The Environment
The environment is, and will probably continue to be for the foreseeable future, a contentious issue. Its relevance to the business world should be obvious since many proposals directly affect our economy and the prospects of many industries such as the oil industry, the timber industry, even the pharmaceutical industry. Julian Simon’s article “Scarcity or Abundance” provides us with an opportunity to approach the issue in a somewhat unorthodox way. I will be supplementing my discussion of this article with other resources including some writings of John Stossel (from ABC’s 20/20) and economist Walter E. Williams. Please feel free to engage in the conversation and point out areas where you find disagreement. It is only by discussing this issue in an open and honest forum that we’ll make any progress towards understanding the problems and possible solutions to environmental issues.
The main characters in this intellectual drama are Paul Ehrlich and Julian Simon. Ehrlich is famous for his 1968 book The Population Bomb, where he makes some rather startling claims and predictions such as:
“The battle to feed all of humanity is over. In the 1970s and 1980s, hundreds of millions of people will starve to death despite any crash programs embarked upon now.”
“If I were a gambler, I would take even money that England will not exist in the year 2000.”
In October 1980 Ehrlich and others bet $1,000 that a given collection of natural resources would cost more in ten years than when the bet was made, thus illustrating that we are exhausting these resources. The resources included: copper, tin, nickel, tungsten, chrome. Julian Simon took this bet (and subsequent ones) and won that bet (and subsequent ones). Simon always bet that the resources would cost less in real inflation-adjusted terms thus indicating that they were not being exhausted. This led to the main formulation of his argument that natural resources are, for all practical purposes, inexhaustible. He claims that our supply of energy is infinite.
To understand this claim we have to look at what he means by energy and infinite. He is not simply focusing on one energy resource but the energy in general. If history has shown us anything, it’s that humans are ingenious when it comes to developing new resources. So, while we may run out of one resource (such as coal or oil) we will be able to develop a new resource, one that might not be economically feasible to develop at the moment. Look at what is happening with hybrid cars. For another example of this, look at the article by Walter E. Williams I’ve linked to this lesson.
But, what about our immediate problem of running out of oil? In 1960 Vance Packard wrote in The Waste Makers, “in oil, the United States is approaching depletion. At today’s rate of consumption, not tomorrow’s, the United States has proved reserves of oil sufficient to meet the nation’s needs for 13 years.” The problem has only gotten worse, right? Let’s look at it:
1960 proved oil reserves: 32 billion barrels
1973 proved oil reserves: 36 billion barrels
How can this be? How can we have more oil 13 years later when everything seemed to point to running out? The simple answer is that supply and demand are based on known reserves which can increase as well as decrease. It is not economically feasible to look for all the oil we’ll ever need. At a certain point, the cost of searching for the oil outweighs any possible profit to be made from finding it. So, we stop looking and concentrate on the supply we now have. But, this creates the illusion that we’re running out.
To understand let’s consider an analogy. Let’s say I have three pairs of shoes and at the rate I wear them, they will wear out in two years. So, I have only a two-year supply of shoes. Does that mean two years from now I won’t have any more shoes? No, it simply means that at some point between now and then I’ll have to procure more shoes. It simply doesn’t make any sense for me to spend all my money on a lifetime supply of shoes. After all, I have to devote resources to other needs as well such as clothes, food, gas, housing, and so on.
OK, so we shouldn’t worry so much about our supply of oil and other fossil fuels but isn’t it true that these are harming the environment by causing global warming? Honest opinion seems divided on this question but it is important to remember that there are also voices in the debate with an agenda. Consider what environmental activist Stephen Schneider said in Discover magazine: “We have to offer up scary scenarios, make simplified dramatic statements, and make little mention of any doubts we may have. Each of us has to decide what the right balance is between being effective and being honest." To me, this is a troubling admission because it illustrates that some are willing to sacrifice honesty to promote a cause. But, he’s not alone. Senator Timothy Wirth of Colorado is quoted in Michael Fumento’s book Science Under Siege as saying “We've got to ride the global warming issue. Even if the theory of global warming is wrong, we'll be doing the right thing, in terms of economic policy and environmental policy."
