Energy

The tragedy of modern environmental thought

Policymakers and most Americans with an environmentalist stripe frame the debate over resource management as one of wasteful overconsumption of scarce resources.  Any resource used today, they argue, cannot be used tomorrow.  Good public policy consists, at the very least, of not squandering these precious resources.

The way humans frame problems has tremendous influence on the way we analyze them.  With the framing above, policy questions about the environment boil down to “what should government do,” because the framing takes as axiomatic that individuals are over-consuming, ignorant of their overconsumption, untrustworthy and unwilling to modify their behavior in the face of crisis, and incapable of have a meaningful effect even if they were.  Yet collectivized “solutions” have been nearly universally disastrous.  What if the question has been framed wrong?

Part of the attraction of the Malthusian-alarmist argument is that it just makes intuitive sense: there’s obviously a finite amount of stuff on this planet.  But consider a famous bet between economists Paul Ehrlich and Julian Simon: Ehrlich, a resource alarmist, believed we were rapidly depleting the stock of natural resources; Simon disagreed and bet that Ehrlich could select any bundle of five commodities he liked and would find that each was more abundant than it had been in prior years.  Ehrlich, confident of his common sense, took the bet — and lost.

Part of the reason Ehrlich lost is that his conception of resources was very poor: the Malthusian model relies on the idea that resources are scarce.

A decent definition of a resource is something that a living being uses to generate value.  Oil, used to produce energy, plastics, chemicals, and an assortment of other goods and services, is a resource.  So is time, as in the phrase “time is money.”  But nothing is a resource until it is in useable form.  While oil may be considered a resource once it has been extracted from the sands of Saudi Arabia, it cannot be while it is still locked up in the Alaskan tundra.  A more proper description for materials in unusable form is raw material.

The Malthusians are correct in some sense: raw materials are indeed scarce, limited by nature.  Yet they fail to see the critical distinction between raw materials and resources: human action.  Only with human action can a raw material be converted to usable form.  Foremost among the things used by humans in doing this conversion are time and our minds, neither of which are limited, and both of which have tremendous value and alternative uses.  As a species, we will never run out of time or thoughts, but at any given time these resources must be allocated in one way or another — we cannot do two things at once.  Thus, converting raw materials into resources demands paying an opportunity cost, and the resource will only be tapped when its value exceeds that opportunity cost.

Developed nations have universally adopted markets as the means by which we ascribe value to goods and services.  The prices that prevail in a marketplace are powerful signals to the participants in the market, telling them in general terms about the scarcity of a product and the opportunity cost undertaken to produce it.  As a raw material becomes scarcer, the cost — and price — increases, encouraging consumers, on the one hand, to find substitutes and reduce consumption, and producers, on the other hand, to find alternatives and new sources.  This signal, acting on both sides of a transaction, will generally succeed in promoting innovation and ensuring that resources flow to their highest-valued uses.  But the signal only works properly when property rights are defined and protected, and individuals are free to make their own decisions in a market free from coercion, fraud, and other distortions.