Saving the Biosphere or Saving by the Biosphere? The Thermodynamics of Negative Interest Rates

A decade ago, the German economist Carl Christian von Weizsäcker mused that the phenomenon of declining opportunities for profitable investments that is behind the trend towards declining interest rates might reflect the Second Law of thermodynamics, in the sense that the more capital we accumulate, the more we must struggle to keep it in order, such that more and more investment is just needed for maintaining the existing stock (for German readers, see his Jöhr lecture, page 15). I was intrigued by this comment, but never found a way to systematically extend on it, until I became aware of Gesell’s theory of negative interest. This post extends on my previous attempt at dealing with that question on this blog.

As a reminder, Gesell argued that negative interest is the natural rate since real saving always erodes through time, so that people are willing to pay for someone who offers to use this saving for productive purposes enabling her to pay back the amount borrowed with a deduction for the service and keep the surplus for herself. Money changes this constellation because money does not decay. If money is scarce, owners of money can just withhold money from those in need unless they pay positive interest (and hoarded money does not decay). This has been elaborated in so-called ‘loanable funds’ approaches to saving and investment where savers are factually investors who deposit their money with a gain in interest. Low interest rates will result if there is a ‘savings glut’ that chases shrinking opportunities for profitable investment. This is the familiar explanation for declining real interest rates in the recent two decades (also followed by von Weizsäcker, thus leaving his idea about thermodynamics aside).

Gesell’s argument can be generalized if we interpret ‘decay’ as reflecting the Second Law, as von Weizsäcker mused. On first sight, this is covered by the economic notion of depreciation which also defines the distinction between gross and net investment. A rate of depreciation can be interpreted as negative interest. In terms of physics, all activities that involve work resulting in negentropic states (‘capital’) ultimately increase the entropy of the system-environment ensemble: A perpetuum mobile is impossible, we will always run out of steam, the more we try. This is valid for a closed system. That’s why we need to feed energy into those ensembles to maintain the state of order (no growth without energy input). Now, thinking along the lines of the Gesell argument, we could be willing to pay someone (a Maxwellian demon) who could offer us to reduce the entropic costs: That would correspond to Gesellian negative interest.

Going back to the Robinson Crusoe metaphor, the sailor is willing to pay Friday for offering his productive services which helps him to overcome the forces of decay. But what about Friday? He keeps the surplus and returns to Robinson more than Robinson would have kept after decay, but less than the full amount. But Friday’s productive capacities are limited, how about his own need for saving? Friday must rely on a newly arriving Monday to engage in additional productive work. Hence, we end up with a self-enhancing process: This is economic growth. But obviously, the original problem cannot be solved: We cannot evade the Second Law, only further and further extend the border beyond which we export entropy to the environment. This is the technosphere: States of order created by human capital accumulation. However, today technosphere growth has reached its limits, since we increasingly face the consequences of concomitant entropy production.

Money seems to evade the physics of saving because money is a purely imaginary thing. Money is a state of beliefs of economic agents undergirded by certain institutional arrangements, but money is not physical, at least today (bitcoin moves in another direction, though). This is the reason why there is the so-called ‘zero lower bound’ in monetary policy. Nobody would hold money if it came with costs but immediately buy real goods or alternatives for value storage. Money does not obey to thermodynamics. Hence, we came to believe that negative interest is an abnormal state of the economy. But this is purely imaginary. Where do we see the working of negative interest in capital accumulation? I think this is the large gap between the return to capital or, narrower, the lending rate (which ties op with the return to capital) and the deposit rate of saving, in real terms. This gap is the opportunity cost of saving and hence the genuine form of negative interest, whereas a negative interest actually paid would be just the accounting correlate. This negative interest is what keeps the technosphere expanding via the monetary economy at its core. But it does not annul the physics of growth fed by increasing energetic throughputs.

Now, facing the looming climate disaster, is there an alternative way to struggle with the Second Law by paying negative interest? Physicists rightly point out that in principle, the Second Law does not limit economic growth, at least at the current stage, since the radiation balance of the Earth system, that is incoming solar energy and outgoing entropy export mainly via infrared radiation, leaves much leeway for ‘mixing in’ human entropy production. Indeed, this is what applies for the biosphere. The biosphere has a record of hundreds of millions of years of continuous growth while keeping the Earth system sustainable far from thermodynamic equilibrium: This is ‘Gaia’ in Lovelock’s sense. The fundamental difference between biosphere and technosphere is that the former combines almost exclusive reliance on solar energy (photosynthesis and heterotrophic organisms feeding on autotrophic ones) and almost complete recycling, that is a circular eco-economy, whereas the ‘great acceleration’ of technosphere growth was fueled by fossil energy. Technological optimists expect that the technosphere might also achieve the same feat in the future. But when? And how? The fundamental problem is that all technospheric solutions will compete with the biosphere, most directly, in terms of space (measured in ecology as HANPP). For instance, solar panels need space which is taken away from the biosphere.

