Resource exhaustibility: a myth refuted by entrepreneurial capital maintenance.

Author:Bratland, John
Position:Essay
 
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The concept of myth is defined as "an unproved collective belief that is accepted uncritically" (Random House Dictionary 1969, 946). One such myth is the idea that extractive resources are exhaustible in an economic sense. In this article, I examine extractive resource availability as it is affected by what is commonly referred to as "resource exhaustion." In part, the myth has been manifested in the long-held notion that all extractive resources are subject to eventual exhaustion and that this prospect should be cause for public alarm. (1) This alarm has conditioned theoretical thinking about public policy in connection with sustainability (Bratland 2006) and has prompted policy discussion of government subsidies for alternative fuels. An examination of the myth reveals, however, that it has its origins in neglect and ignorance of entrepreneurial capital maintenance as it operates in the economics of extractive resources.

The economics profession has perpetuated the myth to a major extent. First, it has persistently focused on imagined issues surrounding global resource exhaustion. Second, it has embraced a traditional but erroneous definition of capital as a physical grouping of produced durable goods. Goods grouped in such a definition may typically include equipment, buildings, inventory, and so forth. Defining capital in this way, however, admits no rational framework for maintenance and in fact has played a significant role in fostering the exhaustion myth. In a coherent theory, capital is always an entrepreneur's own monetary reckoning of the worth of his particular business plan. Capital is not a physical entity; it is not a collection of physical capital goods, even though all entrepreneurial plans involve the use of capital goods (Kirzner 1996, 124). Capital goods come into existence essentially through the actions of savers and the plans undertaken by entrepreneurs. They represent the assets that the entrepreneur has marshaled in the pursuit of a plan.

As applied to extractive-resource renewal, capital maintenance is essentially speculative action undertaken to maintain entrepreneurial income. Viewed in a planning context, income can be seen as part of a speculative plan focused on the portion of expected gross receipts that can be withdrawn from the enterprise while at the same time maintaining capital. Hence, from the entrepreneur's perspective, prospective income must be consistent with the requirements of capital maintenance. Because capital is the corollary of income, capital maintenance necessarily revolves around the success of the entrepreneurial plan in maintaining the extractive enterprise's income. That income, however, is never a certainty in an entrepreneurial environment; a previously implemented plan may yield a lower income than was expected. (2) In such an event, future plans must be adapted to the conditions perceived to exist in the market. Hence, the income earned by the entrepreneurial firm depends on its selection and implementation of plans that take into account conditions of uncertainty and economic change.

Exhaustibility has relevance only within the context of a particular entrepreneur's plan; economic exhaustion motivates investment in capital goods that maintain the value of the entrepreneurial enterprise. The exhaustion's only importance arises in the process by which the entrepreneur seeks to make and develop new discoveries. The entrepreneur undertakes these efforts because of declining returns from deposits already being depleted. The extractive firm maintains income through a perpetual but speculative process involving a continual restructuring of capital goods. It is never in a state of equilibrium with respect to its holdings of capital goods, of which extractive-resource deposits may be only a part. This restructuring process requires entrepreneurial judgment in selecting the respective stages of the production process in which to invest. The stages include: (1) land-surface access, (2) exploration, (3) development, and (4) resource extraction. To the extent that these speculative efforts succeed, capital is maintained. However, as the following discussion emphasizes, investment processes that are narrowly focused on a mechanistic cycle of physical replacement are not necessarily valid examples of successful capital maintenance.

Capital maintenance by extractive enterprises necessarily implies that minerals, of whatever sort, will never be exhausted unless entrepreneurial action is somehow impeded or precluded. Hence, future cessation of the production of an extractive resource will occur not because of its exhaustion, but because either the intended or the unintended consequences of human activity have eliminated the prospects for profitable resource renewal. In one scenario, material substitutes may arise. The availability of such substitutes might cause consumers to be unwilling to pay for the consumer goods or services produced from extractive outputs. More troubling scenarios are also evident: (1) fragmented property institutions may impede entrepreneurial firms' ability to manage resource deposits as capital assets; and (2) government policies may coercively foreclose access to lands that would permit entrepreneurial replacement of extractive resources. For example, government intervention designed to nationalize resources and to impede access to lands for exploration will thwart the replacement processes necessary for extractive enterprises to maintain capital.

