U.S., Mexico: The Decline of the Colorado River

U.S., Mexico: The Decline of the Colorado River

Why Are Diamonds More Expensive Than Water ?

We found this great article called "A Tale of Two Theories" By Ron Baker and wanted to share it with our readers.

Adam Smith was confounded. One of the greatest economic and social thinkers in the history of ideas struggled with the so-called “diamond-water paradox.”

None of us would be able to live beyond a couple of weeks without water, yet its price is relatively cheap compared to the frivolous diamond, which certainly no one needs to stay alive.

Most people resolve this paradox by replying the supply of diamonds is scarce compared to water. But this theory lacks explanatory power. If it did, those drawings by your kids on your refrigerator would be worth a few mortgage payments. Just because something is scarce does not make it valuable.

The Labor Theory of Value

Karl Marx had a theory, too. The labor theory of value still wields enormous influence over our present-day concept of value and price. Marx explained his theory in Value, Price and Profit, published in 1865:

"A commodity has a value, because it is a crystallisation of social labour. The greatness of its value, or its relative value, depends upon the greater or less amount of that social substance contained in it; that is to say, on the relative mass of labour necessary for its production."

This sounds reasonable, but if Marx’s theory were correct, a rock found next to a diamond in a mine would be of equal value, since each took the same amount of labor hours to locate and extract.

If you have pizza for lunch today, under Marx’s theory, your tenth slice would be just as valuable as your first, since each took the same amount of labor hours to produce.

One glaring flaw in Marx’s theory was it did not take into account the law of diminishing marginal utility, which states the value to the customer declines with additional consumption of the good in question.

The Marginalist Revolution of 1871

Fortunately, three economists developed the theory of marginalism and created a revolution: William Stanley Jevons from Great Britain, Leon Walras from France, and Carl Menger from Austria.

There were forerunners to the marginal theory, but it was not until these three came together that the theory was accepted as valid in the economics profession. The idea that all value is subjective seems obvious is retrospect, given how consumer preferences and tastes can change on a whim.

So what made this new theory so revolutionary? As Menger explains in his book Principles of Economics, written in 1873:

"Value is…nothing inherent in goods, no property of them. Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men…[T]he value of goods…is entirely subjective in nature."

Value is like beauty—it is in the eye of the beholder. This theory has enormous explanatory. Philip Wicksteed, a British clergyman, wrote scientific critique of the Marxian labor theory of value in 1884, where he explained:

"A coat is not worth eight times as much as a hat to the community because it takes eight times as long to make it….The community is willing to devote eight times as long to the making of a coat because it will be worth eight times as much to it."

Still, cause and effect is confused constantly on this principle in businesses to this day. I remember taking a wine tour of Far Niente in Napa where the guide was explaining how one particular vintage had to be bottled by hand, which was why it was more expensive—due to the extra labor this entailed.

I could not help thinking: No, you are willing to invest in the labor necessary to bottle the wine by hand because some customers find it valuable (and delicious!) enough to cover the extra labor costs.

Why Are Diamonds More Expensive Than Water?

The German economist Hermann Heinrich Gossen developed what is known as Gossen’s Law: The market price is always determined by what the last unit of a product is worth to people.

While the first several gallons of water may be vital for your survival, the water used to shower, flush the toilet, and wash the dishes is less valuable. Less valuable still is the water used to wash your dog, your car, and hose down your driveway.

On the other hand, the marginal satisfaction of one more diamond tends to be very high.

If water companies knew you were dehydrated in the desert they would be able to charge a higher price for those first vital gallons consumed, and then gradually adjust the price downwards to reflect the less valuable marginal gallons.

Since they do not possess this information—the cost of doing so would be prohibitive—the aggregate market price for water tends to be based upon its marginal value.

Old Fallacies Die Hard

Thomas Sowell explains in his book, Basic Economics, how the economics profession finally overcame the labor theory of value:

"By the late nineteenth century, however, economists had given up on the notion that it is primarily labor which determines the value of goods. This new understanding marked a revolution in the development of economics. It is also a sobering reminder of how long it can take for even highly intelligent people to get rid of a misconception whose fallacy then seems obvious in retrospect. It is not costs which create value; it is value which causes purchasers to be willing to repay the costs incurred in the production of what they want."

That all value is subjective is difficult for many business people to accept, but it does explain how we humans spend money.

Photo Credit: Olga Nikonova / Shutterstock.com

Ron Baker

Founder of VeraSage Institute

Here is a link to him and the article.

The Commodity Picture insight

Water and the Infrastructure Challenge.

The water infrastructure in aging cities can be more than 100 years old. Pipe leaks, drying lakes, etc.are common.



