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Friday, March 28, 2008

There you go again

Historically, natural resources have been subject to long periods of chronic scarcity or abundance with prices rising and then falling back towards their cost of production for extended periods of time. The bullish phases have typically lasted 15 to 25 years until supply finally overtakes demand again. This adjustment usually entails some combination of greater production, more efficient usage and/or creation of a substitute. Countries which are large net exporters of natural resources will seem to have an economic wind at their backs during the bullish phase (think Russia, Brazil and Australia) and more of an economic headwind during the bearish phase. Note also that the magnitude of the price swings and the difficulty of adjustment can be exacerbated by bad economic policy.

This Malthusian redux appeared recently, although in fairness, the authors are not quite full-blown apocaholics.

Now and then across the centuries, powerful voices have warned that human activity would overwhelm the earth's resources. The Cassandras always proved wrong. Each time, there were new resources to discover, new technologies to propel grow.

Today the old fears are back.

Although a Malthusian catastrophe is not at hand, the resource constraints foreseen by the Club of Rome are more evident today than at any time since the 1972 publication of the think tank's famous book, "The Limits of Growth." Steady increases in the prices for oil, wheat, copper and other commodities -- some of which have set record highs this month -- are signs of a lasting shift in demand as yet unmatched by rising supply.

As the world grows more populous -- the United Nations projects eight billion people by 2025, up from 6.6 billion today -- it also is growing more prosperous. The average person is consuming more food, water, metal and power. Growing numbers of China's 1.3 billion people and India's 1.1 billion are stepping up to the middle class, adopting the high-protein diets, gasoline-fueled transport and electric gadgets that developed nations enjoy.

The result is that demand for resources has soared. If supplies don't keep pace, prices are likely to climb further, economic growth in rich and poor nations alike could suffer, and some fear violent conflicts could ensue.

In the past, economic forces spurred solutions. Scarcity of resource led to higher prices, and higher prices eventually led to conservation and innovation. Whale oil was a popular source of lighting in the 19th century. Prices soared in the middle of the century, and people sought other ways to fuel lamps. In 1846, Abraham Gesner began developing kerosene, a cleaner-burning alternative. By the end of the century, whale oil cost less than it did in 1831.

A similar pattern could unfold again. But economic forces alone may not be able to fix the problems this time around. Societies as different as the U.S. and China face stiff political resistance to boosting water prices to encourage efficient use, particularly from farmers. When resources such as water are shared across borders, establishing a pricing framework can be thorny. And in many developing nations, food-subsidy programs make it less likely that rising prices will spur change.

Indeed, the true lesson of Thomas Malthus, an English economist who died in 1834, isn't that the world is doomed, but that preservation of human life requires analysis and then tough action. Given the history of England, with its plagues and famines, Malthus had good cause to wonder if society was "condemned to a perpetual oscillation between happiness and misery." That he was able to analyze that "perpetual oscillation" set him and his time apart from England's past. And that capacity to understand and respond meant that the world was less Malthusian thereafter.

Political responses can alter rules and institutional arrangements so as to facilitate the adjustment by consumers and producers or they can make things worse, particularly by trying to choose the solutions. (Think ethanol from corn...)

I suspect that many people haven't met The Doomslayer.

This is the litany : Our resources are running out. The air is bad, the water worse. The planet's species are dying off - more exactly, we're killing them -at the staggering rate of 100,000 per year, a figure that works out to almost 2,000 species per week, 300 per day, 10 per hour, another dead species every six minutes.We're trashing the planet, washing away the topsoil, paving over our farmlands, systematically deforesting our wildernesses, decimating the biota, and ultimately killing ourselves.

The world is getting progressively poorer, and it's all because of population, or more precisely, overpopulation. There's a finite store of resources on our pale blue dot, spaceship Earth, our small and fragile tiny planet, and we're fast approaching its ultimate carrying capacity. The limits to growth are finally upon us, and we're living on borrowed time. The laws of population growth are inexorable. Unless we act decisively, the final result is written in stone: mass poverty, famine, starvation, and death.

