30 August 2025

More Money Than God

Recommendation

As hedge funds increase in size, variety and number, they also exercise growing power over central banks and national governments, as well as companies and industries. Unfettered by a fixed investment philosophy, hedge fund managers bank on the flexibility to buy assets and sell them short as dynamic markets dictate. Some hedge funds have succeeded spectacularly and some have failed, such as those holding too many mortgage securities when the U.S. housing industry collapsed in 2007. But over its history, the hedge fund industry’s performance has been remarkably good. Here, business journalist Sebastian Mallaby forcefully argues that hedge funds contribute to economic stability by chasing the true value of mispriced assets. His richly detailed book centers on the successes and occasional missteps of famous hedge fund managers, including such luminaries as Stanley Druckenmiller, Paul Tudor Jones II, Michael Steinhardt, Julian Robertson and George Soros. BooksInShort recommends this book as a vivid introduction to hedge funds for those who are unfamiliar with them, and as a valuable, often entertaining, reference for financial professionals. And if you want to know even more, read the illuminating footnotes.

Take-Aways

  • Hedge funds take a more flexible approach to trading than other investment vehicles.
  • To minimize risk, hedge funds often hold simultaneous long and short market positions.
  • The majority of hedge funds are designed to profit from distorted prices for stocks and other assets.
  • Hedge funds usually serve an economic purpose by discouraging irrational investment-pricing trends.
  • The field’s pioneering leaders include Alfred Winslow Jones, who created the first hedge fund in 1949 and became a pacesetting performer.
  • George Soros achieved fortune and notoriety by betting against the British pound.
  • Paul Tudor Jones II made huge profits by buying bonds when stocks crashed in 1987.
  • The 1998 failure of the Long-Term Capital Management hedge fund threatened the financial system.
  • Some hedge funds failed because of the mortgage industry slump that started in 2007, but none required a tax-funded bailout.
  • Only the largest hedge funds require strict government regulation.

Summary

How Hedge Funds Got Started

The first hedge fund manager, Alfred Winslow Jones, was an unlikely leader in financial innovation. The son of a General Electric executive, he graduated from Harvard and embarked on a world tour as a purser on a freighter. After time as an export buyer and investment firm statistician, he joined the U.S. State Department, which assigned him to a post in Berlin in 1930. His short marriage to a “left-wing anti-Nazi activist” and their involvement in the Leninist Organization, forced his State Department resignation. He returned to America in 1934, but stayed abreast of the “German left” and possibly remained “involved in U.S. intelligence.”

“Hedge funds are vehicles for loners and contrarians, for individualists whose ambitions are too big to fit into established financial institutions.”

Worried that a political hysteria like the Nazi movement could undo even his own nation, Jones authored an ode to American democracy. His 1941 book and doctoral thesis, Life, Liberty and Property, led him into journalism. After Fortune published an abridged version, Jones started writing articles for the national business magazine, including a notable essay criticizing investment strategies that remain intransigent and fixed in the face of changing market conditions.

“The cataclysm has indeed shown that the financial system is broken, but it has not actually shown that hedge funds are the problem.”

His focus gradually shifted to investing. In 1949, four friends placed a total of $60,000 with Jones, who added $40,000 of his own and started the first hedge fund. He called it a “hedged” fund because he managed risk by offsetting long positions on securities with short positions. In about 20 years, he earned a cumulative return on investment of nearly 5,000%, one of the best performance records in hedge fund history. His pioneering style undermined a broad assumption that investors earn bigger returns by taking bigger risks. Compared with traditional investment managers who never hedged bets, Jones actually reaped bigger returns by taking smaller risks.

What Makes Hedge Funds Different?

Hedge funds have more flexibility than other investment funds. Equity mutual funds typically buy stocks for long-term growth and mitigate risk with portfolio diversification. On the other hand, hedge funds often address risk by taking simultaneous long and short market positions. They take long positions by purchasing assets for appreciation, and they hedge against the risk of depreciation by conducting short sales, which profit when the price of the underlying asset falls. In a successful short sale, for example, an investor borrows a $10 stock from a securities broker, sells it, then buys it back when the price drops to $7, returning the stock to the broker and pocketing the $3 decline as profit.

“Quickly, [Paul Tudor] Jones emerged as a prodigy with a distinctive style. He approached trading as a game of psychology and high-speed bluff.”

