Mining Nature's Ultimate Resource

In 1972, just two years after the first Earth Day, a team of scholars from MIT published a 200-page book called The Limits to Growth. Using the emerging instrument of computer models, they created a worldwide stir by suggesting that science had now put numbers to a few self-evident truths. Non-renewable resources are fixed; the consumption of such resources must eventually end; any civilization based on such consumption must collapse. New York Times columnist Anthony Lewis called the work “likely to be one of the most important documents of our age” (January 28, 1972).

Of course, the scholars acknowledged that they were dealing with variables. The consumption of resources might be steady or rising; resource supplies might be smaller or greater than estimated. But the logic could not be avoided: The growth of industrial society must run up against the physical limits of the natural world. How soon? That was where the computer models came in. The authors looked at nineteen key minerals, including copper, tin, petroleum, and natural gas. If consumption were immediately frozen at its present rate, they predicted, those four resources would last 36, 17, 31, and 38 years respectively. If consumption continued to grow at its 1972 rate, they would last only 21, 15, 20, and 22 years.

Say this for the young authors (the oldest was only 30): They were no rat-pack of jet-setting doomsayers, deploring the end of civilization as we know it, while hopping from one international conference to another with carbon credits in tow. Principal authors Dennis and Donella Meadows retreated to a New Hampshire farm in order to (in their words) “learn about homesteading and wait for the coming collapse.” Meanwhile, The Limits to Growth went on to sell nine million copies and to be translated into twenty-nine languages.

That was thirty-six years ago. None of the dire predictions came to pass. What went wrong for them (and right for mankind)? What did the authors of The Limits to Growth overlook? And why have these and other recurring projections of resource exhaustion never come true?

The answer is entrepreneurship applied to resources, or resourceship: the ability of man to continually generate his natural resources in a reason- and capitalist-based institutional framework.

Minerals cannot be naturally or artificially created in significant quantities within a human time-frame, giving rise to the natural-science concept of mineral fixity. But that concept has limited economic or business relevance. At one time, perhaps 10,000 years ago, gold and copper were simply gathered, picked out rocks in which they occurred in pure form. But just as man’s life as a hunter-gatherer ended with the Agricultural Revolution, so did his life as a hunter-gather of shiny metals end with the smelting of copper 6,000 years ago. Since then, the minerals that serve as man’s “natural resources” have not been gathered; they have been created, produced, and augmented by means of ever more complex technologies. In a very real sense, they have been and are being manufactured. But just how that is possible can be difficult to understand.

Malthusianism in Food and Fuel

In the late eighteenth and early nineteenth centuries, many people were convinced by Thomas Malthus’s calculation that population must outrun food supplies. Today, most people will concede that—at least in theory—a renewable resource like food can be expanded indefinitely at the rates needed to keep up with growing populations.

But what about mineral resources? The analogy does not seem applicable. After all, we cannot apply fertilizer to our tin mines and petroleum fields to sustain crop after crop and even increase their yield. We do not have mineral scientists developing faster-growing copper and natural-gas varieties. What we have are metals laid down at the time of the Earth’s formation, and hydrocarbons formed over tens of millions of years. These resources cannot be physically expanded, at least not in quantities that are economically significant. Consequently, it would seem, an economy that seeks to be sustainable must keep those resources that are not destroyed by use (such as metals) permanently available through recycling. As for those that are destroyed by use (such as hydrocarbon fuels), they must be eliminated from a sustainable economy.

The first major attempt to apply such Mathusian thinking to minerals came in 1865, when W. S. Jevons published The Coal Question. In that work, he questioned the continued availability of affordable coal to fuel England’s industrialism and global might. Specifically, he sought to uncover “the necessary results of our present rapid multiplication [of demand] when brought into comparison with a fixed amount of mineral resources.” Assuming a continued growth in demand of 3.5 percent annually, he projected a “threatening” rise in fuel costs, “perhaps within a lifetime” and certainly within a century.