So, what are the facts concerning global warming? The consensus seems to be that there is no firm consensus. Scientists do agree that the earth is about a degree warmer now than a century ago and that human activity is a factor. But the question remains as to how much of a factor. As Walter Williams points out “geophysicists estimate that just three volcanic eruptions, Indonesia (1883), Alaska (1912) and Iceland (1947), spewed more carbon dioxide and sulfur dioxides into the atmosphere than all of mankind's activities in his entire history.” And more than this, “termites annually generate more than twice as much carbon dioxide as mankind does burning fossil fuels. One termite species annually emits 600,000 metric tons of formic acid into the atmosphere, an amount equal to the combined contributions of automobiles, refuse combustion, and vegetation.” So, while mankind may be contributing, it is important to keep this contribution in its proper perspective.
One of the central concerns of Paul Ehrlich’s book The Population Bomb was overpopulation. He predicts that “by 1999 the US population will decline to 22.6 million.” We are over 300 million today. At the time Ehrlich’s concern was that we would not be able to sustain the population with enough food and natural resources. Now, many are worried that there are too many people. But, this too is questioned by Simon. UN officials speculate that in several decades the world population will level off and in some countries, the population will decline. Some countries such as Italy are already experiencing a population decline which may become the next big problem to worry about. The PowerPoint reveals some interesting statistics about the population which illustrates a more reasoned perspective.
The theme of Simon’s argument is in part that we need to approach these questions with reason instead of emotion and hysteria. And we need to look at history. In the ’70s the great crisis was global cooling and the next ice age, now it’s global warming. Back then we were worried about overpopulation, now some countries are worried about being able to sustain their population. The moral of the story seems to be that we are not going to find the answers at the extremes.
But, even though Simon wants to refute the doom and gloom and some economists and scholars, there is one resource he is worried about running out of, at least in economic terms: people!
Looking at it from an economic perspective you can determine the relative scarcity of a resource by looking at what happens to its price over time. While the price of many natural resources such as copper and chrome are going down, the price of human beings (in terms of wages at least) continues to rise. This indicates a scarcity; at least a relative scarcity when supply is compared with demand.
So, what accounts for the fact that many other economists have been so wrong about these trends and how can we be sure that Simon is right? Well, to answer the second question first, we can’t. Even Julian Simon himself would say that we should continue to investigate to determine what the trends are doing. But as Niels Bohr once pointed out “prediction is very difficult, especially about the future.” And the other problem (which addresses the second question) is the use of the concept of “current rates.” This was the mistake that Thomas Malthus made. At current rates, we’ll run out of oil in so many years. At current rates, the population will soar to such and such a number. But, current rates rarely remain constant and it is the failure to remember this that makes predictions like the ones we’ve considered here problematic. After all, at the current rate at which my friend’s son is growing, he’ll be 40 feet tall in a couple of years!
The main characters in this intellectual drama are Paul Ehrlich and Julian Simon. Ehrlich is famous for his 1968 book The Population Bomb, where he makes some rather startling claims and predictions such as:
“The battle to feed all of humanity is over. In the 1970s and 1980s, hundreds of millions of people will starve to death despite any crash programs embarked upon now.”
“If I were a gambler, I would take even money that England will not exist in the year 2000.”
In October 1980 Ehrlich and others bet $1,000 that a given collection of natural resources would cost more in ten years than when the bet was made, thus illustrating that we are exhausting these resources. The resources included: copper, tin, nickel, tungsten, chrome. Julian Simon took this bet (and subsequent ones) and won that bet (and subsequent ones). Simon always bet that the resources would cost less in real inflation-adjusted terms thus indicating that they were not being exhausted. This led to the main formulation of his argument that natural resources are, for all practical purposes, inexhaustible. He claims that our supply of energy is infinite.
To understand this claim we have to look at what he means by energy and infinite. He is not simply focusing on one energy resource but the energy in general. If history has shown us anything, it’s that humans are ingenious when it comes to developing new resources. So, while we may run out of one resource (such as coal or oil) we will be able to develop a new resource, one that might not be economically feasible to develop at the moment. Look at what is happening with hybrid cars. For another example of this, look at the article by Walter E. Williams I’ve linked to this lesson.
But, what about our immediate problem of running out of oil? In 1960 Vance Packard wrote in The Waste Makers, “in oil, the United States is approaching depletion. At today’s rate of consumption, not tomorrow’s, the United States has proved reserves of oil sufficient to meet the nation’s needs for 13 years.” The problem has only gotten worse, right? Let’s look at it:
1960 proved oil reserves: 32 billion barrels
1973 proved oil reserves: 36 billion barrels
How can this be? How can we have more oil 13 years later when everything seemed to point to running out? The simple answer is that supply and demand are based on known reserves which can increase as well as decrease. It is not economically feasible to look for all the oil we’ll ever need. At a certain point, the cost of searching for the oil outweighs any possible profit to be made from finding it. So, we stop looking and concentrate on the supply we now have. But, this creates the illusion that we’re running out.
