Natural Resource Scares, Prices and Government Control

It’s somewhat humorous, if only tragically so, that environmentalist doomsayers have such a microscopic and amnesiac view of history. They soon forget the message of Paul Ehrlich (just a small, readily available example) and others who made livings and best sellers out of telling us we are all doomed. Ehrlich’s famous book The Population Bomb predicted a seeming Mad Max future for humanity by the 1970’s and 80’s. The Population Bomb was first published in 1968. It begins with these words:

The battle to feed all of humanity is over. In the 1970’s and 1980’s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now.

Nothing that Ehrlich said has come true. However, he has remained unblemished in his reputation. Population growth was not the only item of Ehrlich’s attacks. Natural Resource depletion received a substantial portion of his warnings. Julian Simon, a respected and amazing (in my opinion) economist, asked Ehrlich and other like-minded chicken-littles to put their money where their mouths were. In 1980 Simon asked the Ehrlichians to pick any resources they wished, any time period they wished, in order to speculate on diminishing resources. Ehrlich and others picked five resources whose prices they where sure would be higher (in real terms) at the end of ten years of their continued extraction from the Earth. At the end every single resource’s price fell rather than rose.

What are we to learn from this? Well, many things, most of which have to do with the function of prices in a (free) economy. Prices convey information. Through a simple organization of numbers a free-market economy is formed into a well-functioning system in which a fixed amount of goods and services are distributed to an economy constituted of millions of people desiring to do different things with the world. In short, prices change, fluctuating with the known state of the real world. Furthermore, they fluctuate with people’s desires towards the world. Also, as importantly, people’s desires towards the world fluctuate with prices.

What does this mean? Say tomorrow a large deposit of nickel ore is found in Siberia. The new nickel on the market will drop the price. I, as a possible consumer of nickel, need to know nothing about how much nickel was found, or even that it was found, in order to see that the price of nickel has dropped. Furthermore, I will adjust my behavior to the new pricing reality. The converse situation is likewise true in understanding scarcity. If no new nickel is found in the next ten years then the price will reflect this information. Likewise, I, as a possible consumer of nickel, will possibly find substitutes for nickel – which may have reached high enough price that another resource is more cost-effective or that it is cost-effective to research ways to diminish my use and need for nickel.

Now, take oil. No one knows how much oil is in the Earth. This information is very costly to obtain. It is costly in the economic sense of the term – many things would have to be traded-off in order to discover the total amount of oil on Earth. Furthermore, one wonders if it is even possible to discover this information – now, or in the near future. However, economies are built for the ignorant. They are the for the functioning of limited, ignorant creatures with many desires that compete with each other in a finite world. To know exactly how much of a resource there is, how much people want it and will want it, and how people’s behavior will change under new realities is to render economies obsolete and to invite this magnificent all-knowing person/deity to control all of our actions in order to make us all happier. If such a thing were possible, I would be the first to invite this omniscient being to rule over us all.

Oil companies endure extreme costs for exploratory drilling – it is a very expensive endeavor. It only becomes worthwhile when the price of oil is sufficiently high to make exploratory drilling a cost-effective practice. Thus, companies will drill the oil they have for now. The oil companies know that this may only be 13 (or so) years of oil but they do not worry. They will find more. To predict that the loss of these reserves will mean a total loss in oil has been likened by economist Thomas Sowell to predicting that a household will go hungry because it will run out of food in a week Ôø? all the while ignoring the fact that the solution is to go and buy more food when desire becomes great enough and the cost becomes low enough.

And, if and when the day comes that we can’t find more, the world will be forced to adjust to that new reality. This reality will be conveyed by prices (if allowed to function freely) and people will act under effective incentives to change their ways – be they consumer or supplier. We no longer burn whale fat for lamp-oil, one day we may trade nuclear for coal power or some other unknown method. All of this activity will be controlled by the functioning of prices.

Therefore, predictions about coming oil crises are always based on misinformation because economies themselves are based on misinformation – or, more adequately, incomplete information. However, these predictions are misleading and harmful because they pretend to be based on “all the facts” – facts that no human being has or can have. As stated previously, no one knows how much oil is in the Earth. This does not change the fact, however, that chicken-littles will always have an audience because what they have to say is interesting – more than everything stated here and elsewhere that is pretty dry and not streamlined for popular consumption. Websites such as this and this are quite ignorant of what I have stated here – but are quite interesting to many people. Likewise, Vance Packard had a 1960 best seller entitled The Waste Makers in which he blatantly stated:

In oil, the United States is clearly approaching depletion. At today’s rate of consumption – not tomorrow’s – the United States has proved reserves of oil sufficient to meet the nation’s needs for thirteen years.