Exhaustible Resources in Neoclassical Economics

The exhaustion myth arose in public-policy hysteria over coal availability in nineteenth-century England and was revived in the panic over world oil supplies in the twentieth century. Neoclassical economists have responded to this public anxiety by contriving formal models of resource exhaustion and by attempting to apply these models to energy issues and to the economics of intergenerational sustainability. Despite impressive efforts to incorporate resource renewal into formal equilibrium frameworks, these undertakings have generally displayed aggregative thinking and neglected the speculative process by which entrepreneurs actually maintain the capital value of the extractive enterprise.

Jevons, Gray, and Hotelling

The exhaustion assumption as it legitimately applies to individual resource deposits has somehow become a metaphor for global exhaustion. (3) It is an implicit but largely unexamined premise in the theory and public-policy proposals about the future availability of extractive resources. In contrast, the idea that extractive resources are always replaceable capital goods has received little attention. An important reason for the relative neglect of extractive-resource replacement is that the earliest work by economists for the most part ignored the entrepreneurial capital maintenance undertaken by extractive enterprises.

Although W. Stanley Jevons, Lewis C. Gray, and Harold Hotelling applied certain concepts related to capital, they never broke out of the mechanistic neoclassical mold by introducing the entrepreneur. (4) Note the reference to "exhaustion of resources" in the titles of each of their major works on the subject (Gray [1914] 1967; Hotelling 1931). Stanley Jevons's 1865 analysis of expected future coal shortages in England touched off what some have called a "coal panic" (Bradley 2007, 65). The oil panic of the 1970s renewed interest in Hotelling's 1931 article, with its premise of global exhaustion manifested in the rising prices of increasingly scarce extractive resources. In other writings, such as Gray's 1914 study (reprinted in 1967), exhaustion entered by way of increasing costs that occurred as a result of cumulative extraction (Morse 1976, 236-40). Missing from these analyses, however, is an allowance for or a description of an entrepreneurial response to changes in extraction cost and the process by which such changes prompt action to maintain capital by replacing the depleting deposits. Even late in the twentieth century, the exhaustion myth persisted in neoclassical modeling of intergenerational sustainability.

The Economics of Sustainability and Its Theory of Physical Capital

Intergenerational sustainability theory is premised on the urgency of formulating a "principle of investment" to maintain a "capital stock" for the benefit of future generations. The presumed exhaustibility of extractive resources has spawned the notion that unborn generations will experience declining levels of consumption. For both John Hartwick, a professor of economics at Queen's University in Canada, and Robert Solow, a professor of economics at MIT, exhausting resources implies a decline in the "capital stock." For them and other economists, the "investment principle" must be applied as a solution to the "sustainability problem" associated with the exhaustion of resources. A principal tenet of this principle is that investment must be focused on replacement of the "physical capital" embodied in the exhausting resource stock. Hartwick posits that the current generation, as an acting entity, must "invest all profits or rents from exhaustible resources in reproducible capital such as machines.... This injunction seems to solve the ethical problem of the current generation shortchanging future generations by 'over-consuming' the current product currently ascribable to current use of exhaustible resources. Under such a program, the current generation would have an obligation to convert exhaustible resources into machines and to 'live off' current flows from machines and labor" ( 1977, 972). Hartwick reprises this prescription in his more recent book (2000, 88-101).

Robert Solow enthusiastically concurs with Hartwick in observing that "the policy of investing resource rents in reproducible capital suggests irresistibly that some appropriately defined capital stock is being maintained intact and that consumption can be regarded...

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