Time is short, and we have to act now.

That's the standard and canonical litany. It's been drilled into our heads so far and so forcefully that to hear it yet once more is ... well, it's almost reassuring. It's comforting, oddly consoling - at least we're face to face with the enemies: consumption, population, mindless growth. And we know the solution: cut back, contract, make do with less. "Live simply so that others may simply live."

There's just one problem with The Litany, just one slight little wee imperfection: every item in that dim and dreary recitation, each and every last claim, is false. Incorrect. At variance with the truth.

"Our species is better off in just about every measurable material way," he says. "Just about every important long-run measure of human material welfare shows improvement over the decades and centuries, in the United States and the rest of the world. Raw materials - all of them - have become less scarce rather than more. The air in the US and in other rich countries is irrefutably safer to breathe. Water cleanliness has improved. The environment is increasingly healthy, with every prospect that this trend will continue.

Julian Simon: The facts are fundamental.

Garrett Hardin: The facts are not fundamental. The theory is fundamental. - from a 1982 debate with the UC Santa Barbara biologist The doomslayer-doomsayer debate, Simon thinks, is an opposition between fact and bad theory, a case of empirical reality versus abstract principles that purport to define the way things work but don't.

"It's the difference," he says, "between a speculative analysis of what must happen versus my empirical analysis of what has happened over the long sweep of history."

The paradox is that those abstract principles and speculative analyses seem so very logical and believable, whereas the facts themselves, the story of what has happened, appear wholly illogical and impossible to explain. After all, people are fruitful and they multiply but the stores of raw materials in the earth's crust certainly don't, so how can it be possible that, as the world's population doubles, the price of raw materials is cut in half?

It makes no sense. Yet it has happened. So there must be an explanation.

And there is: resources, for the most part, don't grow on trees. People produce them, they create them, whether it be food, factories, machines, new technologies, or stockpiles of mined, refined, and purified raw materials.

"Resources come out of people's minds more than out of the ground or air," says Simon. "Minds matter economically as much as or more than hands or mouths. Human beings create more than they use, on average. It had to be so, or we would be an extinct species."

The defect of the Malthusian models, superficially plausible but invariably wrong, is that they leave the human mind out of the equation. "These models simply do not comprehend key elements of people - the imaginative and creative."

As for the future, "This is my long-run forecast in brief," says Simon. "The material conditions of life will continue to get better for most people, in most countries, most of the time, indefinitely. Within a century or two, all nations and most of humanity will be at or above today's Western living standards.

"I also speculate, however, that many people will continue to think and say that the conditions of life are getting worse."

Eventually the current bullish phase for natural resources will end, although not without more predictions of doom, and those familiar with the ideas of the doomslayer will smile.

See also videos of Julian Simon.

10 comments:

erp said...

I love this line, "... the final result is written in stone: mass poverty, famine, starvation, and death."

At least they're not worrying about nuclear annihilation any more and that's a relief.

When a lefty says "Time is short, and we have to act now, " grab you wallet. They have visions of federal sugarplums dancing in their eyes.

Howard said...

erp,

When I confront the statists about how wrong they have been, time and time again, the response is usually a blank stare.

erp said...

What else can can the poor dears do? They deal in feelings, not facts.

Hey Skipper said...

This adjustment usually entails some combination of greater production, more efficient usage and/or creation of a substitute.

I bought a new bicycle last week.

In comparison to its predecessor, 70% of its weight is no longer aluminum, but carbon-fiber.

Bret said...

What bike did you get? I'm contemplating buying a new mountain bike.

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Harry Eagar said...

Not true for helium.

Howard said...

Not true for helium.

On the lack of a substitute, the fate of the world and all future prosperity hinges. Remember, markets fail, use markets!

Harry Eagar said...

'On the lack of a substitute, the fate of the world and all future prosperity hinges'

Largely true.

And the free market is destroying the resource.

Hey Skipper said...

Bret:

A Specialized Roubaix Comp.

Not a mountain bike; in any event, it is a bike absent a lot of aluminum.