Hedge funds apply the risk management technique of simultaneous long and short investment positions to other assets, from stocks and bonds to futures and options. Mutual funds, by contrast, often confine themselves to one type of asset, such as stocks or bonds. Leverage is another distinguishing characteristic of hedge funds: They try to maximize profits by investing with borrowed money. These traits give hedge funds structural advantages over other types of funds that neither hedge nor leverage their investments. Unlike other investment professionals, hedge fund managers tend to invest their own money, as well as their clients’ money, in the funds they run. These managers aim for investment results that exceed the returns on broad market indicators such as Standard & Poor’s index of 500 stocks. In the parlance of money managers, the investment return on the broad market is known as “beta.” Hedge funds’ main mission is to deliver returns in excess of beta, known as “alpha.”

The Contrary Behavior of Hedge Fund Managers

Hedge fund managers tend to take investment positions that are contrary to mainstream financial thinking. Some critics deride short selling as destructive, but hedge fund manager Julian Robertson routinely doubted companies’ stated values, leading him to make frequent short sales. He began his hedge fund business, Tiger Management, in 1980, and his mix of skepticism and stock-picking skill rewarded investors well. They earned an average annual return of 31.7%, after fees, during his remarkable run from 1980 to 1998.

“To an extent that was generally not realized at the time, hedge funds were changing monetary policy.”

The efficient-market theory says a stock price will change immediately, if at all, to reflect new information relevant to the stock. Many hedge fund managers contest this idea. Michael Steinhardt, who had only four losing years in 28 years as a hedge fund manager, based his investing less on securities’ long-term growth than on large investors’ short-term needs to buy or sell. In his view, the efficient-market theory works gradually, not quickly. Long-term prices settle at rational levels, but short-term prices can become distorted, presenting investment opportunities.

“If ever irrational markets cried out for efficiency-enforcing arbitrage, the dot-com bubble surely was a clear example.”

Indeed, hedge funds often display an internal contradiction. Managers can take directly different investment positions day to day, as conditions require, so they can quickly change their funds’ makeup. Paul Tudor Jones II is legendary for making a fortune during the Black Monday stock market crash on Oct. 19, 1987, when the Dow Jones index plunged 22.6%. His firm, Tudor Investments, collected $80-$100 million in profit by selling stock futures short – that is, by betting, the week before equities collapsed, that the futures market would fall. Once the crash occurred, Jones bought bonds, which appreciated after the Federal Reserve eased monetary policy to calm investors, just as he’d predicted. Price momentum drove Jones’ decisions to buy or sell, and how much. His fund management style reflected his experience in the mathematically intensive commodities trading profession. He apprenticed as a cotton trader in New Orleans before joining the New York Cotton Exchange. He left there to start Tudor Investments in 1983. His performance as a securities market “trend surfer” is one of the best.

Exploiting Price Anomalies

Of course, price momentum does not always move in a rational direction. In the short term, misled investors may push the market value of an asset away from its true worth. But normally, at some inflection point, an irrational price trend ends and a rational one begins. George Soros, a genius at identifying these pricing inflection points, became a hedge fund industry legend by pinpointing developments that foreshadow reversals of irrational price trends.

“Hedge funds might have fallen less than the S&P 500, but customers expected them to be up in any kind of market, as though the magicians who ran them had abolished risk rather than merely managing it.”

Little seemed rational in Soros’ traumatic childhood. Born into a financially comfortable Jewish family in Budapest, Hungary, he survived the city’s Nazi military occupation by adopting a Christian persona and hiding with the help of his father’s acquaintances. Soros was only 17 when he moved, alone, to London in 1947. He graduated from the London School of Economics with unimpressive grades and relocated to New York, where he began his Wall Street career in 1956.

“The new view emphasized that traders might attack currencies that were decently managed, and that the attacks might prove self-fulfilling. The spectacular collapse of sterling created a tipping point in this debate.”

As a hedge fund manager, Soros got rich by identifying market misperceptions of asset values and betting on price corrections. His investments defied the efficient-market theory and its rational pricing mechanism. Soros bases his style largely on what he calls “reflexivity,” or the propensity of confused investors to misprice assets. In his view, investors lack a perfect understanding of reality and, therefore, distort it through their misguided actions. Soros himself has been misguided at times. His hedge fund had large losses – some $200 million – mostly on equity investments, due to the October 1987 crash. But a few weeks later, he made substantial profits for his investors with short sales of U.S. dollars, betting correctly that the dollar would depreciate against other currencies as U.S. monetary policy eased. His main investment vehicle, the Quantum Fund, finished 1987 with a 13% annual return on investment, a heroic feat given that the fund had recorded an annual loss for the year at the time of the October crash.

Breaking the British Pound

Another remarkable hedge fund manager, Stanley Druckenmiller, met Soros in October of 1987, just before the crash. Druckenmiller, who began his career as a bank’s equity analyst, foresaw the downturn and reconstituted his portfolio in response, so he suffered fewer Black Monday losses than Soros. In 1988, Druckenmiller joined Soros Fund Management. He and Soros were practiced at the art of picking stocks to buy and sell; they were unimpressed with the small returns that this narrow investment style usually garnered. They shared a vision of profits from mispriced assets of all kinds, and their winning bets revealed that hedge funds could influence not just companies and industries but also national governments and central banks. “Soros was inclined to see markets as wild things, constantly at risk of boom and bust; constantly destabilizing.”

