Eric Neumayer Scarce or abundant?: the economics of natural resource availability Article (Accepted version) (Refereed) Original citation: Neumayer, Eric (2000) Scarce or abundant?: the economics of natural resource availability. Journal of economic surveys, 14 (3). pp. 307-335. ISSN 0950-0804 DOI: 10.1111/1467-6419.00112 © 2000 Blackwell Publishing This version available at: http://eprints.lse.ac.uk/18905/ Available in LSE Research Online: September 2012 LSE has developed LSE Research Online so that users may access research output of the School. Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Users may download and/or print one copy of any article(s) in LSE Research Online to facilitate their private study or for non-commercial research. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. You may freely distribute the URL (http://eprints.lse.ac.uk) of the LSE Research Online website. This document is the author’s final manuscript accepted version of the journal article, incorporating any revisions agreed during the peer review process. Some differences between this version and the published version may remain. You are advised to consult the publisher’s version if you wish to cite from it. Scarce or Abundant? The Economics of Natural Resource Availability Published in: Journal of Economic Surveys, 14 (3), 2000, pp. 307-335 Eric Neumayer Department of Geography and Environment, London School of Economics and Political Science, Houghton Street, London WC2A 2AE, United King- dom Email: [email protected] Correspondence address: Same address. Key words: Natural resources, scarcity, availability, substitution, technical progress JEL-classification: Q20, Q30, Q40 Abstract Most natural resources that are used in production are non-renewable. When they become depleted they are lost for future use. Does it follow that the limited availability of natural resources will at some time in the future constrain economic growth as many environmentalists believe? While classical economists have shared the belief in limits to growth, the distinctive feature of modern neoclassical economics is its optimism about the availability of natural resoures. This survey suggests that resource op- timism can be summarised in four propositions. First, a rise in the price of a resource leads to a substitution of this resource with another more abundant resource and to a substitution of products that are intensive in this resource. Second, a rise in the price of a resource leads to increased recycling of the resource and to the exploration and extraction of lower quality ores. Third, man-made capital can substitute for natural resources. Fourth, technical progress increases the efficiency of resource use and makes extraction of lower quality ores economical. In a critical analysis of these four propositions it is shown that while the conjecture that natural resources will never constrain future economic growth is logically con- ceivable, we do not and indeed cannot know whether it will be possible in practice to overcome any resource constraint. 1 1. Introduction Modern concern that limited availability of natural resources will con- strain the possibilities for consumption growth or, for that matter, even non-declining consumption dates back at least to Malthus (1798). He was convinced that the limitedness of land put an absolute scarcity constraint on food consumption growth. While population rose at a geometric rate, the production of food could only be expanded at an arithmetic rate, Mal- thus thought. Hence, he believed that population could grow only until the minimum subsistence level of per capita food consumption was trans- gressed and had to decline sharply afterwards — only to grow and hit the absolute scarcity constraint afterwards again in an apparently endless vi- cious circle. Later on, Jevons (1865) warned against a running out of coal as an energy resource and expressed concern about detrimental conse- quences of rising coal extraction costs on economic growth and the com- petitiveness of British industry. We know by now, of course, that both had been wrong: population grew tremendously in the 19th century and, even more than 130 years af- ter Jevons’s alarm, worldwide proven reserves of coal in 1996 would last for another 224 years at current consumption rates (British Petroleum 1997, p. 30). Moreover, coal is not seen as an essential resource anymore. Malthus and Jevons committed mistakes other resource pessimists re- peated later on. Malthus did not consider the power of technical progress and he was not aware of the fact that, as Ricardo (1817) first realised, land availability is more a question of relative as opposed to absolute scarcity, 2 i.e. land is a heterogeneous resource and it is possible to get the same amount of nutrition out of an ever lower quality acre by investing increas- ing inputs. Jevons, for his part, underestimated the scope for exploration and finding new reserves of coal and neglected the powerful possibilities of substituting other energy resources for coal. One has to keep in mind, however, that concern about the availability of natural resources was deeply rooted in mainstream economic thinking by that time and many classical economists, most notably Mill (1862) and Ricardo (1817) shared the belief that the economy had to stop growing sooner or later due to a resource constraint (Barbier 1989, chapter 1). In those days economics had a reputation as a „dismal“ science (Barnett and Morse 1963, p. 2). It was not before the so-called marginal revolution and the rise of neo- classical economics at the turn of the century, mainly due to Marshall, Walras and Fisher, that concern about resource availability vanished. In its leading macroeconomic metaphor, the income-expenditure-cycle, the de- pletion of natural resources is non-existent in a seemingly endless circular exchange of labour which produces goods to receive income which is in turn exchanged for the produced goods. Reality seemed to buttress this new thinking: the economy kept on growing, especially in the ‘golden years’ after the Second World War and even if it did not, as in the Great Depression, the reasons were no longer sought in limited natural re- sources. Concern about natural resource availability emerged again with the publication of the Club of Rome’s ‘Limits to growth’-report (Meadows et 3 al. 1972). This concern became popular and widespread after the quadru- pling of world oil prices, as OPEC first boycotted the U.S. and the Nether- lands for their support of Israel in the Yom-Kippur-War in 1973 and soon learned to exercise leverage over the OECD-countries.1 Meadows et al. prophesied that the exhaustion of essential mineral and energy resources would make economic growth infeasible some time in the next century. Therefore, a halt to economic growth and even an eventual economic con- traction might be enforced through resource scarcity. Essentially the same message was echoed by the Global 2000 Report to the President of the U.S. in 1980 (Barney 