Can the supply of natural resources – especially energy – really be infinite? Yes!

This following is an excerpt from Julian Simon’s book, The Ultimate Resource II

A professor giving a lecture on energy declares that  the world will perish in seven billion years’ time  because the sun will then burn out. One of the audience  becomes very agitated, asks the professor to repeat what  he said, and then, completely reassured, heaves a sign of  relief, “Phew! I thought he said seven million years!”‘  (Sauvy, 1976, p. 251)

[My economic analyses rest on] some principles which are  uncommon, and which may seem too refined and subtile for  such vulgar subjects. If false, let them be rejected.  But no one ought to enter a prejudice against them,  merely because they are out of the common road. David  Hume, Essays, 1777 (1987), p. 255.

An author is little to be valued, who tells us nothing  but what we can learn from every coffee-house  conversation. p. 253.

Chapter 2 showed that natural resources, properly defined, cannot be measured.  Here I draw the logical conclusion: Natural resources are not finite. Yes, you read  correctly. This chapter shows that the supply of natural resources is not finite in any  economic sense, one reason why their cost can continue to fall indefinitely. On the face of it, even to inquire whether natural  resources are finite seems like nonsense. Everyone  ”knows” that resources are finite. And this belief has  led many persons to draw unfounded, far-reaching  conclusions about the future of our world economy and  civilization. A prominent example is the Limits to Growth  group, who open the preface to their 1974 book as  follows.

Most people acknowledge that the earth is finite….  Policy makers generally assume that growth will provide  them tomorrow with the resources required to deal with  today’s problems. Recently, however, concern about the  consequences of population growth, increased  environmental pollution, and the depletion of fossil  fuels has cast doubt upon the belief that continuous  growth is either possible or a panacea. (Note the rhetorical device embedded in the term “acknowledge” in the first sentence of  the quotation. It suggests that the statement is a fact, and that anyone who does not  ”acknowledge” it is simply refusing to accept or admit it.)

For many writers on the  subject, the inevitable depletion of natural resources is simply not open to question. A  political scientist discussing the relationship of resources to national security refers  to “the incontrovertible fact that many crucial resources are nonrenewable.” A high  government energy official says that views that “the world’s oil reserves…are  sufficient to meet the worlds’ needs” are “fatuities.”  The idea that resources are finite in supply is so pervasive and influential that the  President’s 1972 Commission on Population Growth and the American Future (the most recent  such report) based its policy recommendations squarely upon this assumption. Right at its  beginning the report asked,

What does this nation stand for and where is it  going? At some point in the future, the finite earth  will not satisfactorily accommodate more human  beings – nor will the United States…. It is both  proper and in our best interest to participate fully  in the worldwide search for the good life, which must include the eventual stabilization of our numbers.

The assumption of finiteness indubitably misleads many scientific forecasters because  their conclusions follow inexorably from that assumption. From the Limits to Growth team  again, this time on food: “The world model is based on the fundamental assumption that  there is an upper limit to the total amount of food that can be produced annually by the  world’s agricultural system.”

The idea of finite supplies of natural resources led even a mind as powerful as  Bertrand Russell’s into error. Here we’re not just analyzing casual opinions; all of us  necessarily hold many casual opinions that are ludicrously wrong simply because life is  far too short for us to think through even a small fraction of the topics that we come  across. But Russell, in a book ironically titled The Impact of Science on Society,  wrote much of a book chapter on the subject. He worried that depletion would cause  social instability.

Raw materials, in the long run, present just as grave a problem as  agriculture. Cornwall produced tin from Phoenician times until very lately;  now the tin of Cornwall is exhausted… Sooner or later all easily accessible  tin will have been used up, and the same is true of most raw materials. The most  pressing, at the moment, is oil… The world has been living on capital, and so  long as it remains industrial it must continue to do so. This is one inescapable though  perhaps rather distant source of stability in a scientific society.

Nor is it only non-economists who fall into this error  (though economists are in less danger here because they  are accustomed to expect economic adjustment to  shortages). John Maynard Keynes’s contemporaries thought  that he was the cleverest person of the century. But on  the subject of natural resources – and about population  growth, as we shall see later – he was both ignorant of  the facts and stupid (an adjective I never use except for  the famous) in his dogmatic logic. In his world-renowned  The Economic Consequences of the Peace, published just  after World War I, Keynes wrote that Europe could not  supply itself and soon would have nowhere to turn:

[B]y 1914 the domestic requirements of the United  States for wheat were approaching their production,  and the date was evidently near when there would be  an exportable surplus only in years of exceptionally  favorable harvest… Europe’s claim on the resources of the New World was  becoming precarious; the law of diminishing returns was  at last reasserting itself, and was making it  necessary year by year for Europe to offer a greater  quantity of other commodities to obtain the same  amount of bread… If France and Italy are to make good their own  deficiencies in coal from the output of Germany, then  Northern Europe, Switzerland, and Austria…must be  starved of their supplies.

