Saturday, February 10, 2007

Economics and the Theory of the Intrinsic Value of Natural Resources

Stuart K. Hayashi

Tali, in your previous post, you wrote:

Wealth is made. Wealth is not some pie in the sky where dog-eats-dog to get the biggest share. If you want more wealth, produce goods and services people want to trade their goods and services for.


Dude, nobody will believe you when you say that human beings can create and add new quantities of wealth to the quantity already existing -- nobody except for a quasi-Ayn Rand lover (that is, not somebody who necessarily loves Ayn Rand, but would love Ayn Rand if he read her).

The reason why nobody will believe you (except for me, the Ayn Rand lover) is that the vast majority of people believe in what I call "The Theory of the Intrinsic Value of Natural Resources." This theory has gained new life because of the New York Times best-selling book Collapse by the overrated UCLA biologist and Pulitzer Prize winner Jared Diamond (see reviews of it here and here).

It is a younger counsin of Karl Marx's Labor Theory of Value. According to Marx, the value of a good or service is contingent solely upon the amount of manual labor that went into producing it. By that standard, manual laborers should get all the revenue, and the money that the entrpreneur takes in is what he stole from the laborers. (See "The Bloodsucking Businessman Myth.")

Marx' labors theory of value overlooks the fact that, if entrepreneurship were as unimportant as Marx said it is, then no technological progress could occur. A day laborer alive today is no stronger than a caveman who lived in 2 Million B.C. And yet the average day laborer living today produces more per-capita output today than his Stone Age counterpart. (See Jean-Baptiste Say's Treatise on Political Economy, Book I, Ch. 7.)

Economist Angus Maddison shows that, even after adjusting for inflation, per-capita output for an average day laborer vastly increased from 1500 to 1800 to 1950 in England and Europe, and every increase in output came from improvement in machinery.

Marx's rebuttal is that all factory machinery was created by laborers, and thus every increase in output spurred from factory machinery must also be credited solely to manual laborers and not to entrepreneurs.

But, again, Marx ignores that those machines weren't designed solely by muscle labor -- they had to be designed by the human mind: that is entrepeneurship and specialized knowledge (often called "Knowledge capital" by management professors).

James Watt, inventor of the modern steam engine, was not substantially stronger than any of his laborers. Suppose he had 30 employees building his steam engines. Even if those 30 employees hired a 31st worker, but did not have a James Watt around to show them his designs for the steam engine or to manage their activities, they would not have been capable of manufacturing steam engines, and thus would not have been able to use steam engines to improve output among other manual laborers. The same principle applies if those original 30 workers hire 70 more manual laborers but no entrepreneur or inventor like James Watt.

Thus, since 1800, the entrepreneur has been indispensable for the production of any machinery used in the private sector that has increased the per-capita output of every manual laborer.

Anyhow, that's the Labor Theory of Value and my refutation of it.

However, Marx's Labor Theory of Value has been replaced by the radical environmentalists' Theory of the Intrinsic Value of Natural Resources (TIVNR).

The Theory of the Intrinsic Value of Natural Resources (a term I coined) goes as follows: Mankind does not create any wealth at all. All the wealth that can ever exist has already existed since mankind's beginning, because all wealth ultimately comes from non-renewable natural resources. So, in the long run, once all non-renewable natural resources are used up, no more wealth can be created.

Do you think, for example, that oil companies create petroleum? That they produce it?

Well,"rock oil" isn't an invention. It's a natural resource that cannot be renewed in a single man's lifetime (or even over ten generations). Once we use up all of the petroleum, it's gone. We're screwed, industrial civilization collapses, and we go back to the Stone Age.

The same goes for coal. And fresh water.

According to the environmentalists, because our wealth comes strictly from natural resources, and because our natural resources are limited (and often non-renewable), our pie of wealth must be constantly shrinking. We have not yet experienced doomsday, they say, but we are bringing it closer and closer the more we consume; we're living on borrowed time.

