30 January 2011

On Scarcity

Not to long ago I heard a podcast with Don Boudreaux and Mike Munger (here) discussing, among other things, Peak Oil. The argument (regarding Peak Oil, not what Professors Boudreaux and Munger put forth) goes something like this: there is only so much oil available (we don't know how much, but logic dictates that there is only a finite amount); global population continues to increase; there are more people using cars (Asia); more goods are being transported more places. Demand increases exponentially while supply, while fungible, is inelastic. The price of oil is spiking in real terms and will continue to rise, leading to all sorts of unsavory consequences not even including the fact that burning all of this oil increases the amount of carbon in the atmosphere, which leads to global warming and will kill us all.

A quick aside to introduce you to a guy named Thomas Robert Malthus, an early 19th century English political economist. Malthus wrote a piece called An Essay on the Principle of Population as It Affects the Future Improvement of Society. His argument boils down to this: food is necessary; people like to have sex, ergo "the power of population is infinitely greater than the power in the earth to produce subsistence for man." An argument which is similar to the Peak Oil logic outlined above. We're doomed.

During the podcast they mention a bet made in 1980 between Julian Simon and Paul Ehrlich. Simon was a professor of business administration at the University of Maryland and Ehrlich is professor of Population Studies in the biology department at Stanford University. Among other things, Ehrlich claimed that by 1981 "all important animal life in the sea will be extinct" and that "If I were a gambler, I would take even money that England will not exist in the year 2000." So in 1980 Simon challenged Ehrlich to a wager measuring resource scarcity. Ehrlich was to pick any five of several commodity metals. Simon bet that the prices of the metals, adjusted for inflation, would be lower ten years hence. The real prices of all five were lower and the price of one, Chromium, was nominally lower as well. Ehrlich, to his credit, paid up.

I had never heard of this wager before and I was intrigued enough to look up more about Professor Simon. Which is how I came to his book, The Ultimate Resource 2. So far a fascinating read, about which more later.

The larger point is that people have been crying doomsday scenarios since time immemorial, though in ancient times it was usually chalked up to evil spirits or displeased gods. But for at least 200 years we've been told that the world is going to end horribly, and it's because of human behavior. Munger, Boudreaux and Simon's point (along with people like John Tierney), all expressed somewhat differently, is that it's not likely. Human ingenuity and people responding to shifting incentives have made life increasingly comfortable since Dr. Malthus started getting all panicky. And since Professor Ehrlich said there'd be no fish left...well, we still have lots of fish. And Great Britain, to the annoyance of the Irish and the French, is still around.

I listen to Car Talk on my local public radio station fairly religiously. On one episode the hosts mentioned that the invention of the catalytic converter was a once in a lifetime invention and something like it would never happen again. Based on what?

As oil becomes more scarce, its price will rise. Converting sour crude will become more cost effective. Extracting oil from shale or sand will become more economical. The higher price to be fetch will entice more participants in the market*, allowing supply and demand to harmonize. Eventually these sources of energy will be depleted. What then? I don't know. And neither does anyone else right now. But I'll bet anyone that, so long as we let market forces continue to hold sway (and encourage more freedom and less regulation), life will be better all around 10, 20, 30, 40 years or however long from now.

Wanna bet on it?

*unless existing companies effectively lobby the government to limit market participation or if government on its own, in an effort to "protect the people" regulate the industry to such an extent that it inhibits free entry and exit into the market keeping the price higher than it otherwise would be like they do with sweet crude oil exploration now.

Postscript. In response to the Tierney article linked to above, the always classy Keynesian economist Brad DeLong, who is slightly less intelligent though just as obnoxiously smug as Paul Krugman (and wrong on just as many things), nominated Boudreaux and Tierney for his "Stupidest Man Alive" award.

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