 emissions – as many of our states and many other countries have already done – the United States will regain its credibility and enter the Copenhagen treaty talks with a renewed authority to lead the world in shaping a fair and
effective treaty. And this treaty must be negotiated this year.
effective treaty. And this treaty must be negotiated this year.
Not next year. This year.
Cui bono? Surely the relationship between Gore’s business activities and his insistence that the US government take steps to institute obligatory carbon trading – “Not next year. This year” – is neither irrelevant nor immune to scrutiny. Gore is pressing the government of which he was once a member to take regulatory action in an area where his own corporate and financial interests are intimately engaged. It is remarkable that legislators and journalists are not asking the obvious questions. Or perhaps – in view of Gore’s high public profile, his unique status as an Oscar- and Nobel Prize-winning former Vice-President, the fact that he is a Democrat, and his newsworthiness as a full-time prophet of climatic end-times – it is not remarkable at all.
Why “this year,” and “not next year”? Whence comes this urgency? It cannot be because the planet is warming catastrophically, because it is not; indeed, as has been shown above, it is cooling, and if anything is likely to continue to cool over the coming decades. What will another year or two of cooling due to the value of the carbon credits held by Generation Investment Management?
Or perhaps the urgency is due to the spreading realization – not just by scientists, but by the public – that human activity does not appear to significantly impact climate. Perhaps it is due to the increasing numbers of scientists who are openly opposing the global warming orthodoxy. Perhaps it is the growing understanding by Western electorates that “global warming” does not, in fact, pose the dire threat to humanity that catastrophists predicted. A Rasmussen poll released in January 2009 showed that more people (44%) believed that global warming is due to planetary trends than to human activity (41%). Only three years ago, the spread was 11 points in the other direction; in April of 2008, 13 points. The reversal of public opinion on the causes of climate change is bad news for politicians bent on forging an international pact to regulate carbon emissions. And it is disastrous for anyone who has a stake in the carbon market. After all, carbon credits are not worth what you paid for them, but only what someone else is willing to pay to buy them from you.
If the AGW thesis is wrong – and it is – and human-produced carbon dioxide has no significant impact on climate – and it doesn’t – then carbon credits are worthless. Once investors realize this, the carbon market will swiftly go the way of tulip bulbs, dot-com stocks, imaginary gold mines in Mississippi, jackasses from Spain, and other “undertakings of great advantage, but nobody to know what they are.” As noted above, whenever an economic bubble pops, the first investor to bail out loses the least money. But his flight may also accidentally spark a sell-off, creating a collapse where there was none before. Anyone holding a large portfolio of a carbon credits would be ill-advised to attempt to sell, as other investors would take the large portfolio-holder’s actions as a vote of non-confidence in the stock, potentially precipitating the very collapse that he or she hopes to avoid. Moreover, the act of selling requires a buyer. A collapse of the carbon market sparked by the implosion of the AGW thesis would by definition preclude a rebound in prices. In such circumstances, who would be so foolish as to buy carbon credits on the down-tick?
The caliphs of carbon are caught in a cleft stick of their own cutting, deeply enmeshed in a market whose existence is predicated upon a scientific theory that has demonstrably failed. The carbon bubble is over-ripe and ready to burst; the only question is who will be the first to jump. What is perhaps most distasteful in this whole enterprise is the fact that “carbon credits” have been sold to a credulous public as a moral obligation; a means of offsetting the damage allegedly caused to the environment by the mundane, day-to-day activities of the citizens of the advanced, industrialized countries. The panjandrums of climate panic tell us, day in and day out, that emitting carbon is sinful. How convenient, then, that the well-meaning but scientifically naïve citizens should be able to assuage their guilty environmental consciences by funnelling a few dollars here and there to foreign governments via a helpful middleman, who merely siphons a pittance off the top.
We’ve seen such “helpful middlemen” before – in the cynical opportunists who peddled indulgences to the unlettered medieval peasantry, enabling them to purchase, on behalf of the deceased, remission of some of their allotted time in purgatory. These “pardoners” routinely described, in gruesomely vivid prose, the tortures and torments that those poor, condemned souls were forced to undergo; and from which they might be reprieved, if their living relatives would only part with a few coins. Chaucer depicted these practices in prose that is startlingly reminiscent of the modern heirs of those “innovative financial scoundrels”:
I stand up like a scholar in pulpit,
And when the uneducated people all do sit,
I preach, as you have heard me say before,
And tell a hundred false jokes, less or more.
Of avarice and of all such wickedness
Is all my preaching, thus to make them free
With offered pence, the which pence come to me.
For my intent is only pence to win,
And not at all for punishment of sin.
 Mackay, Extraordinary Popular Delusions, 103.
 John Kenneth Galbraith, Economics in Perspective: A Critical History (Boston: Houghton Mifflin Company, 1987), 42.
 See “Mississippi Scheme”, Encyclopedia Brittanica, 15th ed. (London: Encyclopedia Brittanica, Inc., 1976), Micropaedia, Vol. VI, 938.
 John Ralston Saul, Voltaire’s Bastards: The Dictatorship of Reason in the West (Toronto: Penguin Books, 1993), 405.
 Lynne Sabel and Phillip Steele, 1000 Great Events (New York: Exeter Books, 1985), 162.