Think about the pie you bake. When you take a slice and eat it, does that slice grow back? Hell, no! It's gone. And when the last slice of the pie is gone, then the pie does not replenish itself. It's gone for good. That, say Malthusian environmentalists, also applies to the natural resources being used up by heavy industry.

Environmentalists say that the non-renewable resources that go to making our goods and services are a scarce pie, which means that our wealth does exist in a fixed amount that is constantly shrinking. When you sap up all the petroleum, it won't grow back. You cannot use a factory to mass-produce more petroleum.

Okay, what Jared Diamond's Theory of Intrinsic Value in Natural Resourcse ignores, just as Marx's Labor Theory ignored, is that natural resources -- just like manual labor -- are completely incapable of producing sustenance for anybody without the involvement of entrepreneurship: that is, the use of the human mind.

Before scientists, engineers, inventors, and entrepreneurs like George Bissell discovered that crude oil could be used as a fuel, nobody wanted crude oil. If a farmer found crude oil on his farmland, he was angry. The crude oil destroyed his crops, and he couldn't sell the worthless crude to anybody.

And crude oil was worthless until scientists like Abraham Gesner discovered methods of harnessing it to serve our human needs. The same goes for the simplest livestock: cows were completely useless until cavemen discovered that they could be used as suitable food.

Contrary to anti-capitalists: neither manual labor nor natural resources have any kind of intrinsic worth. Their value is predicated upon the extent to which they serve the ends of survival and happiness for sapient beings. Kant's ridiculous "Categorical Imperative" doesn't apply to natural resources or livestock. I don't have to value a cow for its own sake; the goodness of a cow is determined by the benefit the cow confers upon me. The same goes for a redwood tree. Even the economic value of gold is determined primarily by the uses that people can find for it.

How can a natural resource have intrinsic worth? Consider the definition of the very term "resource." A "resource" is something that is to be used to serve some sapient being's end. If a resource were not to be used, then, by definition, the word "resource" would contradict its meaning.

Despite what Malthusian environmentalists say, free enterprise is the key to preventing resource depletion.

Every society that was destroyed by resource depletion -- many American Indian tribes, the Maya, the Rapa Nui peoples, the Ancient Romans, the Soviets -- was not destroyed by overproduction in free markets, but by the fact that its own collectivism, and its own failure to allow entrepreneurs to reap the rewards of their efforts, removed the incentives of many individuals to find creative solutions to resource depletion problems.

That does not happen in free enterprise for the following reason: a peaceful entrepreneur -- that is, an entrepreneur whose costs are not contained by any commission of theft or poisoning on his behalf by either private parties or by any government -- must exercise creativity in peaceably staving off resource depletion in order to contain his costs.

When an entrepreneur uses a natural resource, it's not like he gets it completely free of charge. He has to pay for the timber or metals taht he uses, just as he has to pay his workers.

And even if an entrepreneur were able to claim ownership over some natural resources through homesteading rights, he would still have to pay people to utilize processes that will convert those natural resources into tools that he can use (for instance, even if an entrepreneur were able to claim ownership over a forest, and he wanted the forest so that he could use its contents to build houses, he would still have to pay men to cut down those trees and convert them into timber.)

Thus, every unit of natural resources -- just like every unit of manhours -- that the peaceful entrepreneur uses as an input represents a cost to that peaceful entrepreneur. The higher the costs are, the lower the profit margin is.

Thus, to increase his profits, the peaceful entrepreneur must exercise creativity in discovering methods of extracting greater output out of ever-smaller and ever-fewer inputs of natural sources, human labor, and the capital that was created from prior mixtures of natural sources and human labor and entrepreneurship.

That's exactly what happened with copper wire. Back in 1970, environmentalist Paul R. Ehrlich screamed that mankind had exhausted Earth's copper deposits by using up too much copper to build electrical wires. The copper "pie" was being "eaten up" and soon nothing would be left. And it's not like you could wave a magic wand and make copper appear out of thin air.

Resultantly, the drainage of copper supplies led to copper increasing in price. In order to contain their costs, entrepreneurs -- the ones who purchased copper for their own uses -- sought methods of finding a cheaper copper substitute that would work just as effectively in creating electrical wires to be used in satellites and computers.

