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January 7, 2019

The Fractal Nature of Land and Finance


“Smooth shapes are rare in the wild but are extremely important in the ivory tower and factory.” – Benoit Mandelbrot

The word fractal comes from the Latin word “fractus,” meaning broken. Essentially, fractals are when you break something into smaller and smaller pieces that remain self-similar to the whole. Fractals are everywhere in nature — from snowflakes to river systems to trees.

As Benoit Mandelbrot wrote in his seminal book, The Fractal Nature of Geometry, “clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line.” Mandelbrot looks into the formless and finds patterns that unlock how to define the universe around us. Yet, as a society, we are blind. As John Fowles, author of The Tree, accurately assesses, we view nature as something that is separate and foreign, rather than something that is inherent within us. In doing so we focus on the created versus the creation.

A perfect example of this can be seen in how various NGOs, banks, and policymakers have vertically been looking to achieve scale for nature-based investments. This runs counter to the horizontal nature of the land itself.  Some of the leading NGOs state that the way to scale nature-based investments is a function of policy drivers. What they are asking for is to create a regulation before trading and before producing — totally backwards.

“Geometric, linear cities make geometric linear people, wood cities make human beings.” – John Fowles

On this faulty premise, NGOs invest $1 into a pilot, spend $3 in telling the world how novel it is and fundraise $10 from donors to lobby for regulations. The regulations become a fertile playing field where future budgetary line items are secured, adding complexity to the regulation process. We saw this play out in the last attempt to regulate carbon in the United States via the Waxman Markey Bill. This is not the scaling of nature-based investments. This is siloing of finance in the hands of the few.

The disconnect is banks and institutional investors are victims of how time relates to the law of large numbers. That is why many institutional investors will not entertain investments under $50m and where they are only 10% of the investment. It takes the same due diligence process (time) to invest $1m as it does $50m.

There is a way to break the logjam when you change your standpoint of scale. As Mandelbrot states, “So what is this ball of thread, anyway? Zero, one or three dimensions? It depends on your point of view. For a complex natural shape, dimension is relative. It varies with the observer. The same object can have more than one dimension, depending on how you measure it and what you want to do with it.”

There are many dimensions of fractals. Scaling can happen vertically or it can happen horizontally as with self-affine type fractals. When you look at a landscape, what you see are horizontal fractals. It is this change in point of view that is key to the scaling of nature-based investments. When such a change in standpoint occurs, one starts to build in greater resilience. How? Take an EKG to determine if a person’s heart is healthy or not. If the EKG shows lots of spiky readings, it is healthy. Less so, not so much. The key is variance. Variance builds resilience. The key to resilience is diversity.

A bank or NGO uses the vertical nature of scale to get resilience. What is left out of this equation is the lack of diversity of thought, expression, and nature. It is the roughness of the natural world that enables resilience. While cities pursue a linear Euclidean dream, nature’s creation unfolds one fractal at a time.

The land has long been a staple of wealth and taxation as well as a bedrock for democracy. In the 1600s, William Petty set in motion a revolution when he claimed that land is capital and that the only way to unlock its value was through labor. However, the division of man’s labors and the enclosure of “life’s risk” created a moral challenge — and a second revolution.

As Jonathan Levy writes in Freaks of Fortune: The Emerging World of Capitalism and Risk in America, “the moral conundrum that posed, and still poses, is that individual freedom required a new form of dependence. A dependence that is, upon a new corporate financial system, the central nervous system of a rising capitalism that fed off radical uncertainty and ceaseless change.” Levy goes on to say, “As free men began to assume their own personal risk, old forms of security and dependence perished.”

What were those old forms of security? The rural parts of the United States used land as a form of landed independence where wealth was stored in soil. In 1850, farm property accounted for nearly 50% of the nation’s wealth. It was the value of land, not financial assets, that provided stability. But as farmers needed to make further improvements in land and sought to expand their holdings as the country expanded westward, the nascent financial market stepped in through mortgages and life insurance.

This created a cycle that would ultimately shift landed independence to dependence upon the financial system, forcing farmers to sell their products into the commodities market. The biggest risk to a mortgage was the future exertions of the farmer. The largest owners of mortgages were insurance companies. So, the life insurance market insured a man’s property — his life — leading to a double commodification of a farmer’s labor.

As time marched on, the growth of government required new forms of taxation to support scale. The land has been supplanted by income taxation as a wealth factor. With land, there is an accumulation of wealth unfolding. But income provides liquidity mainly today for the insatiable desires of government and its perpetuation.

Now it is time to realize land’s value is not limited to the extractive value of labor over the service it provides. In doing so, we can recalibrate the balance of our capital and land systems – and finally put nature on the balance sheet. Our firm is working on several ways to deliver horizontal scaling. For just as land is taxed as real estate or given land use taxation treatment where the tax is based on the use value as opposed to fair market value, we can broaden our net and recognize the ecological services are rooted in real estate. This will move land and money horizontally over vertically into the banking system. By moving horizontally, the money stays in the locality and scales while also building resilience.

Then, and only then, will the value of creation return as the central focus of our lives. With this reality comes the importance of how the sigmoid curve of growth and creation plays out in a multi-fractal world.

PUBLICATION: https://www.linkedin.com/pulse/fractal-nature-land-finance-chandler-van-voorhis/