All these assertions of impending scarcity turned out to be wildly in error. So much for Keynes’s wisdom as an economist and a seer into the future. Millions of plain American farmers had a far better grasp of the agricultural reality in the 1920s than did Keynes. This demonstrates that one needs to know history as well as technical facts, and
not just be a clever reasoner.

Just as in Keynes’s day, the question of finiteness is irrelevant to any contemporary considerations, as the joke at the head of the chapter suggests. Nevertheless, we must discuss the topic because of its centrality in so much contemporary doomsday thinking. The argument in this chapter is very counter-intuitive, as are most of the ideas in this book. Indeed, science is most useful when it is counter-intuitive. But when scientific ideas are sufficiently far from “common sense,” people will be uncomfortable with science, and they will prefer other explanations, as in this parable:

Imagine for the moment that you are a chieftain of a primitive tribe, and that I am explaining to you why water gradually disappears from an open container. I offer the explanation that the water is comprised of a lot of invisible, tiny bits of matter moving at enormous speeds. Because of their speed, the tiny bits escape from the surface and fly off into the air. They go undetected because they are so small that they cannot be seen. Because this happens continuously, eventually all of the tiny, invisible bits fly into the air and the water disappears. Now I ask you: “Is that a rational scientific explanation?” Undoubtedly, you will say yes. However, for a primitive chief, it is not believable. The believable explanation is that the spirits drank it.

But because the ideas in this chapter are counter-intuitive does not mean that there is not a firm theoretical basis for holding them.

THE THEORY OF DECREASING NATURAL-RESOURCE SCARCITY

People’s response to the long trend of falling raw-material prices often resembles this parody: We look at a tub of water and mark the water level. We assert that the quantity of water in the tub is “finite.” Then we observe people dipping water out of the tub into buckets and taking them away. Yet when we re-examine the tub, lo and behold the water level is higher (analogous to the price being lower) than before. We believe that no one has reason to put water into the tub (as no one will put oil into an oil well), so we figure that some peculiar accident has occurred, one that is not likely to be repeated. But each time we return, the water level in the tub is higher than before – and water is selling at an ever cheaper price (as oil is). Yet we simply repeat over and over that the quantity of water must be finite and cannot continue to increase, and that’s all there is to it.

Would not a prudent person, after a long train of rises in the water level, conclude that perhaps the process may continue – and that it therefore makes sense to seek a reasonable explanation? Would not a sensible person check whether there are inlet pipes to the tub? Or whether someone has developed a process for producing water? Whether people are using less water than before? Whether people are restocking the tub with recycled water? It makes sense to look for the cause of this apparent miracle, rather than clinging to a simpleminded fixed-resources theory and asserting that it cannot continue.

Let’s begin with a simple example to see what contrasting possibilities there are. (Such simplifying abstraction is a favorite trick of economists and mathematicians.) If there is only Alpha Crusoe and a single copper mine on an island, it will be harder to get raw copper next year if Alpha makes a lot of copper pots and bronze tools this year, because copper will be harder to find and dig. And if he continues to use his mine, his son Beta Crusoe will have a tougher time getting copper than did his daddy, because he will have to dig deeper.

Recycling could change the outcome. If Alpha decides in the second year to replace the old tools he made in the first year, he can easily reuse the old copper and do little new mining. And if Alpha adds fewer new pots and tools from year to year, the proportion of cheap, recycled copper can rise year by year. This alone could mean a progressive decrease in the cost of copper, even while the total stock of copper in pots and tools increases.
But let us for the moment leave the possibility of recycling aside. Another scenario:

If suddenly there are not one but two people on the island, Alpha Crusoe and Gamma Defoe, copper will be more scarce for each of them this year than if Alpha lived there alone, unless by cooperative efforts they can devise a more complex but more efficient mining operation – say, one man getting the surface work and one getting the shaft. (Yes, a joke.) Or, if there are two fellows this year instead of one, and if copper is therefore harder to get and more scarce, both Alpha and Gamma may spend considerable time looking for new lodes of copper.

Alpha and Gamma may follow still other courses of action. Perhaps they will invent better ways of obtaining copper from a given lode, say a better digging tool, or they may develop new materials to substitute for copper, perhaps iron.

