Expanding 'Depletable' Resources: Solving a Paradox

By Robert Bradley Jr. -- May 9, 2012

The following was published at Econlib (Library of Economics and Liberty by Rob Bradley with the editorial help of David R. Henderson.

A website project of Liberty Fund, Econlib offers concise, online classical-liberal scholarship for “students, teachers, researchers, and aficionados of economic thought.”

Mineral resources, not synthetically producible in human time frames,1 are fixed in the earth. As each is mined, less supply remains, suggesting that cost and, thus, price must increase as production cumulates.

Yet, for virtually all minerals, the opposite seems to be true: As more is mined, more is discovered to be mined. Prices and costs do not inexorably rise. What was high-cost yesterday has become lower-cost, undercutting the perennial complaint that “the easy stuff has been found.” Overall, there seems to be little difference between minerals and general goods and services.

The mineral paradox is explainable if we recognize that human ingenuity in market settings is the ultimate resource, as Julian Simon stated. Entrepreneurial discovery is open-ended. Applied to minerals, resourceship can and does find supply that, before, no one knew existed—or that no one considered exploitable. But incentives and, thus, institutions can make all the difference between potential and plenty.

Static Theory vs. Reality

“[Economic theory is] plainly inadequate for an industry in which the indefinite maintenance of a steady rate of production is a physical impossibility, and which is therefore bound to decline,” wrote Harold Hotelling in 1931 in the most cited article in the history of mineral economics.2 Yet today, over eighty years later, Hotelling’s static, formalistic framework has some real-world explaining to do.

Petroleum, the inspiration for Hotelling’s analysis and the mineral that Simon called “the most counterintuitive case of all,”3 is an example of an expanding “depletable” resource. The first estimate of proved crude oil reserves worldwide, made in 1944, was 51 billion barrels.

Today, that number is 1.4 trillion barrels, and cumulative production in the last 66 years has been twenty times the original estimate.4  Natural gas and coal proved reserves have also increased several-fold despite decades of production.5  Reserves of tin, copper, iron ore, lead, and zinc were also higher in 2000 than in 1950, despite the fact that production in the half century in between substantially exceeded reserves in 1950.6

The story would be similar for other minerals, from bauxite to uranium.

Solving the Paradox

The expansionist view of mineral resources is often associated with Julian Simon, who won the most famous wager in the history of economics regarding the future scarcity of minerals. Simon and Paul Ehrlich agreed that if resources were to become scarcer in the future, their prices, adjusted for inflation, would rise. At Simon’s invitation, in 1980, Paul Ehrlich et al. chose five minerals: chrome, copper, nickel, tin, and tungsten. If, in 1990, the prices of the minerals had risen, Simon would pay; if the prices had dropped, the consortium would pay.

Simon won resoundingly. The prices of most of the picked minerals had fallen in dollar terms between 1980 and 1990, and each fell in inflation-adjusted terms—despite 822 million more people consuming “depletable” resources.7

In the annals of the history of economic thought, Erich Zimmermann, of the Institutionalist school of economics, not Simon, got there first with what he called a functional theory of resources.

According to Zimmermann, resources are not known, fixed things; they are what humans employ to service wants at a given time. Human “appraisal” turns the “neutral stuff” of the earth into resources. What are resources today may not be tomorrow, and vice versa.8

Zimmermann wrote:

Resources are highly dynamic functional concepts; they are not, they become, they evolve out of the triune interaction of nature, man, and culture, in which nature sets outer limits, but man and culture are largely responsible for the portion of physical totality that is made available for human use.9

Zimmermann concluded: “Knowledge is truly the mother of all resources.”10

The functional or real-world theory clearly distinguished between the natural scientific and social scientific views of resources. “To the physicist the law of the conservation of matter and energy is basic,” Zimmermann stated. “The economist, however, is less interested in the totality of the supply than in its availability.”11  He warned: “To those who are used to view resources as material fixtures of physical nature, this functional interpretation of resources must seem disconcerting” because “it robs the resource concept of its concreteness and turns it into an elusive vapor.”12

Physical to functional; objective to subjective; absolute to relative; static to dynamic; one- to multi-dimensional: Orthodox economists ignored the real world in their quest to remake their discipline into a “hard” science based on mathematical relationships. Economists embraced deterministic ideas of known, fixed resources that enabled them to calculate the “optimal” extraction rate of a “depletable” resource.13

But this determinism came at the expense of understanding the dynamic nature of real-world resources. This explains why, time and again, economists have fallen short of finding a “depletion signal” in the empirical record, breeding false worries about “peak oil” or peak minerals in general.