1980) and twenty years after their first report Meadows et al. published an updated, but hardly revised restatement of their argu- ment (Meadows et al. 1992). Economists, contrary to the wider public, this time did not share the concern about resource availability. Only some ‘outsiders’, regarded as eccentrics by the mainstream economist community, had sympathy with the report’s motivation and goal (Daly 1992, first published in 1977; Geor- gescu-Roegen 1971, 1975; Mishan 1974), without overlooking the criticisms that could be raised against it. In economic terms Meadows et al. were simply naive in extrapolating past trends without considering how techni- cal progress and a change in relative prices can work to overcome appar- ent scarcity limits. This criticism was put forward vigorously in a fierce attack by neoclassical economists who rejected the report(s) as pure non- sense (Beckerman 1972, 1974; Solow 1974b; Nordhaus 1973, 1992). For them the depletion of non-renewable resources had to be tackled with tra- 4 ditional economic instruments and had to be taken on board by neoclassi- cal economics (Solow 1974a,c, Dasgupta and Heal 1974, Stiglitz 1974) — but limits to growth due to resource constraints were a non-problem. This resource optimism of neoclassical economics is mirrored in what has become known as a paradigm of sustainable development called ‘weak sustainability’ (Solow 1974a, 1993a, 1993b; Hartwick 1977, 1990). While being concerned about the welfare of future generations, this para- digm essentially assumes full substitutability of ‘natural capital’ in that the depletion of natural resources can be compensated via investments into other forms of capital. Indeed, the fact that weak sustainability shares the resource optimism of neoclassical economics should come as no surprise as it can be interpreted as an extension to traditional neoclassical welfare economics (see Neumayer 1999 for more detail). So far, the pessimists have been wrong in their predictions. But one thing is also clear: to conclude that there is no reason whatsoever to worry is tantamount to committing the same mistake the pessimists are often guilty of — that is the mistake of extrapolating past trends. The future is something inherently uncertain and it is humans’ curse (or relief, if you like) not to know with certainty what the future will bring. The past can be a bad guide into the future when circumstances are changing. That the alarmists have regularly and mistakenly cried ‘wolf!’ does not a priori im- ply that the woods are safe. Are natural resources scarce or abundant? Will they ever constrain economic growth? Can they easily be substituted for by man-made capital 5 and technical progress? These are the central questions addressed in this survey of the economics of natural resource availability. The distinctive feature of mainstream modern economic thinking is its optimism about the availability of natural resources. Simplifying somewhat, I would sug- gest that resource optimism can be summarised in the following four propositions: The resource optimists’ creed If some resource A is becoming scarce in an economic sense2 its price will rise which triggers the following four mutually non-exclusive effects: a) Demand shifts away from resource A and another resource B becomes economical and substitutes for resource A. Similarly, demand shifts away from products that are intensive in resource A. b) It becomes economical to explore and extract as well as recycle more of resource A. As a consequence, the price of resource A will decline again, thus signalling an ease in economic scarcity. c) Man-made capital will substitute for resource A. d) More effort is put into technical and scientific progress in order to re- duce the necessary resource input per unit of output. Also technical and scientific progress make resource-extraction cheaper and thus the ex- traction of a resource’s lower-quality ores economical. As a conse- quence prices will decline again, signalling an ease in economic scarcity. 6 If resource optimism is correct, then there is no need to worry about the doomsayer’s prediction of a ‘running out’ of resources: Either the world will not be running out of the resource or it will not matter if it does since another resource or man-made capital will function as a substitute. This survey critically examines each proposition of resource optimism. Section 2 examines the possibilities of substituting one natural resource through another one. Section 3 looks at the role prices play in making in- creased exploration, extraction of low-grade ores and recycling of re- sources economical. Section 4 analyses the substitution possibilities of re- sources through man-made capital. Section 5 examines how technical pro- gress contributes to overcoming resource constraints. Section 6 concludes. Note that this survey only addresses the scarcity of natural resources as an input into the production of consumption goods. It does not look at the role nature plays in absorbing pollution and waste and generating direct utility to individuals through environmental amenities. The two aspects are certainly linked due to the first law of thermodynamics (conservation of mass) which implies that no material can be destroyed, it can only be transformed into other material, waste or pollution. But whether or not binding constraints to economic activity are likely to arise from a scarcity of these ‘ecological resources’ is distinct from the availability of natural resources for production purposes and should best be left to a separate survey (see Neumayer 1998a, 1998b). 7 Also note that the availability of food resources is not surveyed here. Indeed, given the focus on natural resources used in the production of consumption goods, the survey mainly looks at non-renewable resources as these are by far more important for production purposes than renew- able resources. For the German economy, e.g., Bringezu and Schütz (1996, p. 4) estimate that the ratio of non-renewable to renewable resource intake is 50:1 in terms of weight. 2. Substitution through other resources Let us first look at proposition a) of resource optimism which essentially says that a resource B will substitute for resource A if the latter is running out either directly or indirectly as demand shifts away from consumption goods that are intensive in resource A towards goods that are intensive in some other resource B. If the proposition is correct, then there is no need to worry about the depletion of resource A and since A could be any re- source, there is no need to worry about the depletion of any resource at all. The point is that the depletion of a resource does not matter economi- cally if it is or becomes unnecessary for production. It was this Beckerman (1972, p. 337) had in mind when he commented rather cynically on the first „Limits to Growth“-report: Why should it matter all that much whether we do run out of some raw materials? After all (...) economic growth has managed to keep going up 8