The cause of these new discoveries, or the cause of applying ideas that were discovered earlier, is the “shortage” of copper -that is, the increased cost of getting copper. So increased scarcity causes the development of its own remedy. This has been the key process in the supply of natural resources throughout history. (This process is explored for energy in Chapter 11. Even in that special case there is no reason to believe that the supply of energy, even of oil, is finite or limited.)

Interestingly, the pressure of low prices can also cause innovation, as in this story:

[In the] period 1984 to 1986 … the producer price of copper hovered around 65 cents per pound. In terms of constant dollars, this was the lowest price since the great depression of the 1930s…. some companies … analyzed what needed to be done to be profitable even if the price of copper remained low…

Major copper companies have found ways of reducing their costs. Phelps Dodge…will improve the efficiency of its transportation of rock by use of computer monitoring and by installing an in-pit crusher…[It]
has improved the efficiency of its copper concentration process by employing analytic instrumentation, including x-ray fluorescence. The most effective move…has been to install equipment that permits inexpensive…production of pure copper from leachates of wastes and tailings.

Improvement in the efficiency of using copper not only reduces resource use in the present, but effectively increases the entire stock of unused resources. For example, an advance in knowledge that leads to a one percent decrease in the amount of copper that we need to make electrical outlets is much the same as an increase in the total stock of copper that has not yet been mined. And if we were to make such a one percent increase in efficiency for all uses every year, a one percent increase in demand for copper in every future year could be accommodated without any increase in the price of copper, even without any other helpful developments.

Discovery of an improved mining method or of a substitute such as iron differs, in a manner that affects future generations, from the discovery of a new lode. Even after the discovery of a new lode, on the average it will still be more costly to obtain copper, that is, more costly than if copper had never been used enough to lead to a “shortage.” But discoveries of improved mining methods and of substitute products can lead to lower costs of the services people seek from copper.

Please notice how a discovery of a substitute process or product by Alpha or Gamma benefits innumerable future generations. Alpha and Gamma cannot themselves extract nearly the full benefit from their discovery of iron. (You and I still benefit from the discoveries of the uses of iron and methods of processing it made by our ancestors thousands of years ago.) This benefit to later generations is an example of what economists call an “externality” due to Alpha and Gamma’s activities, that is, a result of their discovery that does not affect them directly.

If the cost of copper to Alpha and Gamma does not increase, they may not be impelled to develop improved methods and substitutes. If the cost of getting copper does rise for them, however, they may then bestir themselves to make a new discovery. The discovery may not immediately lower the cost of copper dramatically, and Alpha and Gamma may still not be as well off as if the cost had never risen. But subsequent generations may be better off because their ancestors Alpha and Gamma suffered from increasing cost and “scarcity.”

This sequence of events explains how it can be that people have been using cooking pots for thousands of years, as well as using copper for many other purposes, and yet the cost of a pot today is vastly cheaper by any measure than it was 100 or 1,000 or 10,000 years ago.

Now I’ll restate this line of thought into a theory that will appear again and again in the book: More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices eventually become lower than before the increased scarcity occurred.

It is all-important to recognize that discoveries of improved methods and of substitute products are not just luck. They happen in response to an increase in scarcity – a rise in cost. Even after a discovery is made, there is a good chance that it will not be put into operation until there is need for it due to rising cost. This point is important: Scarcity and technological advance are not two unrelated competitors in a Malthusian race; rather, each influences the other.

Because we now have decades of data to check its predictions, we can learn much from the 1952 U.S. governmental inquiry into raw materials – the President’s Materials Policy Commission (the Paley Commission), organized in response to fears of raw-material shortages during and just after World War II. Its report is distinguished by having some of the right logic, but exactly the wrong forecasts.

There is no completely satisfactory way to measure the real costs of materials over the long sweep of our history. But clearly the man hours required per unit of output declined heavily from 1900 to 1940, thanks especially to improvements in production technology and the heavier use of energy and capital equipment per worker. This long-term decline in real costs is reflected in the downward drift of prices of various groups of materials in relation to the general level of prices in the economy.

[But since 1940 the trend has been] soaring demands, shrinking resources, the consequences pressure toward rising real costs, the risk of wartime shortages, the strong possibility of an arrest or decline in the standard of living we cherish and hope to share.

The commission went on to predict that prices would continue to rise for the next quarter-century. However, prices declined rather than rose.There are two reasons why the Paley Commission’s
predictions were topsy-turvy: First, the commission reasoned from the notion of finiteness and used a static technical analysis of the sort discussed in Chapter 2.

A hundred years ago resources seemed limitless and the struggle upward from meager conditions of life was the struggle to create the means and methods of getting these materials into use. In this struggle we have by now succeeded all too well. The nature of the problem can perhaps be successfully over-simplified by saying that the consumption of almost all materials is expanding at compound rates and is thus pressing harder and harder against resources which whatever else they may be doing are not similarly expanding.