To understand let’s consider an analogy. Let’s say I have three pairs of shoes and at the rate I wear them, they will wear out in two years. So, I have only a two-year supply of shoes. Does that mean two years from now I won’t have any more shoes? No, it simply means that at some point between now and then I’ll have to procure more shoes. It simply doesn’t make any sense for me to spend all my money on a lifetime supply of shoes. After all, I have to devote resources to other needs as well such as clothes, food, gas, housing, and so on.
OK, so we shouldn’t worry so much about our supply of oil and other fossil fuels but isn’t it true that these are harming the environment by causing global warming? Honest opinion seems divided on this question but it is important to remember that there are also voices in the debate with an agenda. Consider what environmental activist Stephen Schneider said in Discover magazine: “We have to offer up scary scenarios, make simplified dramatic statements, and make little mention of any doubts we may have. Each of us has to decide what the right balance is between being effective and being honest." To me, this is a troubling admission because it illustrates that some are willing to sacrifice honesty to promote a cause. But, he’s not alone. Senator Timothy Wirth of Colorado is quoted in Michael Fumento’s book Science Under Siege as saying “We've got to ride the global warming issue. Even if the theory of global warming is wrong, we'll be doing the right thing, in terms of economic policy and environmental policy."
So, what are the facts concerning global warming? The consensus seems to be that there is no firm consensus. Scientists do agree that the earth is about a degree warmer now than a century ago and that human activity is a factor. But the question remains as to how much of a factor. As Walter Williams points out “geophysicists estimate that just three volcanic eruptions, Indonesia (1883), Alaska (1912) and Iceland (1947), spewed more carbon dioxide and sulfur dioxides into the atmosphere than all of mankind's activities in his entire history.” And more than this, “termites annually generate more than twice as much carbon dioxide as mankind does burning fossil fuels. One termite species annually emits 600,000 metric tons of formic acid into the atmosphere, an amount equal to the combined contributions of automobiles, refuse combustion, and vegetation.” So, while mankind may be contributing, it is important to keep this contribution in its proper perspective.
One of the central concerns of Paul Ehrlich’s book The Population Bomb was overpopulation. He predicts that “by 1999 the US population will decline to 22.6 million.” We are over 300 million today. At the time Ehrlich’s concern was that we would not be able to sustain the population with enough food and natural resources. Now, many are worried that there are too many people. But, this too is questioned by Simon. UN officials speculate that in several decades the world population will level off and in some countries, the population will decline. Some countries such as Italy are already experiencing a population decline which may become the next big problem to worry about. The PowerPoint reveals some interesting statistics about the population which illustrates a more reasoned perspective.
The theme of Simon’s argument is in part that we need to approach these questions with reason instead of emotion and hysteria. And we need to look at history. In the ’70s the great crisis was global cooling and the next ice age, now it’s global warming. Back then we were worried about overpopulation, now some countries are worried about being able to sustain their population. The moral of the story seems to be that we are not going to find the answers at the extremes.
But, even though Simon wants to refute the doom and gloom and some economists and scholars, there is one resource he is worried about running out of, at least in economic terms: people!
Looking at it from an economic perspective you can determine the relative scarcity of a resource by looking at what happens to its price over time. While the price of many natural resources such as copper and chrome are going down, the price of human beings (in terms of wages at least) continues to rise. This indicates a scarcity; at least a relative scarcity when supply is compared with demand.
So, what accounts for the fact that many other economists have been so wrong about these trends and how can we be sure that Simon is right? Well, to answer the second question first, we can’t. Even Julian Simon himself would say that we should continue to investigate to determine what the trends are doing. But as Niels Bohr once pointed out “prediction is very difficult, especially about the future.” And the other problem (which addresses the second question) is the use of the concept of “current rates.” This was the mistake that Thomas Malthus made. At current rates, we’ll run out of oil in so many years. At current rates, the population will soar to such and such a number. But, current rates rarely remain constant and it is the failure to remember this that makes predictions like the ones we’ve considered here problematic. After all, at the current rate at which my friend’s son is growing, he’ll be 40 feet tall in a couple of years!