 Galbraith, Economics, 42.
 Mackay, Extraordinary Popular Delusions, 58.
 Mackay, ibid., 73.
 Mackay, ibid, 59.
 Mackay, ibid. 75.
 John Kenneth Galbraith, The Great Crash 1929 (Boston: Houghton Mifflin Company, 1988), 169.
 Galbraith also argues that prosperity is a component of a crash of this nature, in the sense that speculation must be fuelled by capital in order to reach truly colossal heights of folly. Galbraith, The Great Crash, 170. To an extent, this is true; but such capital can also itself be artificial, for example, when the South Sea Company loaned money to investors to enable them to purchase its stock; or when sub-prime mortgage lenders refinanced over-valued houses, enabling mortgage-holders to accumulate several “generations” worth of debt on the same property. In such cases, speculation is fuelled not by capital, but by accumulating ever-increasing quantities of debt, further exacerbating the inflationary spiral, and vastly deepening the pit that awaits when the spiral ends.
 Justin Lahart, “Bernanke’s Bubble Laboratory”, The Wall Street Journal, WSJ.com, 16 May 2008 [http://online.wsj.com/article/SB121089412378097011.html].
 Mackay, Extraordinary Popular Delusions, 94.
 Mackay, ibid.
 Daniel Gross, “Bulb Bubble Trouble”, Slate, 16 July 2004 [http://slate.msn/com/id/2103985/].
 Gross, ibid.
 Data obtained from the NASDAQ Composite Index. At time of writing, the NASDAQ had regained only half of the value – roughly 2,500 – of the intra-day peak of 5,132 it had reached eight years earlier.
 United States vs. Microsoft Corporation, Civil Action No. 98-1232 (TPJ) [http://www.usdoj/gov/atr/cases/f3800/msjudgex.htm].
 The irony here is stark: if these analyses are correct, then the industry, fearing the impact on share prices of a pre-emptive sell-off, initiated an early sell-off, because whoever sells first loses the least. But the act of selling early may have precipitated a wider, more draconian sell-off than would otherwise have occurred, leading to total collapse. The thought that the more volatile zones of the stock market are subject to this sort of “mutually assured destruction” is not a comforting one.
 Los Angeles Times, “Will dotcom bubble burst again?”, Quad City Times, 16 July 2006 [http://www.qctimes.com/articles/2006/07/17/news/business/doc44bb0a1ab97ce159604273.txt].
 Oliver Bennett, “The new dotcom boom”, The Sunday Times, 30 March 2008 [http://technology.timesonline.co.uk/tol/new/tech_and_web/article3620882.ece].
 The phrase was coined in reference to John Law by Galbraith in Economics, 143. The use of this phrase as a title should not be taken as an accusation of illegal or unethical conduct. That said, it is no great compliment to say of someone that “He never broke any laws” if the laws themselves are at fault. Nor is it exculpatory to argue that one was merely following the rules within a system whose rules permit, even encourage, the exploitation of financial panics for pecuniary advantage.
 Geoffrey Chaucer, The Canterbury Tales; “General Prologue”, lines 671-716, Librarius.com, [http://www.librarius.com/canttran/gptrfs.htm].
 See http://chicagoclimateex.com/.
 As a human being takes approximately three years to exhale this much CO2, breathing – while obviously individually beneficial – would not seem to be a lucrative source of income.
 Rune Birk Nielsen, “Denmark’s Largest Offshore Wind Farm Approved”, Danish Wind Industry Association, 26 August 2008 [http://www.windpower.org/composite-2031.htm].
 Anselm Aldermann, “Wind Turbines in Europe do Nothing For Emissions-Reductions Goals”, Der Spiegel, 10 February 2009 [http://www.spiegel.de/international/business/0,1518,606763,00.html].
 Julian Glover, “A Collapsing Carbon Market Makes Mega-Pollution Cheap”, The Guardian, 23 February 2009 [http://www.guardian.co.uk/commentisfree/2009/feb/23/glover-carbon-market-pollution].
 Leila Abboud, “An Exhausting War on Emissions”, Wall Street Journal Online, 30 September 2008 [http://online.wsj.com/article/SB122272533893187737.html]].
 The EU emissions trading scheme is described here [http://ec.europa.eu/environment/ climat/emission/index_en.htm]. One of its impacts – a thoroughly predictable rise in energy costs – is described here: [http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/ idUSLF4432920080915].
 AFX UK Focus, “Al Gore-backed investment firm buys 9.5 pct Camco Intl stake”, 6 April 2008 [http://www.iii.co.uk/news/?type=afxnews&articleid=6745270&subject=companies&action=article].
 CNN, “Gore to lobby lawmakers on climate change”, CNNpolitics.com, 28 January 2009 [http://politicalticker.blogs.cnn.com/2009/01/28/gore-to-lobby-lawmakers-on-climate-change/]. Emphasis added.
 “44% say global warming due to planetary trends, not people”, Rasmussen Reports, 19 January 2009 [http://www.rasmussenreports.com/public_content/politics/issues2/articles/44_say_global_warming_due_to_planetary_trends_not_people].
 Geoffrey Chaucer, The Canterbury Tales; “The Pardoner’s Tale”, lines 105-118.