Biophysical Limits to Economic Growth

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Biophysical Limits to Economic Growth

• The Neoclassical Economic Perspective

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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.

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• 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 natural capital (such as
  forests, coal deposits, wetland preserves,
  wilderness, etc.) are substitutes.

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• 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

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• 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.

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• 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.

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

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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.

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• 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)

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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

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• 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.

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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)

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

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• Three reasons for the negative association
  between increases in a nations 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.

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• 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.