“Soros became known as the man who broke the Bank of England.”

Their massive attack on the British pound in 1992 was one of their most notable victories. At this pre-euro time, European governments shared an exchange-rate mechanism that permitted currency rates to fluctuate within preset ranges. The pound shed value after the German central bank raised interest rates. That pressured the Bank of England to do the same. But as Soros and Druckenmiller accurately anticipated, the Bank of England refused to raise interest rates to defend the pound’s value. Soros Fund Management profited by selling British pounds at prices within the official exchange-rate mechanism and buying German deutsche marks. Often, the entity buying Soros’s pounds was the Bank of England itself, since it had an unlimited obligation to buy pounds offered by sellers. The selling pressure was intense. When the Bank of England announced that it had borrowed $14 billion to purchase pounds and prop up their value, Soros and Druckenmiller noted that this was about the same amount they wanted to sell, and they represented just one firm. Other hedge funds also made big bets against the pound. Britain’s government ultimately surrendered by removing the pound from the European exchange-rate mechanism, and Soros’s team pocketed more than $1 billion in profits.

Too Big to Fail?

A doomed hedge fund called Long-Term Capital Management had been considered a leader in quantifying risk. Started in 1994, LTCM hired professionals with advanced academic degrees and special expertise to take a mathematically intensive approach to identifying minor price distortions and capitalizing on them, while hedging with numerical precision against the risk of adverse price moves. With a steroidal boost from leverage, LTCM scored annual returns of 19.9% in the final 10 months of 1994, 42.8% in 1995 and 40.8% in 1996. Its impressive performance helped it attract more clients and amass more assets. By the time LTCM sank in 1998, it held assets valued at $120 billion. Monetary authorities saw its failure as a systemic risk, so a senior official at the New York Federal Reserve brokered a deal among 11 major financial institutions to contribute $3.65 billion to an orderly liquidation of LTCM, instead of allowing a sudden shutdown.

“LTCM’s failure had exposed the fallacy that diversification could reduce risk to virtually zero; but over the next decade investors repeated this miscalculation by buying bundles of supposedly diversified mortgage securities.”

One reason for LTCM’s collapse was its inability to liquidate assets fast enough to meet margin calls from brokers that had lent it money. Many copycat funds made the same investments LTCM made, creating a so-called “crowded trade,” which complicated LTCM’s efforts to liquidate its positions. The fund’s managers quantified the risk of adverse price changes but failed to address liquidity risk fully enough, that is, to admit the possibility that no one would offer to buy certain classes of assets. LTCM’s failure underscores the need for tightened regulation, but only of giant funds. More than any other hedge fund collapse, its breakdown threatened chaos throughout the global financial system. But not every hedge fund needs stricter regulation. Few are too big to fail or so crucial that providing government-funded bailouts would be better than letting them fold.

“The critics of hedge funds continued to worry that these leveraged monsters could ignite systemic fires – after all, Long-Term Capital had done so.”

Consider what happened to hedge funds when the mortgage securities industry imploded and foreclosures surged, triggering the U.S. recession that began in 2007. Some hedge fund managers had spectacular returns, such as John Paulson, a Harvard Business School graduate and former Bear Stearns mergers-and-acquisitions specialist. His fund bought a mountain of insurance on mortgage-backed securities and profited when the underlying mortgages went bad.

“When hedge funds cease to be small enough to fail, regulation is warranted.”

Although some poorly managed hedge funds disappeared during the mortgage market meltdown, not one hedge fund failure has consumed tax dollars, not even LTCM during its scary fall. Government-funded bailouts of major banks have encouraged excessive risk taking at these supposedly safer institutions. Allowing most hedge funds to operate freely may be the best check against further risky behavior in the banking industry.

About the Author

Sebastian Mallaby, a senior fellow at the Council on Foreign Relations, is a Washington Post columnist. He previously covered international finance for The Economist and was its bureau chief in Japan, Africa and Washington. He also wrote The World’s Banker and After Apartheid.