Why don’t we pay negative interest to the biosphere, the proven champion in managing the Second Law? Why don’t we use the biosphere as our Gesellian saving account? In fact, pre-industrial economies did that. For example, in medieval times forests were managed as commons that where akin to saving accounts in the sense that they provided many ‘ecosystem services’ to the communities in the long run, even across generations (wood for construction, heating, spaces for wild animals as hunting prey, and so on). Capitalist forestry destroyed these ecosystems and abolished communal management. Can we follow such a model in modern times? Can we nurture the biosphere by paying negative interest? The key would be designing a symbiotic relation between technosphere and biosphere instead of the current competitive regime. This where Gesell and von Weizsäcker can be combined, as argued in my previous post on that topic. Von Weizsäcker, otherwise a staunch liberal economist (by the way, like Gesell), argued that the government debt is the major savings vehicle under conditions of zero or even negative interest, which also keep it sustainable as long as economic growth is above this interest line (the ‘Japanese model’). As a corollary to his ideas about monetary reform, Gesell suggested public ownership of land (like Henry George and others). We can combine the two ideas. Forests could be an excellent example, reviving the medieval commons model on a global scale. Forests would become public estates managed by entities that are funded by special government bonds as a safe saving medium. These estates would aim at creating forest ecosystems which restore natural eco-communities but also maintain certain ecosystem services for humans. The symbiotic relationship with the technosphere can be achieved, for example, in increasingly substituting cement and steel as main materials in construction by technologically processed wood, which would radically shift the carbon balance of this sector. Since forests are public property, this transformation would be supported by keeping the wood supply out of capitalist competitive dynamics. That would allow for establishing a pricing regime that would include the massive positive externalities of forest ecology, most fundamentally, carbon capture.

Humanity can only save for the future by asking Friday for help. But Friday cannot be human, then. We have two choices: Creating a Cyborg Friday, or just asking our living neighbors. I prefer the latter.

2 Replies to “Saving the Biosphere or Saving by the Biosphere? The Thermodynamics of Negative Interest Rates”

  1. I totally agree with the idea of “negative interest rates“ on biosphere as a coercive mean for collecting funds for saving our ecosystem through technosphere, especially when our ecosystems are on the verge of being overstrained by human activity. I also recommend a cautious approach and discuss the possible negative effects of such radical means.

    An overall “negative interest rates” hides a rule like the ladder tax system, the rich should pay more taxes, because the rich should bear more responsibility. There are parallel concepts in the human-caused destruction of ecosystems, where the rich should take more private jets for international travel, and the damage to the environment is greater. So, the rich will have to pay more, in the form of an interest loss on their deposits. However, the wealthy often own many forms of asset: cars, luxury homes, yachts, planes, cash assets may be only a small part of it, and as a result they take on less responsibility than they should. What’s more, if low interest rates persist, they will further switch asset holding out of rational motives: buying properties, opening companies, reducing cash holdings, the loss of interest rates will be compensated by the appreciation of other assets, the fairness of the system is therefore difficult to maintain.

    Unlike the polluter-pays green tax, the persistence of negative interest rates could also cause turmoil in financial markets. A large amount of liquid cash will flood into the market looking for exit. Please note that when we discuss technosphere or biosphere as a macro phenomenon, we must pay attention to its collateral effect under a certain measure: when negative interest rates activate many emerging enterprises, which dive into the most lucrative sectors and a large part of them might not even be environmentally friendly. Then it is difficult for us to judge whether the positive effects brought by negative interest rates, namely the eco-funds can offset the negative effects brought by these pollutive entrepreneurships. On the other hand, long-term negative interest rates in the market will also encourage excessive borrowing, hot money surging and market bubbles, triggering an economic crisis.

    I think a punitive measure can curb people’s damage to the ecosystem, but this measure must consider many factors, such as fairness, not affecting normal business activities or entrepreneurship. After all, we need to water trees, and that starts with making sure there is water in the pond.


    1. Your arguments show that in the context of markets, negative interest cannot prevail, Keynes and Fisher basically agreed with Gesell, but also concluded that markets will produce positive interest. But that is what Gesell also said, and therefore suggested a new type of money that can decay over time. Clearly, this is an institutional choice, and not a law of nature. Those who gain from the existing regime, will oppose, and these are the powerful. For Gesell, that was even a means to enhance the growth of the market economy. It seems to me that we currently face this dilemma: Interest rates are increasing to tame inflation. But this will hamper the eco-transition, as costs of investment , both private and public will grow. Fatally, increasing interest rate imply that people will discount the future more heavily, shrinking their time horizons.


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