People, the Ultimate Resource

Quite often I enjoy the pleasure of shocking people with my contrarian viewpoints. For some people, the shock is replaced with the pleasure of understanding something that goes against plain common sense. When that happens, I am very gratified but when it doesn’t, I feel sad.

One of the many contrarian ideas I have is that there are no “natural” resources and that all resources are creations of the human mind. As economist and professor of business administration Julian Simon (1932 – 1998) argued that “the most important of all resources is human beings.” (The Ultimate Resource 2. Page 581). The more humans, he insisted, means more abundance and less scarcity.

We are all concerned about facing scarcity. Not all of us face the same scarcity, though. The good news is that scarcity is going down. To understand why that is so requires we define scarcity in some broad sense. We intuitively understand that prices have something to do with scarcity.

If the price of something is going up, it means that (1) the quantity available is decreasing, or (2) the quantity demanded is increasing, or (3) a combination of both. If the price is trending up, it is likely that scarcity is increasing, and vice versa. The price trend is a proxy measure of scarcity. If the trend is falling prices, then we conclude that scarcity is decreasing.

Money is the metric we normally use to indicate prices and costs. The price of a sandwich is $5 means that it will cost me $5 to get a sandwich. But the money price of a thing (usually called “nominal price”) is not a very good measure of the true cost. The most precious thing we have is time. If I have to work for 15 minutes to earn $5, then the time cost or the true cost of the sandwich to me is 15 minutes. That’s all that matters.

Suppose when I was a student, if a sandwich used to cost $3 but it took me 30 minutes to earn $3, then the sandwich cost me 30 minutes. Therefore the true cost of the sandwich has actually fallen from 30 minutes to 15 minutes, even though the nominal price of the sandwich has increased from $3 to $5.

Julian Simon held that resources were getting less scarce and he showed that scarcity was falling, and that was indicated by the fall in prices of resources. Here’s Simon on scarcity and costs:

What matters to us as consumers is how much we have to pay to obtain goods that give us particular services; from our standpoint, it couldn’t matter less how much iron or oil there “really” is in the natural “stockpile.” Therefore, to understand the economics of natural resources, it is crucial to understand that the most appropriate economic measure of scarcity is the price of a natural resource compared to some relevant benchmark.

Future scarcity is our interest. Our task, then, is to forecast future prices of raw materials.

WHAT IS THE BEST WAY TO FORECAST SCARCITY AND COSTS?

There are two quite different general methods for forecasting costs of any kind: the economist’s method and the technologist’s (or engineer’s) method. The engineering method is commonly used in discussions of raw materials, but I shall argue that the conclusions about costs reached with it are usually quite wrong because it is not the appropriate method.

With the technical engineering method, you forecast the status of a natural resource as follows: (1) Estimate the presently known physical quantity of the resource, such as copper in the earth that’s accessible to mining; (2) extrapolate the future rate of use from the current use rate; and (3) subtract the successive estimates of use in (2) from the physical “inventory” in (1). (Chapter 2 discusses technical forecasts in greater detail.)

In contrast, the economist’s approach extrapolates trends of past costs into the future. My version of the economist’s method is as follows: (1) Ask: Is there any convincing reason to think that the period for which you are forecasting will be different from the past, going back as far as the data will allow? (2) If there is no good reason to reject the past trend as representative of the future as well, ask: Is there a reasonable explanation for the observed trend? (3) If there is no reason to believe that the future will be different than the past, and if you have a solid explanation for the trend – or even if you lack a solid theory, but the data are overwhelming – project the trend into the future.

Given the wide disparity between the engineering and economic approaches, it behooves us to consider the conditions under which each is likely to be valid.

That’s from chapter 1 of his book The Ultimate Resource 2. Simon was a very competent thinker but unfortunately that book is not very well written. It needs a competent editor. Read the free text version at JulianSimon.com.