Back in the 1970s, Hotelling’s framework captured the thinking of the economics profession and policymakers. “We have a classic Malthusian case of exponential growth against a finite source,” stated economist and Department of Energy secretary James Schlesinger. “[I]n five years’ time we may have chewed up most of the possibility of further expansion of oil production.”

Paul Samuelson called for a “Manhattan Project” to counter dwindling oil and gas.14  And at Resources for the Future, once a bastion of resource optimism, depletionism was de rigueur.15

Government Barriers

Resources grow with improving knowledge, expanding capital, and capitalistic policies—including privatization of the subsoil—that encourage market entrepreneurship. Resource availability decreases with war, revolution, strife, nationalization, taxation, price controls, and restrictions on access.

Man is the creator of resources, but man-qua-government can destroy and immobilize resources. Such was the lesson of America’s energy crisis in the 1970s, and it remains the lesson today with international petroleum statism.

The Institutionalist perspective of Zimmermann again comes into play: “Laws, political attitudes, and government policies, along with basic geological and geographical facts, become the strategic factors in determining which oil fields will be converted by foreign capital from useless ‘neutral stuff’ into the most coveted resource of modern times.”16

Resource economists, therefore, should focus upon institutional factors and change to explain and quantify changes in resource scarcity. Not only a country’s geological makeup, but also its legal framework and even its people’s customs, can explain the abundance or paucity of mineral development.

Conclusion

How big is the mineral-resource glass? Is it half-full or half-empty? Given the resourceship and the cascading nature of human knowledge and invention, these are the wrong questions to ask. It is not how big or how full the glass is; from a business/economics perspective, there is no glass. Thus: “Discoveries, like resources, may well be infinite: the more we discover, the more we are able to discover.”17

Should we dismiss the term “exhaustible” to describe mineral resources, as energy economist M. A. Adelman has suggested?18 Doing so would be in the tradition of Ludwig von Mises, who stopped short of assigning any special economic meaning to mineral resources.19

A methodological lesson emerges from this story. Sixty years ago,Friedrich A. Hayek expressed the following thought about the advancement of good economics: “It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism.”20

Hayek’s insight can be particularly appreciated in reference to mineral economics. The “fixed” character of minerals has been a siren song to economists who saw less when there was really more. The mineral economist should never forget that what resources come from the ground ultimately depend on the resources in the mind.

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Footnotes

1. Minerals are a large subset of natural resources, the latter including such things as air, water, and foodstuffs. If priced, resources are economic; if, at a zero price, more is demanded than supplied, they are not scarce and are noneconomic.

2. Harold Hotelling, “The Economics of Exhaustible Resources,” Journal of Political Economy, April 1931, p. 139. [pp. 137-75]

3. Julian Simon, “Introduction,” in Simon, ed., The State of Humanity(Cambridge, MA: Blackwell, 1995), p. 11.

4. Robert Bradley and Richard Fulmer, Energy: The Master Resource. Dubuque, IA, 2004, p. 88.

5. Institute for Energy Research, North American Energy Inventory, December 2011.

6. See Sue Anne Batey Blackman and William J. Baumol, “Natural Resources,” in David R. Henderson, ed., The Concise Encyclopedia of Economics. Indianapolis: Liberty Fund, 2008. Online at the Library of Economics and Liberty.

7. Robert Bradley, Capitalism at Work: Business, Government, and Energy. Salem, MA: M & M Scrivener Press, 2009, pp. 276-78.

8. Erich Zimmermann, World Resources and Industries: A Functional Appraisal of the Availability of Agricultural and Industrial Resources. New York: Harper & Brothers, 1933, p. 3; 1951, p. 14.

9. Ibid., pp. 814-15.

10. Ibid., p. 10.

11. Zimmermann, 1933, p. 45.

12. Ibid., 1933, p. 4.

13. J. A. Krautkraemer, “Nonrenewable Resource Scarcity,” Journal of Economic Literature, (1998) 36(4): 2065-2107.

14. Paul Samuelson, “Tragicomedy of the Energy Crisis,” Newsweek, July 2, 1979, p. 62.

15. Bradley, 2009, pp. 256-58.

16. Zimmermann, 1951, p. 16.

17. Julian Simon, The Ultimate Resource 2(Princeton: Princeton University Press, 1996), p. 82.

18. M. A. Adelman, “My Education in Mineral (Especially Oil) Economics.” Annual Review of Energy and the Environment22: 13-46 (1997), p. 26.

19. Robert Bradley, “Resourceship: An Austrian Theory of Mineral Resources,”Review of Austrian Economics, (2007) 20:63-90, pp. 71–72.

20. F. A. Hayek, The Counter-Revolution of Science: Studies on the Abuse of Reason, Glencoe, Illinois, The Free Press (1952), p. 31.