Of course, the coal crunch never came. The growth in demand was far less than Jevons predicted. And interfuel substitution away from coal began with North Sea production of oil and gas in the late 1960s. England did have coal problems, but these were the result of man-qua-government and not of nature.

So, England avoided the Malthusian collapse predicated on the exhaustion of its coal mines. But was it just an accident? Was it the result of nothing but the lucky happenstance that petroleum came along in the nick of time? Or is the very idea that mineral resources exist as a fixed, constantly depleting supply somehow wrong in a fundamental way?

The Austrian School Approach

Even the best economists in the Austrian-school, free-market tradition have imperfectly grasped the economics of “natural resources.” Murray Rothbard realized that mineral resources do not become economic factors until human action makes them such. “Before the development of the automobile and of modern machinery,” he wrote, “the vast pools of petroleum under the earth were totally valueless to man; they were useless, black liquid. With the development of modern technology and industry, they suddenly became useful resources.” But once man had made a mineral valuable, Rothbard said, it did possess a unique feature. “There is one type of resource that is nonreplaceable but also nonpermanent: the natural resource that is being depleted, such as a copper mine or a diamond mine. Here the factor is definitely original and nature-given; it cannot be produced by man. On the other hand it is not permanent, but subject to depletion because any use of it leaves an absolutely smaller amount for use in the future.”

Rothbard’s image of a resource, one might say, is like a fixed tank of water: Yes, it requires human ingenuity to devise a faucet for the tank and thus garner its contents. But once that achievement is past, the tank simply drains, more or less slowly, as the market demands.

F. A. Hayek also was wed to a fixity/depletionist view of natural resources, and thus contrasted those means of production that were created by man (capital goods) with those that were “wasting [that is, depleting] natural resources.” On this basis, he asserted: “Mineral resources are inevitably exhausted by their use and cannot possibly render the same service forever.” Therefore, he concluded: “If income is to be maintained permanently at the higher level which the wasting natural resources make possible, these resources will, as they are exhausted, have to be replaced by produced means of production.”

Ludwig von Mises, the dean of the Austrian School, came closest to avoiding the errors that his leading disciples nonetheless fell into. He did so by rejecting any stance toward resources that was not grounded in real-world business economics. He did not, like Rothbard, think of “the vast pools of petroleum beneath the earth” being suddenly rendered valuable by “modern technology and industry.” Nor did he speak, as Hayek did, of a resource’s inability to render service “forever.” For Mises, the only resource supplies that concerned economics were specific supplies. Holistic notions of aggregate supply and future availability, he wrote, “do not matter for the present-day conduct of mining and oil-drilling. The deposits of mineral substances and their exploitation are not characterized by features which would give a particular mark to human action dealing with them.” Nevertheless, even Mises implied that economics must recognize the fixed quantity of mineral resources and that they are found rather than created.

The Zimmermann Contribution

Thus, the Austrian economists’ approach to mineral resources still harbored four fallacies, to a greater or lesser degree. (1) There remained a tendency to slip back and forth between a physical science view of earth’s chemistry and a purely economic view. (2) As a result, even Austrian economists tended to think of certain resources in terms of an aggregate. Yes, technology was required to make oil a resource. But once that technology was on the scene, one could think of “earth’s oil” as a fixed and dwindling resource. (3) Austrian economists thus tended to think of technology as the only human factor responsible for creating resources out of mere chemicals. (4) Consequently, they also tended to overlook the possibility that resources can be immobilized—can revert to the status of mere chemicals, useless to man—in the face of human social and cultural conditions.

Apparently unbeknownst to the Austrian school, a theory of resource economics that exposed these fallacies was emerging from an unexpected source: the American Institutionalist school of economics.

