Saturday, January 26, 2013

Why the Neo-Malthusian Premise of “Peak Resources” are Misguided

Writing at the Daily Reckoning, Chris Mayer, managing editor for several newsletters has a rejoinder to neo-Malthusians led by GMO’s Jeremy Grantham.
Yet whether it is oil or copper or iron ore or whatever resource, people insist on relying on the same faulty reasoning that “the easy stuff is gone.” They continue to make the same tired case for chronic natural resource shortages and a decline in our standard of living.

The great economist Joseph Schumpeter’s (1883-1950) criticism of the Malthusian position still holds. On Malthus and his ilk, he wrote: “The most interesting thing to observe is the complete lack of imagination which that vision reveals. Those writers lived at the threshold of the most spectacular economic developments ever witnessed.” Yet they missed it.

So here is my prediction: I believe we are on the cusp of even greater levels of innovation and development — another industrial revolution is in progress right now. So ignore the gloom and doom on natural resources. Contra Grantham, the days of abundant resources and falling prices are far from over.
Mr. Mayer is basically right.

But today’s high prices of commodities hasn’t just been a function of market prices operating from a laissez faire environment but importantly represents interventionism on a massive scale, particularly from central banks, whose inflationism has resulted to severe economic distortions that has been reflected on market prices. In short, prices of commodities may also represent monetary dislocations. 

Also the mining-energy industry, for instance, are tightly regulated, where regulations serve to inhibit supplies. There is also a political bias for green energy that has caused economic disruptions at the costs of taxpayers.

Nonetheless, despite these interventions, I would add that trends towards improving the supply side, buttressed by technology, are on the way. In the world of commodities, notably deep sea mining and asteroid mining are great examples.

On deep sea mining from
Deep-sea mining is poised as a major growth industry over the next decade, as large developing-world populations drive consumer demand for metal-containing products, climate change makes previously inaccessible regions like the Arctic Ocean seabed attainable, and improved extraction technologies turn previously uneconomical rock into paydirt.

Cindy Van Dover is a Professor of Biological Oceanography at Duke University and a leading voice in the development of policy and management strategies for deep-sea extraction activities.  Van Dover has studied the ecology of hydrothermal vents for years, and she takes a measured, pragmatic approach to the coming industrialization of her study sites.  If mining is going to happen – a event that the more strident faction of the environmental movement will no doubt contest – “we need to work with industry to make sure we do it right,” says Van Dover.
Taking a leaf out of deep sea mining, asteroid mining seems also in the pipeline. From
A newly launched asteroid miner is looking to the history of deep sea mining as it attempts to navigate laws governing exploitation of space.

Deep Space Industries, which rolled out its plan for space mining today at a news conference in the Santa Monica Museum of Flying in California, said the laws regarding resource mining beyond the earth are largely unformed, and the company will rely on co-operation between the main players. (Video embed of the press conference is below.)

"If you look at parallels, like deep sea mining, that went forward without a global treaty. The companies that wanted to do deep sea mining shook hands: 'We won't interfere with you if you don't interfere with us', that was the general approach going forward," said David Gump, Deep Space's chief executive officer.

Gump said the company will be relying on the 1967 space treaty, which he says will give the company the right to utilize space resources but will not grant the right to claim any sovereign territory.
Like the shale gas boom which has exposed the major flaws in the economic interpretation of “peak oil theory”, neo-Malthusians always mistakenly construe the causal link of prices as signifying a fixed pie for the supply side while downplaying the importance of human capital in providing innovation that contributes to the rebalancing of the economics of commodities.

Professor Don Boudreaux aptly quotes the great Julian Simon from his 1996 book The Ultimate Resource 2 
“[N]atural resources are not finite in any meaningful economic sense, mind-boggling though this assertion may be.  The stocks of them are not fixed but rather are expanding through human ingenuity.”

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