Scarcity and Growth Revisited

Natural Resources and the Environment in the New Millenium

R. David Professor Simpson, Michael A. Professor Toman, Robert U. Professor Ayres, R. David Professor Simpson, Michael A. Professor Toman, Robert U. Professor Ayres

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136524721
• Edition: 1
• Topic: Biological Sciences
• Subtopic: Ecology
• Index: Biological Sciences

In this volume, a group of distinguished international scholars provides a fresh investigation of the most fundamental issues involved in our dependence on natural resources. In Scarcity and Growth (RFF, 1963) and Scarcity and Growth Reconsidered (RFF, 1979), researchers considered the long-term implications of resource scarcity for economic growth and human well-being. Scarcity and Growth Revisited examines these implications with 25 years of new learning and experience. It finds that concerns about resource scarcity have changed in essential ways. In contrast with the earlier preoccupation with the adequacy of fuel, mineral, and agricultural resources and the efficiency by which they are allocated, the greatest concern today is about the Earth's limited capacity to handle the environmental consequences of resource extraction and use. Opinion among scholars is divided on the ability of technological innovation to ameliorate this 'new scarcity.' However, even the book's more optimistic authors agree that the problems will not be successfully overcome without significant advances in the legal, financial, and other social institutions that protect the environment and support technical innovation. Scarcity and Growth Revisited incorporates expert perspectives from the physical and life sciences, as well as economics. It includes issues confronting the developing world as well as industrialized societies. The book begins with a review of the debate about scarcity and economic growth and a review of current assessments of natural resource availability and consumption. The twelve chapters that follow provide an accessible, lively, and authoritative update to an enduring-but changing-debate.

CHAPTER I

Introduction

The “New Scarcity”

R. David Simpson, Michael A. Toman,
and Robert U. Ayres

ONE OF THE MOST famous and influential books ever published on resources and the human prospect appeared in 1963. In Scarcity and Growth, Howard J. Barnett and Chandler Morse interpreted the extensive data assembled by their colleagues Neal Potter and T. Francis Christy Jr. in another seminal work, Trends in Natural Resource Commodities (1962). From those data Barnett and Morse made a compelling case that resource scarcity did not yet, probably would not soon, and conceivably might not ever, halt economic growth.

The interplay between scarcity and growth is an issue of perennial concern, however. Only a decade after Barnett and Morse published their work, pundits, politicians, and activists announced the arrival of an “energy crisis.” Consumers accustomed to decades of the declining resource prices Barnett and Morse had documented found themselves waiting in long lines and paying skyrocketing prices to purchase gasoline. Academic researchers dusted off the writings of scholars such as Harold Hotelling (1931) and M. King Hubbert (1949), looking for insights into the causes and implications of rediscovered scarcities.

At roughly the same time, other types of scarcity were being recognized. For much of human history, sky, water, and land were employed for waste disposal with little thought about the consequences. When people were few and unspoiled territory plentiful, the consequences of waste were manageable. As these circumstances changed, the consequences of pollution mounted. A human population that stood at less than a billion in 1800 had climbed to 2.5 billion by 1950. By the 1970s some commentators were making apocalyptic projections for continued growth to be followed shortly by catastrophic decline (Ehrlich 1968). Humanity was finding itself increasingly living cheek-by-jowl with its own refuse.

That refuse was a more potent witch's brew than our pre-industrial ancestors were capable of producing. The concentrated wastes of humans and animals have always been a breeding ground for disease, and packing ever-larger populations into cities compounded these risks. With the industrial revolution, however, new poisons came into broader circulation. Smoke from her “dark Satanic mills” stained “England's green and pleasant land.” In the early 1950s, thousands of Londoners died in the “killer fog” of coal smoke. Another fossil fuel, petroleum, caused further problems. From Los Angeles to Athens to Tokyo, cities were increasingly smothered by the exhaust of their vehicles. Paper, metal working, chemical, and other industries fouled air, water, and land with toxic cocktails.