This tradition had arisen from the Hegel-inspired German Historical School and therefore included a long line of anti-capitalists, from Thorstein Veblen and John R. Commons to Gunnar Myrdal and John Kenneth Galbraith. The institutionalists’ emphasis on the social context of economic activity led them into the mistaken belief that even the fundamental laws of market economics were merely historical artifacts and could be usefully replaced by Progressivism. But however fatal the attraction of context was to their overall outlook, it proved invaluable for grasping the nature of mineral resources. Though several institutionalists contributed to a new theory of resources, particularly Wesley Mitchell, it fell to Erich Zimmermann (1888–1961) to elaborate the doctrine in full.

Rejecting entirely the economic relevance of the physical science perspective, Zimmermann wrote: “Previous to the emergence of man, the earth was replete with fertile soil, with trees and edible fruits, with rivers and waterfalls, with coal beds, oil pools, and mineral deposits; the forces of gravitation, of electro-magnetism, or radio-activity were there; the sun sent forth his life-bringing rays, gathered the clouds, raised the winds; but there were no resources.” By way of explanation, he said: “Resources are means to ends. Means derive their meaning from the ends which they serve. Ends suggest purpose. Purpose springs from the human mind, for the mind of individuals or of groups of individuals. Resources, therefore, reflect the subjective appraisal of those who purposefully choose means to accomplish given ends.”

Because Zimmermann understood that resources are created and defined by human ends, he did not fall into the fallacy of considering a resource in its hypothetical whole. Such aggregates do not enter into human plans, he said; only specific, here-and-now supplies do. “To the physicist the law of the conservation of matter and energy is basic; the economist, however, is less interested in totality of the supply than in its availability.” Perhaps more properly, Zimmermann should have said that “the businessman” or “the consumer” is less interested in total supply than in available supply. For all too often, as he well knew, “economists” failed to realize the irrelevance of total quantities. Thus, Zimmermann warned his fellow economists against the “unfortunate . . . tendency to think of resources in terms of a single asset, e.g., coal, rather than the whole complex of substances, forces, conditions, relationships, institutions, policies, etc., which alone help to explain the way coal functions as a resource at a given time and place.”

As a result of understanding the centrality of particular supplies, Zimmerman saw that the making of a resource involves more than advances in technology. Economic demand creates and destroys resources just as surely. “Resources are dynamic,” he wrote, “not only in response to increased knowledge, improved arts, expanding science, but also in response to changing individual wants and social objectives.” The technological ability to turn whalebone into corsets may have made whalebone a resource—but only so long as there was a demand for whalebone corsets. Absent such demand, whalebone ceases to be a resource.

Unfortunately, the wider role of society in resource-creation means that resources can cease to be resources, despite technology and demand, if socio-political circumstances are adverse. “The resources at the disposal of man . . . contract with every relapse into the barbarism of war and civil strife,” Zimmermann noted. One might add: And with every relapse into collectivism—witness the economic regression and energy problems portrayed in Ayn Rand’s Atlas Shrugged.

In the end, though, even Zimmermann fell short of being the complete resource economist. His institutionalism, born of German Hegelianism and fostered by American anticapitalism, inclined him to look askance at the plentitude of free-market production. Rather than perceiving such abundance as a cornucopia, he saw it as overproduction and a “warped appraisal” in favor of present output. “Private profits,” he complained, “are made at the expense of appalling long-run social waste.” This was a market failure, he declared, and a proper concern of government, which “as the political embodiment of the group . . . takes in the conservation of the limited non-renewable resource.” Despite all that he had done to revolutionize resource economics, Zimmermann could not shake off entirely the view that the physical nonreproducibility of minerals had some significance—moral, social, and political, if not strictly economic.

Resourceship

To turn the noun “resources” into the verb “resourcing,” to discard entirely the notion of a resource “glass” that is somewhere between full and empty, requires one more analytic step—a step that Zimmermann failed to take.

Because we cannot know the total quantity of any mineral, we cannot say what percentage of it has been used or at what rate it is being used (in percentage terms). Nor can we specify how much remains potentially available or at what rate it might become available. Those things depend (at minimum) on the future of technology, which is also unknowable. The absence of any knowable physical or technological limits on our potential to produce a given mineral results in a situation that is economically equivalent to one in which synthetic additions could be made to the mineral supply.

