VALUE: After Hours (S07 E17): Jake’s Veggies: Cantillon Effects and Eutrophication

During their recent episode, Taylor, Carlisle, Schwartz and Hanauer discussed Jake’s Veggies: Cantillon Effects and Eutrophication. Here’s an excerpt from the episode:

Jake: Yes, sir, Happy to do it.

Tobias: Market fellas, it’s 32 minutes past the hour. [chuckles] No, it’s two minutes past the hour. What am I talking about?

Jake: 32 minutes in.

Tobias: 32 minutes in.

Jake: Imagine a river so polluted that it bursts into flames. This isn’t a metaphor. This actually happened. The Cuyahoga River, in the summer of 1969. Kids were eating popsicles on Lake Erie’s edge when just upstream, the water literally caught fire. So, here’s the mystery. How does a body of water like Lake Erie go from a regional jewel, the pride of the Great Lakes, to dead in a matter of years? As Munger always said, “You can learn a lot from studying failure.” Resolving this mystery for us could help us understand other ways that we’re likely to die and maybe avoid them.

So, for a little bit more background, Lake Erie was shallow and warm and nutrient rich and really perfect for supporting biodiversity and midwestern economies. And then came the post war fertilizer boom. Synthetic nitrogen and phosphorus flooded in, but not uniformly. The Maumee River drained this massive chunk of Ohio farmland right into the Erie. Algae then didn’t just grow, it exploded. The blue green blooms, they turned deadly, killing fish, suffocating aquatic life. This phenomena is called eutrophication.

By the early 1970s, Lake Erie was officially declared dead. How did all this abundance create collapse? Was it just pollution, urban sewage, overfishing? The environmentalists pointed to the runoff. Policymakers blamed industry and greedy farmers. The public just watched on in horror. But something deeper and invisible was at play. And oddly, it might be a useful metaphor for understanding a key force in economics.

So, here’s a clue. Richard Cantillon, C-A-N-T-I-L-L-O-N, was an 18th century economist that you probably skipped over in Econ 101. But his big idea was that new money doesn’t enter an economy evenly. It’s not as if it’s dropped from the sky by millions of helicopters with bags of fresh cash that Ben Bernanke is just throwing out the window.

It flows through existing pipes into preferred pockets, those closest to the spigot, banks, financial institutions, government contractors, defense firms, large asset owners who benefit from inflation, venture capital and private equity, who benefit from cheap money. Really, the moneyed class are the preferred pockets in here. They all get to shop with the fresh money at yesterday’s prices. Those furthest from the spigot, hourly wage earners, retirees on fixed incomes, anyone living paycheck to paycheck, they all feel the price increases, but just have to hope that some of it trickles down to them. They’re too far downstream, and usually, they just get the higher prices and the hangover.

So, let’s take this back to Lake Erie. Think of that upstream farm using supercharged fertilizers. Those nutrients don’t spread evenly either. They gush in through the Maumee River. And the algae closest to the inlet get these first dibs on it. They bloom, they party, they dominate, [crosstalk] then they die sucking oxygen from the room. The fish suffocate, the whole ecosystem collapses. And eutrophication is this dark outcome of Mother Nature’s Cantillon effects.

This system, the fragility, the systemic fragility, can be hiding in plain sight and even look like prosperity when the algae is in full bloom. So, whether it’s in money or nature, it’s not just what gets added. It’s also important to examine when and where. So, unequal timing of inputs can create these feedback loops that look like growth right up until they implode.

So, policies, whether they’re ecological or monetary, need to account for the where the enrichment happens, not just how much. And so, like inflation, this eutrophication is a story of timing and power and unintended consequences. And really, nature is not exempt from Cantillon’s ghost, and neither are we when we’re running these trillion-dollar deficits. So, there’s your veggies for the day.

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