The obvious truth that there are a limited amount of resources on the planet and a seeming infinite amount of desires is relevant. However, I am reminded of John Stuart Mill’s almost paralyzing fear that the world would run out of musical compositions – finite notes makes for finite musical pairings. Thinking of the number of musical innovations that had yet to come – jazz, country, rock and roll, not to mention Schonberg’s harmonic innovations – it is difficult to understand his fright. However, we are usually totally unaware of the future paths our societies may take. The microchip wasn’t a faint hope in the 1930’s – a mere 30 years before it was invented. This is likewise true of countless innovations. Thus, the simple fact that “there are limited resources and unlimited desires” is not personally troublesome. What is a “resource” cannot even be quantified in this limited view. When similar predictions were made in the 19th century societies couldn’t begin to count the atom, hydrogen, or the numerous fuels that can be refined from petroleum under the heading of “resource.” We don’t even know what resources we have. So, in the end, the simple truism of Ôø?limited resources, unlimited desiresÔø? may just be a reiteration of the second law of thermodynamics, the amount of disorder in a system: entropy.

However, what is truly discouraging about such environmental doomsayers – and many doomsayers in general – is that such dire predictions are almost always implicit, or explicit, endorsements of stricter and more over-riding government control. Whenever the situation is seen to be ominous or hopeless our youthful predilections to “run to daddy” are often replaced by a paternalistic trust in government. What we don’t know, they know. What we can’t do, they can do. (This trust is interestingly shown in one of the websites mentioned above which consistently adds the meant-to-be-reassuring proviso, “Generally, these estimates come from the government.”) Although this essay is not an argument for a radical free-market, it is a short description of what the free-market can do. If prices are understood as conveyors of information – information that no single person or group of people can hold – then perhaps we will be more resistant to meddling with them or calling for strong government control to correct “crises” that are often the product of misinformation, a misunderstanding of simple economics, and a desire to be interesting.

What has proven truly scary about this trust in governmental control is the fact that major shortages are almost always caused by government meddling in the system of prices. Ludwig Von Mises, an incredible intellectual and founder of the Austrian school of economists, knew, from the outset, why communism would fail miserably. As early as the second decade of the twentieth century he predicted that communism would fail due to its inadequate system of prices. The result would be mass shortages and surpluses of even the most mundane goods. Without prices being allowed to change with new underlying realities and people to make adjustments based on those changes, industry, as well as basic goods and services, would be perpetually overextending resources, making surpluses, or underutilizing them, making shortages. In the end the economy would exist in a vicious cycle embodying the most basic features of a poor economy – an inability to adequately describe both the reality of existent resources and the actuality of what people wanted to do with those resources. It is interesting here to curtly note that Von Mises’ prediction came true – perhaps more than even he expected – whereas the panoply of popular doomsayers are generally batting .000.

Describing the world accurately – how much there is available or a desired resource – and accurately describing people’s competing desires towards those resources, is the preeminent concern of an economy. No one is helped by plugging our ears, closing our eyes and pretending that there is more of a resource, such as housing, than there is or that people don’t want the resource. By controlling prices we are essentially pretending one of these aspects – possibly hoping that changing the price, which should reflect the essential aspects of reality, will actually change reality. Likewise, natural resource crises are best solved by similar means – letting prices reflect reality and letting individual’s actions and desires adjust to that new reality. With all this in mind I will drive my gas-burning car with my conscience at ease. Hell, I may even go buy a Hummer.

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6 Responses to Natural Resource Scares, Prices and Government Control

  1. Anonymous says:

    You’re right, in parts. Millions of people aren’t dying each year from hunger, millions of white people that is.

    Black and brown people however are dying, in their millions, each year from starvation. I won’t even go into the numbers who are dying a slightly slower death in the form of malnutrition.