So, in addition to renewed concern regarding the scarcity of energy resources, the early 1970s also saw some of the first broad manifestations of concern with what we will call in this volume the “New Scarcity”—the limitations on the environment's capacity to absorb and neutralize the unprecedented waste streams humanity looses on it. From celebration of the first Earth Day on April 22, 1970, to the first United Nations Conference on the Environment in Stockholm in 1972, to the enactment of broad-reaching Environmental Protection Acts in the United States and other nations, citizens expressed their concerns over environmental degradation, and governments responded.

Scholars also weighed in. The Club of Rome's controversial 1972 volume Limits to Growth predicted that such limits were fast approaching, and global society ignored them at our collective peril (Meadows et al. 1972). Others were quick to fault the analysis in Limits to Growth (e.g., Nordhaus 1974). New scholarship appeared on the economics and management of natural resources (e.g., Dasgupta and Heal 1974, 1979; Solow 1974; Stiglitz 1974; Clark 1976).

In the fall of 1976, Resources for the Future held a conference to again investigate the topic of Scarcity and Growth. In many respects Scarcity and Growth Reconsidered (Smith 1979), the volume of collected papers and commentaries from that conference, echoes the optimism of its predecessor. That optimism had been buffeted somewhat by the events of the 1970s, however. Moreover, as one might expect from a volume combining the contributions of a dozen different authors, Scarcity and Growth Reconsidered had a less synoptic perspective than its predecessor. Not only did some contributors raise doubts about whether Barnett and Morse's relatively rosy perspective was justified, several also raised concerns regarding the limitations of received economic theory as a tool for analyzing scarcity and growth. And, it must be said, Scarcity and Growth Reconsidered evidenced some groping on the part of the practitioners and innovators of “received theory” to determine what their models could, in fact, say on the topic. Several of its chapters focused on determining what it was that available data could tell us about scarcity and growth, rather than on making pronouncements regarding long-term prospects from such data.

More than a quarter of a century has passed since the chapters constituting Scarcity and Growth Reconsidered were collected. New modes of analysis have been developed in many disciplines. New empirical understandings have come to the fore. New questions have arisen. Even if we are no closer to a final resolution of questions of scarcity and growth, we are in a position both to bring new tools and facts to bear on them and to consider nuances that must now be addressed in answering them.

To investigate these issues, Resources for the Future, with generous assistance from the Vera I. Heinz Endowment, the Netherlands Ministry of the Environment, and the European Commission, again assembled a panel of distinguished economists, natural scientists, and others to discuss scarcity and growth. On 18 and 19 November 2002, authors presented their draft papers and discussed them with other participants.¹ Following these discussions, the authors revised their contributions extensively.

Before reviewing these contributions, however, let us briefly discuss further the background and motivation for this undertaking.

Scarcity and Growth: The Long View

Before detailing our reasons for again revisiting a classic, we may first take inspiration from it and give the reader a broad overview of the issues, both historical and current, motivating continuing interest in scarcity and growth. Barnett and Morse displayed a genuine erudition that is sadly absent from much of what the economics profession produces today. Many readers remember Scarcity and Growth for its substantial quantitative and diagrammatic analyses. However, its first 100-odd pages are dedicated to an extensive, authoritative, fascinating, and in contrast to much that has been written on the subject in the years since, refreshingly jargon- and mathematics-free account of what great thinkers of earlier eras and many disciplines had to say about scarcity and its implications for continuing human well-being. Thus, when Barnett and Morse proceeded to present their quantitative analysis in the last two-thirds of Scarcity and Growth, the reader had been afforded a very complete introduction to the topic.

We cannot duplicate Barnett and Morse's introduction. We commend it to the reader for its careful scholarship and as an introduction to the perennial questions of Scarcity and Growth that remain as relevant as they were in the year their book was written. We will also, however, in the space of the few pages available now for the purpose, attempt to radically condense and to slightly update their introduction for readers of this volume.²

Perhaps the most important point the original Scarcity and Growth established is that world views have changed remarkably in the last two centuries, particularly among economists. Thomas Carlyle bestowed the sobriquet “the dismal science” on economics in response to the writings of classical economists.³ It is ironic that some two hundred years later, economists have come to be seen by some as Panglossian apologists for “business as usual” scenarios in which the invisible hand of the market will solve all problems: in fact, some early economists argued that our problems are insoluble.