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More Money Than God

Book More Money Than God

Hedge Funds and the Making of a New Elite

Penguin Group (USA),


 



30 August 2025

Happiness around the world

Recommendation

Money can’t buy happiness, or so your parents used to say. But if money doesn’t make you joyful, what does? In her astute, rigorously researched book, public policy scholar Carol Graham evaluates the components of happiness across countries, socioeconomic groups and cultures to tease out what “well-being” means, at least statistically speaking. Using extensive surveys in Latin America, Central Asia and Afghanistan, and existing data on happiness in the developed world, Graham posits that, despite varying levels of wealth, people and nations share fundamentally similar characteristics when it comes to being content. She examines how happiness measures can guide policy makers and notes the pitfalls involved. Be prepared, though, to brush up on your statistics and get reacquainted with z-scores and Gini coefficients. The book relies heavily on statistical analysis and calculations, but Graham manages to surface from the data occasionally to provide conclusions in lay language. BooksInShort finds her work of value to economists, psychologists, policy makers and all those who just want to get happy.

Take-Aways

  • “Happiness economics” meshes economists’ analytics with the field of psychology to determine what makes people and nations happy.
  • The goal is to use public policy to address factors that influence happiness.
  • To measure happiness, researchers use survey questions, but the type of queries, how they are asked and order they’re in can skew results.
  • Generally, wealthy people and nations are happier than poor people and nations.
  • But that’s true only to a certain extent; after a point, more money doesn’t make you happier.
  • Research shows that increased earnings make you happy for only one year, while the effects of upward mobility, such as job promotions, last five years.
  • Once you live above a certain subsistence level, factors such as your health, job and relationships have a greater impact on your happiness.
  • For most people, health is the major determinant of happiness.
  • People are least happy in their mid- to late 40s.
  • French and British policy makers are investigating “national well-being accounts.”

Summary

“Happiness Economics”

For centuries, great minds have tried to answer the question: “What makes people happy?” Today, economists are teaming up with psychologists to define and measure joy. They set out to determine if applying happiness measures to public policy and economics could improve life for people around the world. New “analytical and research tools” now enable an objective evaluation of a highly subjective topic, “the study of happiness.”

“King Midas sought happiness in gold, and, in the end, that pursuit made him miserable.”

As the field of economics became increasingly analytical, it began to see earnings as a symbol for human welfare. The concept of “maximizing utility” (getting the most use from goods or services) came to depend on income measures, but money isn’t always the best indicator of what people want. For example, some people choose less remunerative work that is more satisfying and feel quite content. Modern happiness economics broadens the definition of “utility.” It measures social groupings, demographics, employment status, political environments, economic resources and the availability of public services to amass a comprehensive picture of what constitutes contentment in a country. These measurements facilitate global comparisons.

“For decades, and indeed centuries, the pursuit of happiness was limited to constitutional proclamations and its study to the ephemeral texts of philosophers.”

Most satisfaction happiness data comes from surveys that ask people to articulate their “expressed preferences.” In contrast, classical economics relies on “revealed preferences”; that is, researchers infer people’s motives based on their answers. Polls find that what people say is different from their theoretically predictable responses. This happens because ordinary citizens can’t affect macro issues, like government policies, that might influence their options for achieving joy. Also, credible results may depend on survey design, the way the researchers’ questions are stated, what order they’re presented in and even the researcher’s mood. In addition, “a naturally curmudgeonly” respondent who always replies negatively could bias the findings.

“The economics of happiness is an approach to assessing welfare, which combines the techniques typically used by economists with those more commonly used by psychologists.”

Research following the same people over time – called “panel data” – tends to alleviate the effect that personal traits have on responses. Questions about “life satisfaction” and joy yield highly correlated results. Researchers use questions about how respondents rate their lives – based on a “best possible” scenario – to compare their reactions with those of both their near neighbors and people far away. For instance, local respondents in Afghanistan express relatively high levels of personal contentment, but low levels in the category of “best-possible-life.”

Is Money the Root of Happiness?

“When income exceeds a certain threshold, it no longer brings more happiness,” according to the “Easterlin paradox.” Within a country, the rich are generally happier than the poor, but that’s not true over time or in comparisons among countries. People in richer countries are, on average, more content than those in poorer nations, but no connection emerges between rising wealth and rising happiness, even in poorer nations. Income disparities influence contentment less in the U.S. and Europe than in Latin America, maybe because people in the developed world see income gaps as motivators for success, not as lasting, insurmountable inequities.

“The economics of happiness does not purport to replace income-based measures of welfare but instead to complement them with broader measures of well-being.”

The “hedonic treadmill” explains one facet of the Easterlin paradox: Once people have the vital necessities of life, like food and shelter, their “rising aspirations” value relative wealth, not absolute wealth. They adapt to greater incomes and compare what they have to what others have. Losses affect them more than gains. Factors other than money – health, jobs and relationships – influence their happiness levels, which return to a “set point” over time. The exception is that “life-changing episodes,” such as bereavement or divorce, have a lasting impact.

“Deprivation and abject poverty in particular are very bad for happiness.”

