Biophysical Limits to Economic Growth

1. Biophysical Limits to Economic Growth The Neoclassical Economic Perspective

2. Introduction • Basic Postulates of the neoclassical economic perspective of natural resource scarcity and allocation: • Nothing rivals the market as medium for resource allocation • Resource valuation depends only on individual “preferences” and initial endowments as determine by prices.

3. continue... • For privately owned resources, market prices are “true” measures of resource scarcity. • Price distortions arising from externalities can be effectively remedied through appropriate institutional adjustments. • Resource scarcity can be continually augmented by technological means. • Human-made capital (such as machines, buildings, roads, etc.) and naturalcapital (such as forests, coal deposits, wetland preserves, wilderness, etc.) are substitutes.

4. continue... • Based on this fundamental premises, neoclassical economist have traditionally been skeptical toward Malthusians’ gloom-and-doom prophecies pertaining to the future economic condition of humanity. • They criticize the Malthusian perspective for the following two reasons:

5. continue... • Malthusian are generally predisposed to view humankind as having a natural propensity for self-destruction. In other words, they underestimate human wisdom and instinctive capability for self-preservation. • Malthusians’ tend to lump all resources together without regard to their importance, ultimate abundance or substitutability.

6. continue... • When human wisdom and resource substitutability are properly considered, “from the prospective of neoclassical economics it is tautological and therefore uninteresting to say that resources are becoming increasingly scarce given that resources are assumed to be available in geologically fixed (finite) quantity while population continues to grow.”

7. continue... • For neoclassical economists, therefore, the fundamental issue to be addressed is not so much the existence of biophysicallimits, but rather how, through technological progress and appropriate institutional arrangements, such limits can be overcome.

8. The Classical Doctrine of Increasing Resource Scarcity: The Empirical Evidence • The strong hypothesis of increasing natural resource scarcity: (Barnett and Morse 1963) • “The real cost of extractive products per unit will increase through time due to limitations in the available quantities of natural resources. Real cost in this case is measured in terms of labor (man-days, man-hours) or labor plus capital per unit of extractive output.”

9. continue... • Explain the Strong resource scarcity hypothesis, and the empirical evidence for the United States for the period ranging from the Civil War to 1957. • Explain follow up studies by: • Manely Johnson (1980) • V. Kerry Smith (1979, 1982) • Barnett (1982) • Julian Simon and Herman Kahn (1984)

10. Criticisms of the Barnett and Morse Type of Empirical Studies • Studies based on statistical trends do not make explicit environmental quality considerations. Resource prices do not reflect their social values. • No consideration is made to account for major transformations in the use of energy resources. More specifically, higher-quality fuels displaced the use of lower-quality fuels--first coal replaced wood, then oil and natural gas replaced coal. [Culter Cleveland]

11. continue... • The laws of thermodynamics impose certain limits on the substitution of human capital for natural capital. • The pace of technological progress over the past has been uneven. In other words, rapid resource-saving technological progress of the kind experienced in the past tow hundred years does not necessarily imply continued technical progress in the future.

12. Population and Economic Growth: The Neoclassical Perspective • The Theory of Demographic Transition: this theory based on empirical generalization claims that, as nations develop, they eventually reach a point where the birth rate falls. That is, in the long-run, the process of industrialization is accomplished by a sustained reduction in population growth. (Explain)

13. continue... • The microeconomic theory of human fertility (Becker 1960) EXPLAIN • Three reasons for bearing children: • Utility • Work • Old age security

14. continue... • Three reasons for the negative association between increases in a nation’s average income and the rate of its population growth: • As a nation advances economically, it can afford to provide its people with improved health care facilities--reduction in infant mortality. This will reduce the desire of people to have big family.

15. continue... • As families become increasingly wealthier, their needs for using children as a hedge for old age security become less important. • Continued economic progress provide increased opportunities for mothers to work for income--increase in the opportunity cost of raising children.