Of course, there have always been optimists as well as pessimists. Quintus Tertillianus, writing in 200 A.D., was surely not the first to suppose that the world was in decline. “We are burdensome to the world,” he wrote. “The resources are scarcely adequate to us…. Truly, pestilence and hunger and war and flood must be considered as a remedy for nations, like a pruning back of the human race” (quoted in Johnson 2000).⁴

Others, of course, had rosier perspectives, and such perspectives could claim an even more ancient pedigree. According to the Old Testament, God is supposed to have been a “resource optimist”:

Let us make man in our image, after our likeness: and let them have dominion over the fish of the sea, and over the fowl of the air, and over the cattle, and over all the earth….

And God blessed them, and God said unto them, Be fruitful, and multiply, and replenish the earth, and subdue it: and have dominion over the fish of the sea, and over the fowl of the air, and over every living thing that moveth upon the earth. (Genesis 1:26, 28)

God promised Abraham, “I will make thee exceeding fruitful, and I will make nations of thee” (Genesis 17:6). The Almighty did not seem worried about the limitations of the earth's resources for Abraham's descendents, as God also said, “I will multiply thy seed as the stars of the heaven, and as the sand which is upon the sea shore” (Genesis 22:17).

Yet a very different view of the human prospect dominated many of the writings of classical economists. In An Essay on the Principle of Population (1798), the British economist and cleric Thomas Malthus advanced his well-known theory that population tends to increase geometrically, while food production can be expected to grow at best arithmetically. As a consequence, humanity tends inexorably to approach what came to be dubbed almost two centuries later “the limits to growth,” often with catastrophic consequences.

The early economists were a dismal bunch.⁵ Even Adam Smith (1776), the founder of the modern discipline, opined, “Every species of animals naturally multiplies to the means of their subsistence, and no species can ever multiply beyond it.” Malthus contemporary David Ricardo is remembered for his theory of rent: Resources are in short supply. Those lands favored by location or other attributes command high prices (“rents”) and are quickly appropriated and exploited. This leaves latecomers to the economic scene with meager pickings from which to choose. As Robert Heilbroner remarked, “Anyone who was not sufficiently depressed by Malthus had only to turn to David Ricardo” (1967, 86).

Ironically, one of the fundamental insights of economic analysis led the classical economists to their misguided, or to give them the greatest benefit of the doubt and to suppose with today's pessimists that the case is not yet closed, premature “dismal” pronouncement. The principle of diminishing returns explains a tremendous amount in economics. The more there is of something, the less productive is still more of it. If natural resources are limited, we can expand the human workforce and manufactured capital employed in combination with them. Without more resources, though, our gains from employing more of other factors of production will be progressively smaller. It is the principle of diminishing returns that underlies the use of marginal analysis in economics, and it is marginal analysis that resolves the greatest puzzle in economics: the paradox of value. Why are some things, like water, both so useful and so cheap relative to things like diamonds, which are neither? Because of diminishing returns. There is so much water relative to diamonds that a little more water is of little incremental, or marginal, value.

The principle of diminishing returns is, then, central in economics. Yet its straightforward implication is that economies relying on fixed stocks of land and other resources are, at best, destined for stagnation. At worst, population growth in combination with profligate resource use and a lack of foresight spell doom for the majority of mankind.

Many once believed this. The great figures of early economics were often inaccurate prognosticators. William Stanley Jevons, who first formalized marginal analysis, is famous for his predictions concerning the calamities that awaited when coal was exhausted. His dire predictions now have a faintly comic tone: Jevons stockpiled reams of writing paper in anticipation of its eventual shortage.

The following might have been written by a modern conservationist:

The world is really a very small place, and there is not room in it for the opening up of rich new resources during many decades at as rapid a rate as has prevailed during the last three or four. When new countries begin to need most of their own food and other raw produce, improvements in transport will count for little.