Does wealth make you happy? How much more money could make you somewhat more happy, or a lot more? Because ambitions change, you may tend to believe that you were not as happy yesterday as you will be tomorrow – people don’t account for their improved conditions when looking at the past or future. Income variations explain changes in happiness less than other aspects of life, such as health and job status. In any given nation, wealthier people experience proportionately less happiness as their money grows. Research in “transition countries,” such as Eastern European nations in the 1990s, found that people derived less fulfillment from their jobs, health and families as their wealth grew, but this pattern has reversed in some countries in the intervening years. Folks in poor countries believe that happiness and money are strongly linked.

Money Makes the World Go Round, or Does It?

Comparing rates of happiness across countries can be tricky, given cultural, economic and social differences that testing may not capture. However, while some “outliers” defy the idea that wealthier nations are happier – Nigeria is very happy; Japan, not so much – other factors, such as age, marriage and jobs, regularly show up in happiness calculations. Age has a “U-shaped relationship” with contentment; people are least happy in their mid- to late 40s. Being married makes people happier, being unemployed makes them unhappy and being healthy makes them very happy. Education, gender and type of job have varying effects on joyfulness, depending on levels of educational opportunity, gender bias and insecurities about self-employment. For instance, self-employed people are more satisfied in the U.S. and in Russia, where that’s a routine option, than in Latin America, where the lack of jobs forces people to work for themselves. In America, women are happier. In Russia, men are happier. And, in Latin America, men and women are equally happy. Among these three regions, minorities are more content only in Russia, because political changes after communism gave them greater status.

“Are wealthier people happier, or are happier people more likely to be successful and earn more income over time?”

Studies in Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan show similar determinants of happiness as in other nations, except in “social capital.” Central Asians do not associate trust, religion and community with happiness, most likely due to their experiences within the former Soviet Union and their evolving political situations. Surveying residents’ level of contentment in Turkmenistan was impossible “due to the complex political situation.”

“The complexity of the relationship between happiness and income – and the range of other mediating factors – seems to increase as countries go up the development ladder.”

Among the citizens of transitional nations, Cubans stands out because they reputedly are “remarkably cheerful,” though polling shows less joy than in other Latin American nations. Cubans in Havana and Santiago favorably cite their superior health care and educational prospects, but rank their “economic opportunity” satisfaction lower than that of other Latin Americans. While optimism is related to happiness in most regions, in Africa it is “inversely correlated” to poverty: Poorer people are more optimistic about the next generation’s future. This may be because only the eternally hopeful can endure Africa’s vast, endemic poverty, or because people have made a “realistic assessment that conditions are so bad they can only improve.”

Health and Happiness

Worldwide, health is the major variable that influences joy, even more than money. Contented people are healthier, and healthy people are more content. In the developed nations of the OECD (Organisation for Economic Co-operation and Development), the higher the blood pressure, the lower the happiness level, and vice versa, indicating a “virtuous happiness and health circle.” Similar to the joy-to-income ratio, happiness doesn’t grow beyond a certain level of healthiness.

“In the same way that GNP allows us to track economic growth within and across countries, national well-being measures provide a complementary tool for assessing welfare trends.”

Gains in hygiene and medical care have a compelling impact on health and even survival (for example, available clean water means lower infant mortality). In higher-income populations, advances in science, not income, bring bigger strides in battling the illnesses that are more common in richer nations. Income and health care satisfaction are not correlated across nations: More Kenyans (by percentage of population) than Americans are content with their health. In fact, the U.S. scores 81st among 115 nations (lower than India, Malawi and Sierra Leone) in “public confidence in the health system.” Mental illness takes a greater toll on joy than physical ailments do. In the U.S. and Russia, “obese people are, on average, less happy than the non-obese.” But the levels of dissatisfaction relating to weight depend on your social group and location, since norms vary widely. In the U.S., poor minorities are less worried about being heavy than rich whites. Obesity affects mental health in that overweight people are likelier to suffer depression.

“The Happy Peasant and the Frustrated Achiever”

Up-and-comers are sadder than anyone else, including the destitute. Even when frustrated achievers move up, they view their success in comparison to others. They see their gains as insecure, because they fear reverting to their previous circumstances. In nations with rapidly accelerating economic growth, residents are more apt to feel less satisfied during growth’s early phases. Rural Chinese who move to big cities exhibit greater dissatisfaction at their new situation, despite their improved material comfort, because they compare themselves to the urbanites in their new surroundings, not to the farmers they left behind.