Source: Bloomberg

The Commodity Picture insight

Vast Aquifer Found In Namibia Could Last For Centuries By Matt McGrath, Science reporter, BBC World Service

A newly discovered water source in Namibia could have a major impact on development in the driest country in sub-Saharan Africa. Estimates suggest the aquifer could supply the north of the country for 400 years at current rates of consumption.

Scientists say the water is up to 10,000 years old but is cleaner to drink than many modern sources.

However, there are concerns that unauthorized drilling could threaten the new supply.

For the people of northern Namibia water is something that they either have too much of or too little.

The 800,000 people who live in the area depend for their drinking water on a 40-year-old canal that brings the scarce resource across the border from Angola.

Over the past decade the Namibian government have been trying to tackle the lack of a sustainable supply in partnership with researchers from Germany and other EU countries.

They have now identified a new aquifer called Ohangwena II, which flows under the boundary between Angola and Namibia.

On the Namibian side of the border it covers an area roughly 70 km by 40 km (43 miles by 25 miles).

According to project manager Martin Quinger, from the German federal institute for geoscience and natural resources (BGR), it's a substantial body of water.

"The amount of stored water would equal the current supply of this area in northern Namibia for 400 years, which has about 40 percent of the nation's population."

"What we are aiming at is a sustainable water supply so we only extract the amount of water that is being recharged." 

"What we can say is that the huge amount of stored water is will always be enough for a backup for an area that is currently supplied only by surface water."

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People living in areas of water stress rising

The number of people living in areas affected by severe water stress is expected to increase to almost four billion people..

Source: Ahead of the Herd


OECD Environmental Outlook to 2030

The Stockholm International Water Institute has kindly provided some statistics we should all be aware of:

- The 10 largest water users (in volume) are India, China, the United States, Pakistan, Japan, Thailand, Indonesia, Bangladesh, Mexico and the Russian Federation.

- With rapid population growth, water withdrawals have tripled over the last 50 years. According to the United Nations Department of Economic and Social Affairs (UNDESA), the world population is predicted to grow from 6.9 billion in 2010 to 8.3 billion in 2030 and to 9.1 billion in 2050. At the same time, urban populations are projected to increase by 2.9 billion, to 6.3 billion by 2050. An estimated 90% of the people expected to be added to the population, by 2050, will be in developing countries, many in regions already in water stress where the current population does not have sustainable access to safe drinking water and adequate sanitation.

- Water withdrawals are predicted to increase by 50% by 2025 in developing countries, and by 18% in developed countries

- Water for irrigation and food production constitutes one of the greatest pressures on freshwater resources. Agriculture accounts for around 70% of global freshwater withdrawals, even up to 90% in some fast-growing economies

- Feeding everyone in 2050 could require 50% more water than is needed now
The dietary shift from predominantly starch-based food to meat and dairy, which require more water, is the greatest to impact on water consumption over the past 30 years. Producing one kg of rice requires approximately 3,500 liters of water while one kg of beef requires 15,000 liters. Producing that one kg of meat requires as much water as an average domestic household uses over ten months (50l/person/day).

- Estimates indicate that there will not be enough water available on current croplands to produce food for the expected population in 2050 if we follow current trends and changes towards diets common in Western nations (3,000 kcal produced per capita, including 20 percent of calories produced coming from animal proteins)

See more of Richard Mills article in Financial Sense here.

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Food shortages could force the world into vegetarianism

Water scarcity's effect on food production means radical steps will be needed to feed population expected to reach 9bn by 2050.

Leading scientists have issued one of the sternest warnings yet about global food crises, saying that the world may have to switch almost completely to a vegetarian diet over the next 40 years to avoid catastrophic shortages.

Humans derive about 20% of their protein from animal-based products now, but this may need to drop to just 5% to feed the extra 2 billion people expected to be alive by 2050, according to research by some of the world's leading water scientists.

"There will not be enough water available on current croplands to produce food for the expected 9 billion population in 2050 if we follow current trends and changes towards diets common in western nations," the report by Malik Falkenmark and colleagues at the Stockholm International Water Institute (SIWI) said.
"There will be just enough water if the proportion of animal-based foods is limited to 5% of total calories and considerable regional water deficits can be met by a … reliable system of food trade."

Adopting a vegetarian diet is one option to increase the amount of water available to grow more food in an increasingly climate-erratic world, the scientists said. Animal protein-rich food consumes five to 10 times more water than a vegetarian diet. One third of the world's arable land is used to grow crops to feed animals. Other options to feed people include eliminating waste and increasing trade between countries in food surplus and those in deficit.

"Nine hundred million people already go hungry and 2 billion people are malnourished in spite of the fact that per capita food production continues to increase," they said. "With 70% of all available water being in agriculture, growing more food to feed an additional 2 billion people by 2050 will place greater pressure on available water and land."