This quote is not taken from any consensus report of the recently concluded World Summit on Sustainable Development. It was, rather, the opinion of Alfred Marshall (1907), among the most important economists working at the turn of the twentieth century.

Marshall did, however, also point the way out of the resource-constrained cul-de-sac. He went on to write that “the Law of Diminishing Returns can be opposed only by further improvements in production; and improvements in production must themselves gradually show a diminishing return.” Marshall was adopting the wisdom expounded by John Stuart Mill, the greatest economist between his generation and that of Malthus and Ricardo. Mill (1848) amended Smith, Malthus, and Ricardo by noting that the law of diminishing returns might “be suspended, or temporarily controlled, by whatever adds to the general power of mankind over nature; and especially by any extension of their knowledge.”

Subsequent generations have yet to determine whether the implications of diminishing returns have, in fact, been “suspended” or merely “temporarily controlled” by the “extension of their knowledge.” As economics evolved, however, statistical evidence was marshaled that seemed to show that knowledge was accumulating at an impressive rate (we will discuss a little later whether the evidence does in fact show this). Robert Solow, one of the leading economists of the post-World War II generation, is associated with the “residual” to which his name is often attached. This residual is the share of output growth that cannot be explained by an increase in the use of inputs.

The gross domestic product of the United States grew at an average annual rate of some 3.4 percent between 1950 and 2000. We can decompose the growth of output from one year to the next as follows. It is the rate at which output grows in response to increases in labor hours times the change in labor hours, plus the rate at which output changes with changes in equipment used times the change in equipment used, etc., for all inputs. Economic theory shows that the rate at which output changes with changes in the quantity of an input is proportional to the price of that input. We can, then, decompose changes in output into constituent elements: the change in output due to change in labor plus the change due to change in capital equipment and so on, weighting each by its price. Solow noted that these changes fall short of adding up. There is a residual left over—a difference between observed rates of overall growth and measurable changes due to changes in input use. In the decomposition we have just described, there is a missing term for the rate at which output changes with changes in unmeasured inputs times the proportional change in unmeasured inputs. This residual, commonly called multifactor productivity growth, averaged about 1.2 percent per year between 1950 and 2000.

The reason the residual is missing from the calculation we have described above is, of course, that it cannot be measured. In Moses Abramowitz's (1956) memorable phrase, the residual is “a measure of our ignorance.” It is, by definition, what is left over when the effects of all measurable explanatory variables have been calculated. Despite this fundamental uncertainty, the productivity residual is often interpreted as the effect of technological progress. To foreshadow an issue we will discuss below, however, we should note other possibilities. The “missing input” the residual represents could also be an increase in the unmeasured consumption of resources that are not traded in markets, a category in which we might also include degradation of the environment.

What does productivity growth mean? If we take the rosy view that it can be extrapolated into the indefinite future, it means that we have little to worry about. Recent work by Martin Weitzman suggests that, if we assume that productivity growth will continue at its historical l...

Table of contents

• Front Cover
• Title Page
• Copyright
• About Resources for the Future and RFF Press
• Dedication
• Contents
• About the Contributors
• 1. Introduction: The “New Scarcity”
• 2. Mineral Resources and Consumption in the Twenty-First Century33
• 3. Economics of Scarcity: The State of the Debate
• 4. Ecosystem Goods and Services and Their Limits: The Roles of Biological Diversity and Management Practices
• 5. Emerging Scarcities: Bioenergy-Food Competition in a Carbon Constrained World
• 6. Sustainability and Its Economic Interpretations
• 7. Resources, Scarcity Technology, and Growth
• 8. Endogenous Technological Change, Natural Resources, and Growth
• 9. Evolutionary Analysis of the Relationship between Economic Growth, Environmental Quality, and Resource Scarcity
• 10. Environmental Policy as a Tool for Sustainability
• 11. Public Policy: Inducing Investment in Innovation
• 12. The Marvels and Perils of Modernity: A Comment
• 13. Intragenerational versus Intergenerational Equity: Views from the South
• 14. Sustainable Economic Development in the World of Today's Poor
• Index