Happiness and Hard Times

Statistics don’t yet reveal how the 2008-2009 recession affected happiness levels, but clearly the greatest impact will stem from the insecurity of bad times, as well as the downturns in people’s fortunes. During the crises in Russia and Argentina in the 1990s and early 2000s, average happiness scores fell 8.7% in Russia and 10.7% in Argentina (where gross domestic product, or GDP, declined 10% in 2002). Diminishing happiness levels affect people’s health, job prospects, endorsement of democracy and free markets, and future aspirations. On the positive side, studies show that contentment levels rebound once the crisis passes. Russians and Argentines are again as happy as they were before their nations’ economic slumps.

Happiness Is a Warm Ballot Box

On average, people who “live in a context of freedom” express greater satisfaction than those who do not, and freedom ranks higher in importance for those who are used to it. Confidence and the public’s belief in political organizations tend to hew closely to recorded happiness levels. Involvement in democratic systems seems to raise happiness. The proof: Only Swiss nationals can vote in Switzerland, even on referendums that affect natives and non-natives. Researchers can isolate the variable factor that points to voting as a net positive for Swiss citizens. Similarly, those in free market are more satisfied, and satisfied citizens favor open markets, which augers well for emerging democracies. Yet people who live in corrupt, crime-ridden societies adjust their tolerance; they come to accept these inequities by “adapting to bad equilibrium.”

Policy and Happiness

If happy people worldwide, “from war-torn Afghanistan to new democracies like Chile and established ones like the United Kingdom,” are glad for the same core reasons, what does that mean for public policy? Happiness ratings could become indicators of human advancement, much as GDP measures economies. In fact, the U.K. and France are already investigating ways to incorporate “national well-being accounts” into their policy considerations. The government of Bhutan currently computes “gross national happiness” statistics as substitutes for GDP. The idea of using happiness scores in governance faces three main obstacles:

  1. The level of adaptation in human endeavor, “upward and downward,” may distort perceptions: If you tolerate crime and corruption in a society rife with them, what is your incentive to fix those problems?
  2. Governments must determine how to respond to the happy peasant anomaly: Should they make cheerful poor people aware of their misery, raise their income until they become sad, or just let them remain poor and cheery?
  3. “Cardinality versus ordinality” in happiness surveys doesn’t allow for distinctions between levels of sadness and joy, so is it better to make a blissful person happier, or a joyless individual happy?
“Happiness levels typically recover along with economies.”

Since most research suggests that happier people enjoy better health, jobs and relationships, perhaps the best policy would seek to abolish or minimize unhappiness.

About the Author

Carol Graham, a Senior Fellow at the Brookings Institution and a professor at the University of Maryland, served in advisory roles at the International Money Fund.


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Happiness around the world

Book Happiness around the world

The paradox of happy peasants and miserable millionaires

Oxford UP,


 



30 August 2025

Limits to Growth

Recommendation

This book is neither easy nor pleasant reading. However, it is not the purely pessimistic voice of doom or the rabid environmentalist tract that many reviews described when the first edition came out 30 years ago. Rather, it is a sort of cross between a primer on budgeting and the warning a doctor might give to an overweight smoker. A good budget rests on a few simple assumptions: Resources are limited; you must plan for the future; and if you overspend now, you’ll run short later. A doctor’s report would say, “You may not have symptoms now, but your habits will eventually cause your body to break down.” Donella Meadows, Jorgen Randers and Dennis Meadows present such a warning to all of human civilization. They analyze resource consumption, economic distribution, population growth and pollution. Their sobering conclusions amount to an attempt to start humanity on the road to a more equitable, sustainable society. The effort required to read this book comes in part from the writing, which varies drastically in style, tone and organizational choices, and in part from the innate challenges of the material. That said, BooksInShort recommends it to anyone who wishes to plan realistically for the future, whether you’re a CEO who wants to do sustainable business, a national leader who wants to create thriving human institutions, a community member concerned about local pollution, or a parent who does not want his or her children to grow up in a wasteland.

Take-Aways

  • Growth is not the same as progress.
  • Growth has limits.
  • Humanity has overstressed the environment, to the point where it may never recover.
  • If the human race does not radically change its path, it will produce massive, irreversible ecological disaster.
  • Even the natural resources that are not running out are becoming more expensive and more difficult to access.
  • All systems have feedback mechanisms that take time to work. Humanity is just now seeing the results of the feedback mechanisms in the natural world.
  • One factor contributing to likely ecological breakdown is that short-term economic planning looks only at the near future.
  • Human economic planning is also local: It looks only at the results close at hand.
  • Change is not only necessary but possible.
  • Society must learn to become sustainable.

