Tuesday, February 17, 2015

Free Enterprise Makes Natural Resources More Abundantly Available

"Because we can expect future generations to be richer than we are, no matter what we do about resources, asking us to refrain from using resources now so that future generations can have them later is like asking the poor to make gifts to the rich."

Julian Simon (1932 - 1998)

All this talk about using up our natural resources.

We hear it and hear it and hear it.

Who says we will run out of natural resources?  People who don't understand economics. Economics says that no natural resource will ever go to zero.  We will NEVER use up any natural resource to the point that there is no more of it.

What, then, is economics?  Economics is a social science that tries to understand all of the various processes that govern the production, govern the distribution, and govern the consumption of all the goods and services in a given economy.

Key word:  govern.  The key word everyone forgets is govern!  There are true laws in the social science of economics!  For example:

  • There is the law of supply and demand.  If supply does this, demand will do that.  They reach an equilibrium point.  If someone tries to force a change in the supply or demand of a given good or service, they will each respond, and perhaps in ways not anticipated.  It's a law.  You can count on it.
  • There is the law of diminishing marginal utility.  Sounds like a fancy, schmancy term, but it isn't.  Marginal utility is the gain from an increase or the loss of a decrease of something.  The marginal utility of something, its usefulness, can diminish if there is too much of that something.  If I have a small garden that needs water, there is great usefulness to a first bucket of water.  Maybe a second or a third bucket is just as useful, but the one millionth bucket certainly has no use whatever, and is detrimental.  It's a law.  You can count on it.
  • There is the law of rent.  The economist David Ricardo demonstrated that rent is among the most firmly established laws of economics.  Rent, essentially, is the economic advantage, or disadvantage, of using a given thing productively.  That thing might be land, labor, or even capital.  Using a given factor of production, let's say a farmer's capital, like a wagon, to haul his hay from the field to the barn may not produce much capital gain for the farmer.  But on days not needed for hauling hay, if the wagon was dressed up and put at the side of a busy road, and used to sell produce to passersby, the wagon's value increases, and returns that value to the farmer.  Ricardo said that is rent.  It's a law.  You can count on it.
See the very first post on this blog, written in August of 2011 entitled:  Free Enterprise At Work.
So what is this idea that a given natural resource would never be used up?  Is Julian Simon crazy?

No, far from it.  Nature utilizes this principle itself!  What if a natural disaster like a forest fire caused by lightning or a volcano like Mount St. Helen blows up and destroys the natural forest nearby.  What happens?  Nature rebuilds itself.  It takes time.  But it rebuilds.  (The same thing would happen to a jungle where all the trees are cut down by a lumber company.  It will rebuilt itself.  It takes time.  But it rebuilds.)

What happens if an oil company uses up all the oil it can get to in a given drilled hole?  The hole might be abandoned.  But what happens over time?  Over time many things can happen.  Free enterprise  will create new technologies to come forth that help the oil company get more oil out of the same hole.  (Happening now.)  Or free enterprise  will find new ways to go get any oil that may be in a given area.  (Happening now.)  Or free enterprise  will design new techniques to get oil from the area that could not previously been derived, like from inside the surrounding rock.  (Happening now.)  Or free enterprise  finds cheaper and cheaper ways to create oil synthetically from other materials.  (Happening now.)

Or, theoretically, all of the oil in the world becomes so scarce and becomes so expensive that substitutes are developed that are cheaper and the expensive oil that remains is never used up.  Free enterprise  will always find those substitutes!  That is, if people and markets are free.

The Dr. Simon comment above is simple.  It is a free enterprise  comment!  Where free enterprise  exists markets have grown, those societies have gotten richer, and the people living there have enjoyed higher and higher standards of living.  Where free enterprise  does not exist none of that is encouraged.

Look around.

Free enterprise makes natural resources
 more abundantly available 
and future generations richer.

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