Scarcity and Growth Reconsidered

V. Kerry Smith

• Publisher: RFF Press
• Year: 2013
• ISBN:
  9781135989453
• Edition: 1
• Topic: Economía
• Subtopic: Desarrollo sostenible

Current views on resource availability are examined, along with the original Barnett-Morse thesis of resource supply.Originally published in 1979

1
The Economics of Natural Resource Scarcity: An Interpretative Introduction

V. Kerry Smith and John V. Krutilla
V. Kerry Smith and John V. Krutilla are Senior Fellows in the quality of the environment division, Resources for the Future. A number of individuals have generously commented on earlier drafts of this paper. We would especially like to thank K. J. Arrow, H. J. Barnett, W. J. Baumol, E. N. Castle, R. C. d'Arge, R. Day, B. C. Field, A. C. Fisher, F. M. Fisher, G. Heal, A. V. Kneese, C. Morse, P. Portney, V. Ruttan, T. Sandler, T. W. Schultz, W. D. Schulze, M. Sharefkin, R. M. Solow, J. Sonstelie, and W. Spofford. Thanks are also due the conference participants since many of their remarks have influenced our thinking on these issues. Smith's research was partially supported by the John Simon Guggenheim Memorial Foundation.

I
Introduction

It is doubtful that any country has been more richly endowed with natural resources than the United States. The diversity and abundance of its resources contributed to America's rapid industrial development and emergence as a paramount world power. New supplies were forthcoming at rates equal to demands and at almost continuously falling supply prices, so that not until the mid-1900s was any general concern expressed regarding the adequacy of supplies of raw materials to sustain continuous economic growth.¹

The heavy demands of World War II led, in the early 1950s, to a review of the nation's agricultural potential and mineral resource stocks by two presidential commissions. The President's Materials Policy Commission (Paley Commission, 1952) found that over the next twenty-five years it was unlikely that there would be any general exhaustion of resources. However, there was concern about the apparent change in the trend of prices and particularly about some critical commodities. Indeed, it was felt that a continuous reexamination of materials policy was needed because of the expected rising relative costs of important industrial materials.²

Resources for the Future was established twenty-seven years ago, largely in response to this concern over the continued adequacy of natural resources. The most profound analysis of this issue, Scarcity and Growth: The Economics of Natural Resource Availability, by Barnett and Morse, had its origin in these events. Their evaluation of the trends in "real unit costs" and relative prices over the period 1870 to 1957 concluded that resource scarcity had been avoided by advances in technology which allowed the progressive substitution of lower grade resources, with corresponding increases in effective supplies.

Much of the thinking about natural resources policy has been influenced by the reasons advanced to account for the apparent increase in effective supplies. Basically, four factors were adduced to be involved. First, as higher grade sources are exhausted, lower grade sources are found in greater abundance. Moreover, the qualitative differences among various stocks diminish as the grade of the materials declines. Second, as a particular extractive resource becomes more scarce, continued increases in the rate of appreciation in its price tend to be offset by substitution of other resources. That is, users seek alternatives with more favorable cost relationships and all but the more insistent demands for the resource are reduced or eliminated. Third, increases in prices stimulate exploration for new deposits and provide incentives for increased recycling, which can reduce the pressure on sources of virgin materials. Fourth, technical change reduces the costs of providing natural resource commodities either by reducing the extraction costs for existing deposits or introducing methods which make previously uneconomic resources a part of the effective reserves at current or short-term future prices.³

Of these four factors, one involves the frequency and characteristics of resource occurrences. The others are related to the technology of conversion and the characteristics of markets. Accordingly, any evaluation of natural resource scarcity must address all three aspects: the physical constraints of the resource endowment, the production technology or state of the art for conversion, and the character of the markets in which outputs exchange.