Summary

The Consequences of “Overshoot”

Humanity is in a condition of overshoot. Overshoot happens all the time in daily life, whenever you accidentally go beyond physical limitations: Standing up too fast, you lose your balance. Driving recklessly on an icy road, you slide past a red light. Whether on the personal or global level, the same three causes contribute to overshoot:

  1. “Growth, acceleration [and] rapid change” stress the system.
  2. Pushed beyond its natural limits, the system can’t remain intact.
  3. Delays in perceiving the problem may lengthen response time in reacting to or stopping the overshoot.
“The idea that there might be limits to growth is for many people impossible to imagine. Limits are politically unmentionable and economically unthinkable.”

The most obvious signs of overshoot in today’s world are exploding population and massive pollution. Civilization’s addiction to growth is the underlying cause of both. Nearly everyone associates growth with progress. That may be true of individual wealth, but it is not the case with systems, which have inherent limits. Although some people warn that society must take action and correct the situation, knowing does not necessarily imply doing. Perhaps humanity will change its ways and create a sustainable civilization; perhaps it will suffer a terrible crash.

The Rich Get Richer

A construction crew builds one mile of road per week. The road’s growth is “linear” – it increases by the same amount during each time period. In contrast, human population growth is “exponential.” In 1650, the population grew at 0.3% annually. In 240 years, it doubled. In 1900, population was growing at 0.7% to 0.8% annually, a rate at which it would double every 100 years. In 1965, the growth rate reached 2% per year, a rate at which population would double every 36 years. Fortunately, the growth rate slowed because of a phenomenon called “demographic transition,” which occurs roughly two generations after a region industrializes. Yet, even though population is now growing more slowly than it did during the 1960s, it is still growing, and earth’s resources are still limited.

“The Earth is finite. Growth of anything physical, including the human population and its cars and houses and factories, cannot continue forever.”

Economic growth both causes and is affected by population growth. For much of recent history, the economy has been expanding exponentially and faster than population, in a positive cycle of growth and reinvestment. Abundant resources have fueled population increases.

All people do not benefit equally from the good economy. Those who are already privileged receive the most benefits, in what systems theory calls a “success to the successful” feedback loop. The result is a growing gap between rich and poor. Few of the world’s riches ever reach the very poor, resulting in pockets of extreme suffering and starvation. Although in theory the economy produces enough to feed everyone, the current system of distribution does not allow it.

“To reach sustainability, humanity must increase the consumption levels of the world’s poor, while at the same time reducing humanity’s total ecological footprint.”

At some point, both the population and the economy will reach their limits, and both will stop growing. This will happen whether or not the economy shifts to a postindustrial model, because even an information-based economy requires physical computers to store and process data. So, humanity must figure out how to manage material goods, where to direct the growth that still occurs, what the new socioeconomic system should look like and how much suffering it can tolerate.

What Limits Growth?

The Earth’s supply of energy or raw materials does not limit growth. Most resources still exist in abundance. The problem is rather that getting to them is becoming more expensive. When the cost of extracting resources exceeds the returns, the economy will begin to contract.

“There is substantial consensus that petroleum is the most limited of the important fossil fuels, and its global production will reach a maximum during the first half of this century.”

However, humans are exhausting and misusing these three categories of resources, thereby curbing economic growth:

  1. “Renewable resources” – These include living material, such as forests and fish; nonliving material, such as water; and combinations of the two, such as soil. Humans are overusing these resources. Increased food production has depleted the soil. Increased population has depleted water supplies. Food production is reaching a plateau. To feed a rising population, people will have to farm land that is less arable, resulting in higher costs and lower returns. Farmers can make some accommodations, such as more efficient irrigation and pumping groundwater to make up for rainfall shortages, although groundwater, too, has limits.
  2. “Nonrenewable resources” – While estimates differ somewhat, most experts predict that petroleum production will peak during the first half of the twenty-first century, yet the global demand will continue to rise even after that. Although this situation will stress the system, it will drive the economy in the right direction by increasing incentives for efficiency and conservation. Similarly, as key industrial materials such as copper and nickel become scarce, industries will learn to get by with less and to recycle.
  3. “Pollution and waste” – Civilization has recognized the dangers of some pollutants and reduced them: The levels of cesium-137 in cow’s milk, lead in children’s blood and DDT in herring have all plummeted in the last 20 to 40 years. However, it has failed to address several other kinds of pollution, such as the more than “65,000 industrial chemicals...in regular commercial use.” Chlorofluorocarbons (CFCs) have damaged the planet’s ozone layer, and carbon dioxide is contributing to the greenhouse effect and climate change.
“A sustainable society would be interested in qualitative development, not physical expansion. It would use material growth as a considered tool, not a perpetual mandate.”

Solving the problems of pollution and depleted resources will act as a brake on economic growth. Right now, humanity is like a person dipping into capital, rather than living on interest. That may work for a while, but eventually, you’re bankrupt.