    Prices do signal, allocate resources. For a very good example I refer you to the depression (cf. Keynes’ “price sticky downwards” – which can also be found in K. Marx’s “The Communist Manifesto” under a very different name), I also refer you to the plethora of wars the Yanks have started to ‘allow’ prices to signal and allocate THEIR resources.

    Because you are white and middle-class and therefore NOT poor, don’t assume the rest of the world isn’t poor. Go and see the world a bit. Go to Mexico, see some poverty and hopefully you’ll stop seeing the world as just your town/city but just a whole lot bigger.

    It would be interesting to see you defend any form of economic theory that you believe supports your general opinions. I would be very, very interested to have a discussion with you about that. And before you pigeon hole me as a commie, I ainít. Not even close.

    Regards

  2. Trevor Burrus says:

    This is a comment that I hardly want to dignify with a response. There is nothing in it that undermines my position whatsoever. Vague accusations of racism, charges of cultural myopia, or general gist of “you just don’t get it” put no dent in my essay.

    “Black and brown people however are dying, in their millions, each year from starvation.”
    This statement seems to be designed to show that Ehrlich was, in fact, right. However, the starvations and famines that have swept the world in the past 30 yrs (Ethopia, Somalia) had nothing to do with overpopulation and everything to do with the local food markets being disrupted by war, natural disaster or despotism. Ehrlich’s assertion is that, try as we might, by the 70’s and 80’s we will not have ENOUGH food to curb such starvations. The simple act of airlifting tons of food to alleviate starvation shows that the problem wasn’t with the total amount of food but with food distribution.

    “Prices do signal, allocate resources. For a very good example I refer you to the depression (cf. Keynesí ìprice sticky downwardsî – which can also be found in K. Marxís ìThe Communist Manifestoî under a very different name.)”
    The concept of a “sticky downwards” movement of prices is a convenient economic tool of hindsight. Economics, particularly microeconomics, is often a hindsight science. Analyzing a market situation, for example real estate, and describing how the prices were affected in a “sticky downwards” manner (The equilizing of a market at “clearing” prices is traded off to lack of transaction volume – rather than the price falling people stop selling.) has all the convenience of holding information that no one had at the time. As stated in my article, information, and the lack of it, is both the problem of economies and the reason they exist. As for your casual mention of the depression (I assume you mean the “Great Depression”) and its causes, I do not intend to debate such an important and charged issue with casual name and concept-dropping. This is a debate that I am very interested in and I have personally concluded that government intervention was the biggest cause of the prolonged continuation of the Great Depression. (Many are probably eye-rolling, tilting to the side and saying to themselves “he would think that. The insanity of his uncaring free-market advocacy is all-pervasive.”) This is just an idea where I stand. I assert here and I do not intend to engage in this long-winded, empirically taxing argument. If you take this as a sign of my lack of gumption or support, so be it.

    “I also refer you to the plethora of wars the Yanks have started to ëallowí prices to signal and allocate THEIR resources.”
    This sort of oblique, one-liner contrarianism is thoroughly unalluring and only serves to harm the substance of the larger issues that lay behind this view. Who do you hope to convince with this unevidenced, emotionally evocative contribution? It will ring a chord with those who agree with you already, and it will find no resonance with those who do not. However, it begs the question in my mind, CAN you resonate with those who don’t already agree with you? If you cannot then one must wonder why you believe what you do.

    “Because you are white and middle-class and therefore NOT poor, donít assume the rest of the world isnít poor. Go and see the world a bit. Go to Mexico, see some poverty and hopefully youíll stop seeing the world as just your town/city but just a whole lot bigger.”
    Now the thoroughly damning “you just don’t get it” sword is unsheathed. This poster has read substantially between the lines to produce the conclusion that I “assume the rest of the world isn’t poor.” I have now been maligned by assigning a STARTLING amount of ignorance that seemingly follows from my position that prices convey information better than central authorities can. Debate is skirted here by the excessive ladling of baseless accusations – that I haven’t “seen the world,” I assume the “rest of the world isn’t poor,” and I see the world as “just my town/city but a whole lot bigger.” Furthermore, this poster has also laid out a clear system of moral differentiation that places his views in the anointed category of “cosmopolitan,” “far-reaching” and based on “all the facts.” To think differently than he/she is not to be simply ignorant, or to have a values difference, it is to be willfully and malignantly ignorant of how the world actually works.