The oil embargo of 1973 and other materials shortages of the period,⁴ the emergence of activist environmental groups, and popular predictions of secular stagnation have all rekindled interest in whether our supply of natural resources is adequate to sustain current patterns of production and consumption. The current debate over the adequacy of materials resources offers the widest range of opinion of any recent policy issue, Judgments range from Houthakker's statement that "the ancient concern about the depletion of natural resources no longer rests on any firm theoretical basis" [5, p. 12], to the completely opposite conclusions of Georgescu-Roegen [6] which draw on principles from the natural sciences in support of his position. His paper in this volume observes that:

Neoclassical economics . . . has paid practically no attention to natural resources. To be sure, legions of production functions in the neoclassical literature contain the factor land, by which is meant, however, only Ricardian land. But Ricardian land raises no issue for the intergenerational allocation of resources. And this is the problem of natural resources.

[chapter 4, p. 95]

These differences in opinion are not limited to theoretical approaches, but extend to empirical appraisals of the resource picture as well.⁵ Accordingly, there appears to be some justification for organizing within a single volume statements representing these views in order to understand why there is a divergence of opinion on such an important problem. This is the purpose of this volume. It is the outgrowth of a forum sponsored by Resources for the Future on the economics of natural resource scarcity. Its objective was to help identify what questions need to be investigated so that we can begin to resolve the issues underlying differing views of resource adequacy.

In the following sections we provide background and an overview of the papers presented at the forum and included in this volume. In doing so, we attempt to show their relationship to earlier literature, as well as to each other. We begin with a definition of natural resources, and what is meant by reference to their scarcity. The third section of this introduction reviews how the role of natural resources in production and consumption is modeled under various definitions. This discussion considers the role of society's purposes in governing the allocation of a nonrenewable resource as well as constraints on the allocation process. Section IV discusses the deficiences of formal modeling and empirical analyses in this area in order to provide a setting for the papers that follow as well as an outline of the issues which a research agenda must address. The concluding section reviews some unanswered questions which we will return to in the concluding chapter of this volume.

II
The Definition of Natural Resources and the Meaning of Scarcity

For the most part, earlier analyses of the adequacy of our natural resources have represented them as the basic sources of primary commodities produced by extractive activities. They are the raw material inputs into production and consumption. While these studies have clearly distinguished between renewable and nonrenewable extractive outputs, the definition of natural resources in total has been sufficiently restrictive so that materials policy could be construed as addressing the problems of natural resource scarcity.

The conception of resources as a source of materials inputs leads one to consider the environmental side effects of extraction and conversion activities as phenomena to be distinguished from resource utilization and depletion. Such a view is explicitly advanced in Barnett and Morse's Scarcity and Growth. Resource commodity extraction and conversion might be attended by environmental degradation and may influence the quality of life, but these authors hold that this phenomenon is independent of the issue of resource scarcity in the classical sense. Their view is even more clearly stated in Barnett's reappraisal of the trends in scarcity indexes in this volume (chapter 8). He contends that environmental damage can be treated separately from scarcity measures by evaluating the costs associated with meeting air and water pollution standards.⁶

In later sections of this essay we argue that such a separation may not adequately address the issue and is a matter which must be evaluated critically. For the present, what is important is the definition of natural resources. Treatment of resources as industrial raw materials eliminates, by definition, consideration of alternative final consumption services which such resources could provide. Since these alternatives are frequently incompatible, and use of resources for one purpose may foreclose irretrievably the option for an alternative use, such restrictive definitions can bias evaluation of resource adequacy.

Accordingly, we shall argue that the most appropriate definition of natural resources can be taken as a direct extension of Ricardian concepts to be all the original elements that comprise the earth's natural endowments.⁷ In a broad sense, they may be thought of as the life support system. However, when they are considered in terms of the earth's endowments, we can readily identify both the early and current analyses of natural resource problems with a specific subset of these endowments. For example, the work of Hotelling and much of the concern of current neoclassical models has been directed to mineral endowments. It is our contention that a more general viewpoint will identify an array of economic issues associated with the use of these endowments which are overlooked when the focus is too narrow.

