Wednesday, June 12, 2013

The schismatic's brief

I'm in Burlington, VT, for the 7th biennial meeting of the US Society for Ecological Economics, which wraps up today. One of the presenters is the physicist Tom Murphy from UC San Diego, who is the proprietor of the blog Do the math.

In conversation, Tom observed that the people here represent a small minority of all the economics departments in the country. Personally, he sees a lot of sense in the basic perspective of ecological economics, including the idea that the use of natural resources is not a specialized question for a subdiscipline of economics, but is central to economics itself. But obviously that perspective is not generally shared among economists. Or as I might put it (Tom didn't), the people gathered here are schismatics among the economists.

(The meeting was held jointly with the 5th annual meeting of biophysical economics, which is sort of a schism within a schism. That's how these things go.)

Tom had a question for those of us actually in econ. Say you had a more conventional-minded economist, a sharp person open to evidence and persuasion. What argument would they make against the project of ecological economics?

I mentioned that Paul Krugman's recent textbook had a page that neatly encapsulated three fallacies about resources and the economy. Of course, not everyone agrees that they're fallacies—many economists are eye-to-eye with Krugman and see them as true statements. If you think they're fallacies, you end up at places like this meeting, among the schismatics.

On the fly in conversation, I could only remember two of the fallacies. The full set is:
  1. A focus on land specifically rather than resources in general.
  2. A conflation of the availability of resources within a country and the quantity of resources actually used by that country's economy.
  3. An excessively abstract view of technology and capital that mischaracterizes the relationship between them and resources.
Below the fold, the original passage, and the explanation.
From Paul Krugman and Robin Wells, Economics: second edition in modules, 2012, p. 380:

Other things equal, countries that are abundant in valuable natural resources, such as highly fertile land or rich mineral deposits, have higher real GDP per capita than less fortunate countries. . . . But other things are often not equal. In the modern world,natural resources are a much less important determinant of productivity than human or physical capital for the great majority of countries. For example, some nations with very high real GDP per capita, such as Japan, have very few natural resources. Some resource-rich nations, such as Nigeria (which has sizable oil deposits), are very poor.
Historically, natural resources played a much more prominent role in determining productivity. In the nineteenth century, the countries with the highest real GDP per capita were those abundant in rich farmland and mineral deposits: the United States, Canada, Argentina, and Australia. As a consequence, natural resources figured prominently in the development of economic thought. In a famous book published in 1798, An Essay on the Principle of Population, the English economist Thomas Malthus made the fixed quantity of land in the world the basis of a pessimistic prediction about future productivity. As population grew, he pointed out, the amount of land per worker would decline. And this, other things equal, would cause productivity to fall. His view, in fact, was that improvements in technology or increases in physical capital would lead only to temporary improvements in productivity because they would always be offset by the pressure of rising population and more workers on the supply of land. In the long run, he concluded, the great majority of people were condemned to living on the edge of starvation. Only then would death rates be high enough and birth rates low enough to prevent rapid population growth from outstripping productivity growth.
It hasn't turned out that way, although many historians believe that Malthus's prediction of falling or stagnant productivity was valid for much of human history. Population pressure probably did prevent large productivity increases until the eighteenth century. But in the time since Malthus wrote his book, any negative effects on productivity from population growth have been far outweighed by other, positive factors—advances in technology, increases in human and physical capital, and the opening up of enormous amounts of cultivatable land in the New World.
So what are the three fallacies?

1. "Land" instead of "resources"

Note what's here in Krugman and Wells' explanation of how we escaped from the Malthusian trap, and also what's missing. Resources are present, but only in the form of "enormous amounts of cultivable land in the New World." Of energy or fossil fuels, not a word. The focus on "land" rather than "resources" has deep roots, reaching down at least to the benchmark work on growth accounting by Edward Denison. In Trends in American economic growth, 1929-1982, there is interesting information about the poor match-up at the quarterly level between productivity downturns and the oil shocks of 1973 and 1979 (p. 52). But given the nature of how productivity is measured, long-run trends may be more reliable indicators than quarterly fluctuations. A few pages later, Denison refers to the small share of costs devoted to energy and focuses on energy per unit output, rather than energy per worker (p. 54). But in Denison's hands, both of these pieces of evidence are merely arguments for not measuring the effect of resources. In his actual growth accounting he uses "land" to mean quite literally "land": in the book's data tables, the input of 'land" to the economy is unchanged over the period 1930-1982, a span during which use of petroleum went up by 413%, coal by 12%, and overall energy use by 209%. The same treatment of land is repeated in several other of Denison's works.