To state the matter in other words: Today’s existing supply of any “fixed” mineral must be looked upon, from an economic standpoint, as being just as reproducible as it would be if we could synthetically create the substance. Resourceship, the act of mineral creation, is thus economically akin to manufacturing in a factory—and so there is no viable distinction, such as even the Austrian economists drew, between “capital goods” and “natural resources.”

The tendency to confound physics and chemistry with economics has plagued all attempts to reach an understanding of mineral resources. The laws of thermodynamics and the conservation of matter and energy rule in their domains. But there is no economic law analogous to the conservation of matter. Estimates can and have been made as to the physical quantity of various minerals: the amount of certain elements in the earth’s crust, for example. But what subset of that quantity will become economic supply, and when, is unknowable. Such estimates therefore have no economic significance. “What we observe in the real world are not one-time stocks immaculately created to be consumed,” MIT economist M. A. Adelman has stated, “but inventories of ‘proved reserves,’ constantly renewed by investment in finding and development.”


What Is the Ultimate Resource?

Almost thirty years ago, the depletionist mind-set was tested against the anti-depletionist mind-set in the form of a wager—the most famous ever made in economics.

In 1970, the depletionist/catastrophist Paul Ehrlich had written: “If I were a gambler, I would take even money that England will not exist in the year 2000.” The anti-depletionist Julian Simon tells what happened next: “In an exchange with him in 1980, I offered to take that bet or, more realistically, wager . . . that natural resources would become cheaper rather than more expensive.” Each side then published an article in the March 1981 Social Science Quarterly, announcing that the bet was on. Wired magazine later recounted the story:

Ehrlich and his colleagues picked five metals that they thought would undergo big price rises: chromium, copper, nickel, tin, and tungsten. Then, on paper, they bought $200 worth of each, for a total bet of $1,000, using the prices on September 29, 1980, as an index. They designated September 29, 1990, 10 years hence, as the payoff date. If the inflation-adjusted prices of the various metals rose in the interim, Simon would pay Ehrlich the combined difference; if the prices fell, Ehrlich et alia would pay Simon.
Then they sat back and waited.

Between 1980 and 1990, the world’s population grew by more than 800 million, the largest increase in one decade in all of history. But by September 1990, without a single exception, the price of each of Ehrlich’s selected metals had fallen, and in some cases had dropped through the floor. Chrome, which had sold for $3.90 a pound in 1980, was down to $3.70 in 1990. Tin, which was $8.72 a pound in 1980, was down to $3.88 a decade later.

Which is how it came to pass that in October 1990, Paul Ehrlich mailed Julian Simon a check for $576.07.

In contrast to some of his more enthusiastic admirers, Simon knew and said that his bet involved risk. He claimed that his victory would be duplicated, “not in every single place, not in every single time span, but on the average.” As he wrote in The Ultimate Resource 2: “I’m only offering to bet; I do not guarantee a rosier future in all respects as a sure thing.”

How would Simon’s wager have fared at other times? A 2005 study by David McClintick and Ross Emmett showed that: “Despite ups and downs over the course of the past century, a wager in 1900 would have been won in 1999 by the person who predicted a decrease in natural resource prices. If someone invested $200 at 1900 metals’ prices in each of these five metals the inflation-adjusted value of the same bundle of metals in 1999 would have been 53 percent lower. The person who took Simon’s position would have won over the entire century.” But the wager would have gone against Simon in half of the decades: the 1920s, 1930s, 1950s, 1960s, and 1970s.