To begin with, all natural resources are assets which yield service flows. The literature has focused, for the most part, on a subset of the natural resources and uses of their services. A broadened definition that includes common property or open-access resources provides for diversity of uses and the corresponding complexities for economic analysis. Even within the traditional framework, we wish to distinguish different types of nonrenewable natural resources—those which can be recycled and those which cannot. An example of the former might be metallic minerals, while the latter might be any of the conventional energy commodities.

Because private property resource services may be increased at the expense of common property resources, this general framework identifies the potential for conflict in alternative allocations of natural resources and provides one dimension on which it is possible to differentiate the analyses in the papers which follow.⁸ In neoclassical economics, attention is directed to goods and services that exchange on organized markets while Daly's work can be viewed as concerned more directly with the conjunctive effects of these use patterns, that is, their implications for the common property amenity and life-supporting natural resource services. Any restriction on the definition of natural resources will affect the view of resource adequacy that is derived from the associated models.⁹

Assume, for the moment, that we accept the more restrictive definition of natural resources as industrial raw materials exchanging on primary commodities markets. Two questions must then be addressed. The first of these concerns what we mean by scarcity and the second focuses on why the scarcity of natural resources would present more of a problem than scarcity of any other resource.

With universal abundance of all resources—that is, in the absence of scarcity—there is no role for economics, nor do we encounter any realistic situation known to human history. However, with insufficient means to satisfy all of society's ends, we must distribute the "deficiency," that is, allocate the scarce resources among competing ends. But the substance of the resource rationing problem depends on society's goals as well as the resource endowments and the state of the technology that converts natural resources into final consumer goods. We have a set of criteria by which it is possible to evaluate these choices, and they involve selecting those methods which allocate resources to their highest valued use. This process seems straightforward enough until one realizes that the values themselves are influenced by previous "efficient" allocations which determine, in part, the distributions of income and wealth. Since economic judgments on the efficacy of institutions which allocate resources to achieve predefined ends depend on the process defining these ends, it is proper to inquire as to how effectively society's larger purposes are met by the marketplace and its distribution of property rights. There is the related basic question of whether scarcity of means is increasing in severity over time relative to demands for them.

Once we broaden the definition of natural resources to include all services provided by our natural endowments, it becomes necessary to evaluate whether the set of interrelated markets is sufficiently comprehensive and discriminating to function satisfactorily in distributing scarcity. There are some ends which require resources that are not allocated through the established markets, or for that matter through any markets which could be established. Accordingly, it is reasonable to question whether all legitimate claims to our natural and man-made endowments are adequately mediated through existing markets motivated solely by the sovereignty of the consumers existing at any given moment.

Daly (chapter 3) begins his essay with a philosophical discussion of the relations between means and ends and the role of natural and social sciences in determining these means and ends. Moreover, he argues that there are unique problems associated with nonrenewable resources and their role in production technology which make it imperative to consider carefully the process which defines society's ends.

Once there is an explicit definition of these ends and the mechanisms by which they are pursued, it is possible to be more specific in defining measures of scarcity and discussing their meaning. The different consequences of natural resource scarcity compared with scarcity of any other input are also fundamental to anyone's interest in the availability of sufficient supplies of natural resources (however they might be defined). One of the attributes of the mechanisms by which means are c...

Table of contents

• Cover
• Title
• Copyright
• Contents
• Foreword
• Preface
• 1. The Economics of Natural Resource Scarcity: An Interpretive Introduction
• 2. A Neoclassical Analysis of the Economics of Natural Resources
• 3. Entropy, Growth, and the Political Economy of Scarcity
• 4. Comments on the Papers by Daly and Stiglitz
• 5. Fundamental Concepts for the Analysis of Resource Availability
• 6. The Age of Substitutability: A Scientific Appraisal of Natural Resource Adequacy
• 7. Comments on the Papers by Brobst and Goeller
• 8. Scarcity and Growth Revisited
• 9. The Adequacy of Measures for Signaling the Scarcity of Natural Resources
• 10. Measures of Natural Resource Scarcity
• 11. Summary and Research Issues
• Index