2. Conflating the presence of useful resources within a country's borders and the quantity of resources actually used by that country's economy

We can see the confusion between using resources and having them within your borders in an earlier work of Denison's, Why growth rates differ; postwar experience in nine western countries (1967) . He extends "land" by considering different types, including what he refers to as "mineral lands." "Products measured were bituminous coal, lignite, anthracite, peat, natural gas, crude petroleum, iron ore, copper, uranium, zinc, lead, gold, silver, china clays, lime phosphate rock, salt, sulphur, pyrites, and potassium salts." But these are measured in value, not in volume, and more importantly, the data are marshaled for an "approximate comparison of minerals production, not use." p. 185 [emphasis added]

The same confusion is evident in Adrian Wood's review of Barbier, Natural resources and economic development, just in more barbed language than Krugman and Wells employed:
Whether countries or people are rich or poor does not usually depend fundamentally on natural resources.  Economics is helpful in seeing through this illusion. ... Some economists have taken a clear and correct line on this illusion, particularly in recent work on the role of institutions in development. But other economists have persuaded themselves by various sorts of theoretical and empirical analysis that countries are poor because they have too many natural resources and (though mercifully not usually in the same article) that people are poor because they have too few natural resources. (Journal of Economic Literature, vol. 45 (2007), pp. 201-204; quote from 201-202)
In mentioning the idea that some countries are poor from having too many natural resources, Wood is referring to the concept of the "natural resource curse." This is the idea that having a rich endowment of natural resources (say, sitting on top of a large oil field) leads to corruption, efforts to control the flow of revenues from the resource, and neglect of developing any useful economic activity other than resource extraction; the result is then that excessive gifts of nature leave you poor, rather than rich.

In the passage I cited, Wood pretends astonishment that people can propose the natural resource curse and also say that poverty is the result of too few resources, but this is easily cleared up if we apply the "have-vs.-use" distinction. Having lots of resources may or may not be good for your economy, in part depending on the institutional factors that Wood rightly alludes to. As illustrated in the earlier passage from Krugman and Wells with the comparison of Japan and Nigeria, it's easy to find resource-rich countries that are poor, and resource-poor countries that are rich.

But if dysfunctional institutions do keep you from turning resource abundance into economic prosperity, you'll find that it is, in a sense, because those bad institutions keep you from using the resources you have. Because whether you look at total energy from the International Energy Agency, or at ecological footprints from the Global Footprint Network, the relationship between resource use and GDP is exceptionally strong.

Not only does a regression of GDP on resource use produce an astonishingly high adjusted r-squared. It's also true that there are no countries that are very poor yet use more-than-average quantities of resources, and there are no countries that are very rich and use less-than-average quantities of resources. The link between resource use and GDP is formidable. It's only possible to miss it if you're looking at a country's resource endowment or extraction and harvest rather than its own use.

3. An excessively abstract view of technology and capital that mischaracterizes the relationship between them and resources

Krugman and Wells list "advances in technology" (along with resources in the form of land) as one of the reasons for avoiding the Malthusian dynamic. One can find more pointed statements as well.

In "The intellectual origins of economic growth," Joel Mokyr is, in part, having a dispute with Kenneth Pomeranz over Pomeranz's view on why Europe took off into sustained growth and China didn't.

Pomeranz points to Europe's "ghost acreage," land in the colonies that could grow wheat for Europe's bread, sugar for Europe's tea and jam, trees for Europe's shipwrights, cotton to be spun into thread and cloth in Europe's mills. These advantages were then extended with the application of coal, first to the metals industry, then as a source of power in steam engines.

Mokyr quite explicitly disagrees. "It is Europe's intellectual development rather than its coal or its colonial ghost acreage that answers Pomeranz's query of why Chinese science and technology—which did not 'stagnate'—'did not revolutionize the Chinese economy.'!" (p. 324)

I think this is a more subtle issue than the first two points, but nonetheless a fallacy.

Of course technology matters. Coal, oil, and natural gas have lain beneath our feet for all of human history, and people have been aware of their presence for ages, but they didn't make any society rich until the 1700s. Iron and steel used to be made by putting charcoal into a single vessel along with the ore or iron and "firing" them together. It took decades of experimentation in England in the 1700s before coal could be used in place of charcoal, using a different process, to reliably make metal of acceptable quality.

The principle of the steam engine had been known at least since the time of Hero of Alexandria in the first century A.D., but it took Newcomen's innovations to make a practical machine that could actually do useful work, and it took improvements by Watt and others to increase the machine's efficiency and power so that it could be used more widely.

Analogous points could be made about all the applications of oil and gas, from gasoline and aviation fuel to plastics and fertilizers.

And investment matters too. It's all well and good to figure out the concept of a steam locomotive running on metal rails. But it won't move a single passenger or a pound of freight if you don't actually build the damn thing. And investment is linked to innovation. People didn't leap from minimally effective steam engines pumping water from a mine, to a locomotive that could go 100 mph. Rather, they started with what look to us like clumsy machines, and as they built more of them, kept figuring out ways to make them better. Without those decades of investment, the innovation wouldn't have happened.

So economists are right to say that innovation and investment are important. Without them, resources will never make you rich. But they aren't just abstract "improvements in technology" or "increases in capital stock." All innovations are new ways of relating to resources. Very often, they are ways of using more resources, or using resources for some new purpose, or in a new way. And investments—building more power plants, more cars, more highways, more airplanes—make you rich because you have the coal or the oil to burn and make them useful.

Newcomen and Watt made coal useful, but they didn't "invent" the stuff that fed their engines, any more than England "invented" the countless acres across the ocean that supplied the cotton to feed England's mills, or the sugar to feed the people who worked in those mills.

The passage from Krugman and Wells implies that "advances in technology" are things that allow you to have economic growth without reliance on natural resources. Perhaps in the future they will be. Up till now, they've more often helped us grow by giving us ways to use more and different resources.

No comments:

Post a Comment