Will Simon’s wager continue to be a winner? In August 2005, John Tierney—a New York Times columnist who had written an admiring article on Simon and his wager fourteen years earlier—bet peak-oil prognosticator Matthew Simmons that the average price for a barrel of oil, during the year 2010, would be less than $200, adjusted for inflation. Tierney ended the article on his wager with Simmons thus:

I realize this isn’t a sure thing, because the price of oil has risen before—it quintupled in the 1970s. But then it dropped, thanks to new discoveries and technologies, validating the Cornucopians’ optimism. So I figure the long-term odds are with me. And while I’m at it, I’ll extend Julian’s challenge and consider bets from anyone else convinced that our way of life is “unsustainable.” If you think the price of oil or some other natural resource is going to soar, show me the money.
But how wise is Tierney’s bet? He seems to have overlooked the most critical point about Simon’s wager: It stipulated that the commodities had to be “not government controlled.” Yet the thirteen largest oil companies in the world, ranked by proven reserves, are all nationalized oil companies. And the world’s nine largest private oil companies control only 5 percent of the world’s crude oil reserves. And even private oil companies operating in the United States are under heavy politicized control.

Perhaps it is telling that Tierney is a science columnist. Undoubtedly, he has heard of emerging technologies that will enable firms to extract oil from more distant and more difficult deposits. Certainly, he is following the renewed interests in nuclear energy as a means of alleviating some of the global demand for petroleum in power generation. Probably, he also tracks laboratory advances in the microbial conversion of cellulose into liquid energies. All of these reports are exciting to the technologically minded. But they cannot help Tierney win his bet if Congress places environmental bans on drilling or if the Energy Department’s “alternative energies” fizzle in the marketplace. (Confession: I made a similar bet with Matthew Simmons and have not Tierney’s excuse. Both of us still expect to win our bet, but the addiction of governments to meddling in oil markets is making the outcome a lot more interesting than I would ever have thought.)

In any case, we all need to learn more thoroughly the truth that Julian Simon came to appreciate later in his career. In The Ultimate Resource (1981), Simon placed his reliance almost completely on the power of the human mind. That, he announced, was the ultimate resource. But in the revised edition, The Ultimate Resource 2 (1996), Simon recognized that the ultimate resource was the free human mind; only that could be counted on to solve man’s problems—and for that reason political circumstances had always to be taken into account. Like Erich Zimmermann, Simon came to see that the efficacy of human technology cannot be discussed apart from the human institutions that encompass it. “It is not only the human mind and the human spirit that are crucial,” Simon admitted in the conclusion of The Ultimate Resource 2, “but also the framework of society. The political-economic organization of a country has the most influence upon its economic progress.”

But while acknowledging the critical variable of institutions, Simon continued to maintain that improvement was inevitable. Responding to writers who took as their slogan “ideas have consequences” and who emphasized the volitional character of human culture, for better and for worse, Simon declared: “Yes, ideas matter, and fighting for the truth can make a difference in how fast we make progress. Unlike those writers, however, I do not think that ideas are decisive in the long run. . . . I believe that, in the long run, in a world of modern global communication and mobility, real material improvement cannot be prevented forever.”

For the man who proved the irrelevance of “can’t last forever” thinking in regard to resources, it was a curious position. And for the man who explained that humans are not bound by their existing material culture, it was an oddly reductionist view. Men should no more resign themselves to being saved by the possibility of abundance than they should resign themselves to be destroyed by the prospect of shortages.

It is men, institutions, and societies that create resources from physical nature, and they can just as surely “destroy” resources—in the sense of leaving the creatable uncreated, reducing what would have been mineral resources to what Zimmermann called the “neutral stuff” of the earth. This destruction can be “creative destruction” (Joseph Schumpeter’s term), as in the case of whalebone mentioned above: Capitalist commerce is characterized by the good replacing the bad and the better replacing the good. But destruction can also be wanton destruction: Many resources that Greek and Roman civilization had created were wantonly destroyed by Dark Age civilization: Pozzolana, the basis of waterproof cement, to mention but one example of many, ceased to be a resource for mankind during the Dark Ages.

Only the engine of the free human mind, the true ultimate resource, can never be the object of creative destruction, for there is nothing superior by which it might be replaced. But the wanton destruction of the free human mind, pace Simon, is a danger that we shall always have with us.