Restoring the Ozone Layer

Change is possible. The story of the ozone layer offers a promising example. In 1974, scientists realized that the chlorine atoms in CFCs could damage the ozone layer. International scientific investigations, including a British Antarctic Survey in 1984, “measured a 40 percent decrease in ozone in the stratosphere over their survey site.” Although industry and governments initially put up resistance and denied the problem, after complex negotiations, nations signed the Protocol on Substances that Deplete the Ozone Layer in 1987. Enforcing the protocol, including blocking “CFC smuggling,” has been difficult, and ongoing monitoring is still necessary. However, the protocol shows that humanity can pull together and shift from destruction to sustainability.

The Market Is Not the Answer

Many economists believe that market forces will produce negative feedback loops that will increase the price of scarce materials, forcing smart entrepreneurs to step in and invent substitutes. Or, they imagine that if pricing changes to include social costs such as pollution, manufacturers will have an incentive to develop more efficient, cleaner processes. In fact, sometimes such feedback loops do correct overshoot problems, at least partially. However, technology or markets are not sufficient solutions, for these reasons:

  • Closing the information loop takes time: The damaging effects of a process may not become evident for years or even decades.
  • Rich people or regions can displace the negative effects of development onto others, dumping pollutants into poor neighborhoods, for example.
  • Governments may reward businesses for pushing natural systems too far, as it did in the case of ocean fishing.

So When Is the World Ending?

If civilization is in overshoot and on the brink of environmental collapse, how long has humanity got? The short answer is “Who knows?” Creating predictive models of global technological civilization is tremendously complex. The answers such models provide vary, depending on the assumptions on which you base them, about the ecology’s carrying capacity, future technological developments, and which changes humans will make and when. For example, if you assume, in a dream scenario, that economic growth has no physical limits, you come up with a world population that grows to about nine billion before leveling off through demographic transition in 2080 and an economy that produces 30 times as much as it did in 2000. If you assume that current policies will not change, you see a drop in standard of living during the first few decades of the twenty-first century, increasing pollution, and massive global poisoning and erratic shocks to the system by the end of the century. However, if society takes steps to limit population and pollution, the world will experience a smoother, less painful transition.

The Sustainable Society

The planet’s natural systems are sending clear signals indicating that humans must change their ways. People have three choices about what to do:

  1. Denial – Not really a solution, although it may feel good for a little while.
  2. “Technical or economic fixes” – For example, comprehensive recycling programs and replenishment of renewable resources, such as forests. Unfortunately, while these virtuous programs may work in the short term, they are only temporary solutions.
  3. “Work on the underlying causes” – In other words, change the whole system, its underlying structures and its assumptions about the nature of the world. Humanity must transform its “norms, goals, expectations, pressures, incentives and costs” – the factors that have created the positive feedback loops that have pushed society into overshoot.
“Sustainability, sufficiency and equity require structural change; they require a revolution, not in the political sense...but in the more profound sense of the agricultural or industrial revolutions.”

Rather than pursuing growth for its own sake, society will learn to evaluate each new technology in terms of its sustainability. The higher the population and the level of waste technology produces, the harder bringing civilization into balance will become. A sustainable society has these characteristics:

  • It uses renewable resources only as fast as it can regenerate them, and uses nonrenewable resources only at the rate at which it can develop “renewable substitutes.”
  • It emits pollution only at a rate and level that the environment can tolerate.
  • It allows great variation in culture, but insists on feedback loops that accurately communicate information about the ecological costs of all choices.
  • It responds quickly to damage to a natural system.
  • Its planning horizon is long.
  • It addresses problems such as poverty, unemployment and “unmet physical needs.”
“Lies distort the information stream. A system cannot function well if its information streams are corrupted by lies.”

Individuals can bring this new society into being in many ways. As an individual, you can take corrective actions such as conserving energy and recycling, but those are only stepping stones. Here’s how to make a broader contribution:

  • “Visioning” – Imagine what a sustainable society would look like. How would you make sure everyone has enough? How can you bring the economy into ecological balance?
  • Networking – Networks can spread the word to their members that political and media messages proclaiming that everything is fine and no change is necessary are false. They can also show them that warnings aren’t predictions of doom but rather guides for action.
  • Learning – No one knows exactly what the future holds or what a sustainable society looks like. Nature can be a model, but finding the particular forms of sustainable societies will require study – and love, so people learn to support one another and help society survive the looming crisis.

About the Authors

Donella Meadows founded the Sustainability Institute. Jorgen Randers is president emeritus of the Norwegian School of Management. Dennis Meadows is director of the Institute for Policy and Social Science Research at the University of New Hampshire.


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Limits to Growth

Book Limits to Growth

The 30-Year Update

Earthscan,
First Edition:2004


 




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