The second reason the Paley Commission went wrong is that it looked at the wrong facts. Its report gave too much emphasis to the trends of costs over the short period from 1940 to 1950, which included World War II and therefore was almost inevitably a period of rising costs, instead of examining the longer period from 1900 to 1940, during which the commission knew that “the man-hours required per unit of output declined heavily”.

Let us not repeat the Paley Commission’s mistakes. We should look at trends for the longest possible period, rather than focusing on a historical blip; the OPEC-led price rise in all resources after 1973 and then the oil price increase in 1979 are for us as the temporary 1940-50 wartime reversal was for the Paley Commission. We should ignore them, and attend instead to the long-run trends which make it very clear that the costs of materials, and their scarcity, continuously decline with the growth of income and technology.

RESOURCES AS SERVICES

As economists or as consumers we are interested, not in the resources themselves, but in the particular services that resources yield. Examples of such services are a capacity to conduct electricity, an ability to support weight, energy to fuel autos or electrical generators, and food calories.

The supply of a service will depend upon (a) which raw materials can supply that service with the existing technology, (b) the availabilities of these materials at various qualities, (c) the costs of extracting and processing them, (d) the amounts needed at the present level of technology to supply the services that we want, (e) the extent to which the previously extracted materials can be recycled, (f) the cost of recycling, (g) the cost of transporting the raw materials and services, and (h) the social and institutional arrangements in force. What is relevant to us is not whether we can find any lead in existing lead mines but whether we can have the services of lead batteries at a reasonable price; it does not matter to us whether this is accomplished by recycling lead, by making batteries last forever, or by replacing lead batteries with another contraption. Similarly, we want intercontinental telephone and television communication, and, as long as we get it, we do not care whether this requires 100,000 tons of copper for cables, or a pile of sand for optical fibers, or just a single quarter-ton communications satellite in space that uses almost no material at all. And we want the plumbing in our homes to carry water; if PVC plastic has replaced the copper that formerly was used to do the job – well, that’s just fine.

This concept of services improves our understanding of natural resources and the economy. To return to Crusoe’s cooking pot, we are interested in a utensil that one can put over the fire and cook with. After iron and aluminum were discovered, quite satisfactory cooking pots – and perhaps more durable than pots of copper – could be made of these materials. The cost that interests us is the cost of providing the cooking service rather than the cost of copper. If we suppose that copper is used only for pots and that (say) stainless steel is quite satisfactory for most purposes, as long as we have cheap iron it does not matter if the cost of copper rises sky high. (But as we have seen, even the prices of the minerals themselves, as well as the prices of the services they perform, have fallen over the years.)

Here is an example of how we develop new sources of the sources we seek. Ivory used for billiard balls threatened to run out late in the 19th century. As a result of a prize offered for a replacement material, celluloid was developed, and that discovery led directly to the astonishing variety of plastics that now gives us a cornucopia of products (including billiard balls) at prices so low as to boggle the 19th century mind. We shall discuss this process at greater length in the context of energy in Chapter 11.

ARE NATURAL RESOURCES FINITE?

Incredible as it may seem at first, the term “finite” is not only inappropriate but is downright misleading when applied to natural resources, from both the practical and philosophical points of view. As with many important arguments, the finiteness issue is “just semantic.” Yet the semantics of resource scarcity muddle public discussion and bring about wrongheaded policy decisions.The ordinary synonyms of “finite”, the dictionary tells us, are “countable” or “limited” or “bounded”. This is the appropriate place to start our thinking on the subject, keeping in mind that the appropriateness of the term “finite” in a particular context depends on what interests us. Also please keep in mind that we are interested in material benefits and not abstract mathematical entities per se. (Mathematics has its own definition of “finite” which can be quite different from the common sort of definition we need here.)

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One Response to “Can the supply of natural resources – especially energy – really be infinite? Yes!”

  1. This article was a joy to read! It resonates exactly how I feel when I deal with people disillusioned by artificial scarcity, and the concept of "finite" resources. Often times people will get caught up in the propaganda, which is good for the propagandist but bad for the intellectual libertarian. Looking at this with a clear, common sense perspective offers insight into the ingenuity of man when faced with obstacles and challenges. Faith in mankind, instead of precautionary anti-human sentiment will help everyone succeed in this highly competitive world. The overreaction of government, in thanks to the systems propaganda mechanics, oversteps it's role and actually takes destructive actions in face of practical solutions. I'm glad to see a real change in the overall feeling among people, you can feel it in the air. Empower the individual, not the machine.

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