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Wednesday 23 Aug 2017 | 17:56 | SYDNEY
Wednesday 23 Aug 2017 | 17:56 | SYDNEY

Are we testing the limits to growth?

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24 January 2012 10:06

I ended my earlier post by pointing out that economists typically think about resource scarcity differently than those who take a more pessimistic view, such the authors of The Limits to Growth and New Scientist magazine, which recently gave Limits a 40th anniversary appraisal. A neat way of explaining the difference is set out in this paper by John Tilton, which outlines two alternative models. 

Model one is the fixed stock paradigm. It starts with the common-sense observation that the earth is finite, from which it follows the supply of resources must also be finite, and hence can be represented as a fixed stock. Since the demand for those same resources is a constant flow variable, the flow must eventually deplete all of the fixed stock. Moreover, if demand growth then turns out to be exponential, depletion could occur quite quickly. This is a Limits-style world.

A second approach is what Tilton calls the 'opportunity cost paradigm', which assesses the availability of resources by thinking about what society has to give up to secure another barrel of oil or ton of copper.

In this model there are two forces at work. First, there is the same story of the depletion of existing stocks of a given commodity. This means producers must find new stocks which will often be harder to access or of lower quality, tending to push up costs and hence prices. Second, however, is the introduction of new technology which can offset this upward pressure on prices by economising on the use of an existing resource, by finding substitutes, or by reducing the cost of acquiring new stocks. 

One spur for this new technology is, of course, the shift in costs and prices produced by the first effect. So in model two, the cost of a given resource is determined by a race between the cost-increasing effects of resource depletion and the cost-reducing effects of technological change. It follows that resource scarcity will produce rising real price over time. 

Model two is richer than model one, and there is no doubt that, in terms of past predictive ability, it has vastly out-performed model one, since for most of the 20th century, for most commodities, the second effect has dominated, and the real price of most commodities tended either to decline or at best remain relatively flat.

This is captured in another favourite cautionary tale — the notorious 1980 bet between the biologist Paul Ehrlich and the economist Julian Simon as to the likely price trajectories of five resources over the following decade. Ehrlich chose five minerals (tungsten, nickel, copper, chrome and tin) and calculated how much of each could be bought with US$200 in 1980. The bet was that, come 1990, Simon and Ehrlich would calculate the price of the same quantities of the minerals; if the total price was higher than the US$1000 (after adjusting for inflation) Ehrlich paid back in 1980, Simon would pay Ehrlich the difference. If it was lower, Ehrlich would pay Simon. Of course, Simon won the bet hands down: the quantity of minerals that had cost US$1000 in 1980 was worth less than US$424 by 1990.

The good news is that I reckon model two will continue to out-perform model one as a way of thinking about the prospects for non-renewables. The not-so-good news is that this is not the same as saying we have nothing to worry about when it comes to assessing potential limits to growth, for at least two reasons.

First, resource price signals as received over the past decade appear to be sending quite a different message from the earlier, generally reassuring one sent by the steady falls in real prices experienced by most commodities over much of the previous century. Something important might be changing in the race between resource depletion and technological change.

Second, the focus on what comprises the critical limits to growth has changed. Current fears are not so much about running out of non-renewable resources, but instead about bumping into environmental constraints including the damage to renewable resources and breaching so-called planetary boundaries. These are concerns that at least some economists now take very seriously. Indeed, as the New Scientist piece points out, it is striking that one area where the otherwise über-pessimistic Limits to Growth has actually turned out to be too optimistic is with regard to pollution and climate change.

Photo by Flickr user Roger's Wife.

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