And so the entrepreneurs took advantage of the discovery of scientists and engineers that fiber-optic cables -- made from glass, which, in turn, was made from sand -- conducted electricity even more efficiently than copper . . . and at a lower cost to them!

So industries switched from using copper to cheaper, more powerful fiber-optic cables. In so doing, they used up fewer and fewer grams of natural resources for every unit of wattage that powered their machinery. And so they got more output with lower costs by using up a smaller amount of natural resources for every unit of output.

And guess what: because of that advance, the demand for copper dropped. Adjusting for inflation, copper is cheaper now than it was in 1970. And more tons of copper are on the market today than in 1970.

As Ronald Bailey observed in 2001:

Let's take a look at a few concrete examples of dematerialization, or the "reduction of material use per unit quality of life." A copper wire can transmit 24 voice channels or about 1.5 megabytes of information per second. Far thinner and lighter optical fiber can transmit more than 32,000 voice channels and more than 2.5 gigabytes of information per second. The first American communications satellite, Telstar 1, was launched in 1962 and could handle 600 telephone calls simultaneously. Modern Intelsat satellites can handle 120,000 calls and 3 TV channels at the same time.

Miniaturization and its cousin "lightweighting" are pervasive. Consider heavy vinyl phonograph records being replaced by CDs -- and now, by immaterial MP3 files. Since the 1970s, the weight of the average car has fallen by 25 percent. Food cans are 50 per cent lighter than they were 50 years ago. A flexible plastic pouch that replaces a steel can reduces the packaging weight by 93 percent. Plastic soda bottles are 30 percent lighter than they were in the 1970s -- which were already much lighter than the glass ones that preceded them. Similarly, plastic grocery bags are 50 percent thinner than they were 20 years ago and lighter than the paper bags they replaced. The invention of the steel frame building did away with structures that needed heavy thick walls to support their own weight.

Functionality is increasing throughout the economy as well -- as computers get smaller and faster, air conditioners, refrigerators, furnaces, and all manner of appliances become more efficient and longer-lasting. [...]

Of course, some things can't be miniaturized -- food, for example (fans of nouvelle cuisine may beg to differ). Yet food can be produced more efficiently, which is what has happened. Hence, corn yields per acre in the United States have more than tripled since 1950. Improving crop productivity is based entirely on technological improvements such as fertilizer, pesticides, and better seeds.

"How Much Land Can Ten Billion People Spare for Nature?" That's the question Paul Waggoner, a distinguished scientist from the University of Connecticut Agricultural Experiment Station, used in the title of a 1996 article in the journal Daedalus. He concluded, "If during the next sixty to seventy years the world farmer reaches the average yield of today's U.S. corn grower, the ten billion will need only half of today's cropland while they eat today's American calories." If Waggoner is right -- and all signs are that he is -- the future will be populated by fat people who will have plenty of wilderness in which to frolic.

Land is a non-renewable resource, right? You can't just grow more land. Yet even the carrying capacity of land has increased over the Industrial Revolution. A single acre of farmland existing today grows more food per person than that same acre would have in 1800. Likewise, back in 1800, architecture was not yet advanced enough for the construction of skyscrapers. If a 2-story building on X square feet of land could house 30 people in A.D. 1800, then, today, a 50-story building sitting on the same X square footage of land can house 750 people.

So, comparable to their Marxian forebears who fixated on manual labor, today's environmentalist worshippers of the Theory of the Intrinsic Value of Natural Resources fixate on natural resources while ignoring that true wealth comes from the entrepreneurship that gives meaning to the manual labor and natural resources.

Free enterprise is the ultimate tool in fighting against resource depletion, because profit motivation in a free market provides rewards to humans for finding ways of taking smaller and smaller crumbs of "the pie" and applying scientific ingenuity toward making those "crumbs" even more "filling," "nourishing," and "nutricious" than the bigger pieces that mankind had consumed in the past.

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