    “You just don’t get it” arguments are thoroughly unconvincing wherever they are found. How much do you have to “get” before your opinion is seen as on the same level? Presumably enough until your opinion is identical to your naysayer’s. Such positions avoid debate and implicitly turn society’s discussions into stagnant pools of information difference – in which you cannot tell a person why they are wrong but they must go out and experience a multitude of facts and imbibe many attitudes before a debate is possible. Information difference is an inevitable fact of human existence, pointing it out as a central argument in a debate precludes the debating process entirely. You-don’t-get-it arguments beg the response “well, make me get it.” If the person cannot conquer the baseline of inevitable information difference between human beings and convey their opinion one must wonder, “why do YOU get it?”

    “It would be interesting to see you defend any form of economic theory that you believe supports your general opinions.”
    Any time, any place. If I cannot defend it then I will change it. Essentially, you’ve given nothing to “defend” against here. Also, what are my “general opinions?” You ask me not to read between your lines and infer that you are a commie. I would not. I did not. However, you seem to have read a lot between the lines in my essay – including the fact that I will be quick to call you a “commie.” I do not throw such labels out lightly. Also, labels are not of interest to me, ideas are.

    Well, I am just about done. I appreciate you reading and responding to my essay and hope you will respond to this post. Thanks.

    Trevor Burrus

  3. Sirveri says:

    “By controlling prices we are essentially pretending one of these aspects – possibly hoping that changing the price, which should reflect the essential aspects of reality, will actually change reality.”

    Yes, I’ll agree with you that controlling prices is bad, however big businesses controls prices as well. Look at the point spread between regions for gas? The more that the oil companies think they can get out of you, the more they charge. Look at the California energy deregulation fiasco, where we had a company say that a pipe was ‘malfunctioning’ even though it worked perfectly fine, then they refused to send natural gas thru it and price gouged us. So the question finally drags down to who should we trust? Should we trust big business, whos only purpose is to make money? Or should we trust the government, in this case the USA, which is suppossedly for the people and by the people?

    Price can only be a true market determinator if nobody plays with it. But since corporations are duty bound to their shareholders to make as much money as possible, there has to be a reason for them to not charge gouging ammounts. Competition is one way, but then they can simply collude with one another. So really, why shouldn’t the oil companies charge as much for gas as their fuel market will bear? Probably because it screws over the consumers and the little guy. Being that the job of the government is to protect us from threats both foreign and domestic, I’d say that this could be one of those threats.

  4. josiah gibbs says:

    Trevor,

    It is easy to make fun of people who predict the future. I remember the predictions of the nuclear energy crowd in the 1950’s. They predicted that electricity from nuclear power would be so cheap that it would be given away and furthermore, it would be clean and safe; all of this by the time I was an adult. I am 55 now. The president of the Rand Corporation predicted in 1961 that by the end of the century, world transportation of goods would be cheap and fast due to the use of space shuttle technology. In 1946 the oil industry told us that if government didn’t support exploration, the world would exhaust its oil reserves within twenty years.

    It is notoriously difficult to create timelines to the future. Trajectories are easier to recognize. The fact that so many people in the United States and other “developed countries” took Paul Erlich seriously and promoted the idea of one or two children families, may have been a factor in slowing the ticking of the population bomb. Too bad the people in Cairo, the Middle East, Mexico City, and other such places haven’t read Erlich’s book. Too bad the same people haven’t read those silly predictions about what LA would be like if we didn’t do something about pollution. Maybe then, my friends with lung problems would not be told my their doctors to avoid Mexico City.

  5. Trevor Burrus says:

    Josiah,

    I agree that future predictions are troublesome matters. Furthermore, it seems that such predicting will be necessary to our society successfully negotiating actual crises that may come to pass. However, I would not say I was “making fun” of such seers – only trying to offer some perspective on such predictions that have been made in the past. Does this negate a current prediction because past ones have been inaccurrate? Absolutely not. But, we may be given cause to look harder at the predictions and subject them to more careful scrutiny.

    Trevor

  6. josiah gibbs says:

    Trevor,

    I agree with what you wrote. My point; implied as opposed to explicit, was that we should be balanced in the way we exercise our tools of scrutiny; choosing which predictions to scrutinize can serve political motives just as much as making the predictions in the first place. Check out the note to Aaron about obesity, which I am about to post.

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