Competition for water between food production and other uses will intensify pressure on essential resources, the scientists said. "The UN predicts that we must increase food production by 70% by mid-century. This will place additional pressure on our already stressed water resources, at a time when we also need to allocate more water to satisfy global energy demand – which is expected to rise 60% over the coming 30 years – and to generate electricity for the 1.3 billion people currently without it," said the report.
Overeating, undernourishment and waste are all on the rise and increased food production may face future constraints from water scarcity.

"We will need a new recipe to feed the world in the future," said the report's editor, Anders Jägerskog.
A separate report from the International Water Management Institute (IWMI) said the best way for countries to protect millions of farmers from food insecurity in sub-Saharan Africa and south Asia was to help them invest in small pumps and simple technology, rather than to develop expensive, large-scale irrigation projects.

See more of TheGuardian article here.

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The ten biggest American cities running out of water

Major cities in the United States are running out of water in the near future like Los Angeles, San Francisco and Las Vegas.

24/7 Wall St. looked at an October 2010 report on water risk by environmental research and sustainability group Ceres and a comprehensive July 2010 report from the Natural Resources Defense Council, which mapped areas at high risk of water shortage conflict. 24/7 Wall St. also did its own analysis of water supply and consumption in America's largest cities, and focused on the thirty largest metropolitan areas.

The analysis allowed us to choose ten cities which are likely to face severe shortages in the relatively near-term future. Some of these are likely to be obvious to the reader. The area around Los Angeles was once too dry to sustain the population of a huge city. But, infrastructure was built that allowed water to be pumped in from east of the region. Las Vegas had similar problems. It was part of a great desert until Lake Meade was created by the Hoover dam built on the Colorado river.
 
Severe droughts that could affect large cities are first a human problem. The competition for water could make life in some of America’s largest cities nearly unbearable for residents. A number of industries rely on regular access to water. Some people would be out of work if these industries had poor prospects for continued operation. The other important trouble that very low water supplies creates is that cities have sold bonds based on their needs for infrastructure to move, clean, and supply water. Credit ratings agencies may not have taken drought issues into account at the level that they should.

Extreme disruptions of the water supply of any city would have severe financial consequences. The National Resources Defense Council (NRDC) report takes the following into account when assessing the likelihood of water shortages: “The risk to water sustainability is based on the following criteria:  (1) projected water demand as a share of available precipitation; (2) groundwater use as a share of projected available precipitation; (3) susceptibility to drought; (4) projected increase in freshwater withdrawals; and (5) projected increase in summer water deficit.

The ten cities on this list are the ones with the most acute exposure to problems which could cause large imbalances of water supply and demand.  There are a number of metropolitan areas which could face similar problems but their risks are not quite as high. The water problem for US cities is, although it may not be evident, one of the largest issues that faces urban areas over the next ten years.

See the ten largest cities by population that have the greatest chance of running out of water here.

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Water - Global water shortages

Australia is running out of water. The fourth largest lake on the planet shrunk by 90%. Four continents are already running dry. Forget about our dependence on fossil fuels. The crisis that could doom us all is the world's shrinking water supply. And nowhere is the growing water crisis more acute than in China.

China, where 20% of the world's population has only 7% of its water. Wheat produced on the North China Plain is depleting water tables so rapidly that the water table is dropping three feet a year. Beijing is in dire trouble, and could run out of water in as little as five years, leading to economic collapse of the city—and massive civil unrest.

China is racing to complete a monstrous $62 billion South-North water diversion project.That still may not be enough, so they're eyeing Tibet's enormous water resources, the source of water for 47% of the world's population in ten countries.

China's water is among the world's most polluted, which is why they've invested $31 billion into water treatment technologies. Hundreds of water treatment companies are knocking on China's door. Some known names include Dow Chemical, Bayer Technology, ITT, Siemens and a host of others.

China's water treatment upgrades have barely started, and there's billions of dollars in work yet to be awarded.

Clean water, essential minerals, even the topsoil we need to grow food are getting dangerously scarce. Simply put, we're running out of the resources we need to survive. But a handful of innovative companies stand ready to solve these problems. The UK warns: A "perfect storm" of crises in food, water and energy could topple governments and markets globally.

Over the next 20 years, world population will grow 27%. Yet arable land will shrink 18%, per capita water supply will drop by a third and global oil production will fail to meet soaring demand. More people to feed, and less land, water and energy to produce food. We saw a small glimpse of the future in the 2007 food crisis. Food prices exploded, commodity prices went off the charts. Riots broke out in 30 countries. Federal troops were called in to guard fields and warehouses. And at least one government was toppled by the food crisis. But that crisis was nothing compared to what you'll see in the next few years.

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