Biophysical Limits to Economic Growth The Malthusian Perspective

Malthusian Model of Economic Growth n Thomas Malthus (17661834) developed a growth model that relates the association of resource scarcity and the prospect for long-run human economic growth.

Malthusian Model of Economic Growth 1. Resources are scarce in absolute terms. That is, humanity is endowed with a finite amount of material resources. 2. If uncontrolled, the tendency of human populations is to grow exponentially. 3. Technology should not be perceived as the ‘ultimate’ escape from the problem of resource scarcity.

Assumptions of Malthusian Model n the total amount of land available for agriculture (arable land) is immutably fixed; n the growth of population is limited by the amount of food available for subsistence; n human population will invariably increase where the means of subsistence increase.

Malthusian Model of Economic Growth “The power of population is indefinitely greater than the power in the earth to produce subsistence for man. ” “Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. ” “A slight acquaintance with numbers will show the immensity of the first power in comparison with the second. ”

n Law of diminishing marginal product n “Iron Law of Wages” n “vices” and “virtues” in the Malthusian period

Ricardian Model of Growth David Ricardo (1772– 1823) n Human material progress would not be hampered in the long run by explosive growth of human population as Malthus had envisioned, but by the progressive decline in the quality and quantity of extractive resources, most importantly, agricultural land n

Ricardian Model of Growth Agricultural land varies in its natural productive capacity. n Plots of land with high natural fertility (or mines containing high-grade ores) are put to use first because their real cost is low. n (Real cost: the amount of factors of production needed to make a farmland available for cultivation. ) n

Ricardian scarcity n A steady increase in rent (and real cost) as quality of land (or any other extractive resources) decline. n It is the steady increase in rent as land use expands that would ultimately stifle human longterm economic progress. n Population is relevant only to the extent it has an effect on what happens to demand. n The major impediment to human material progress would emerge not so much from demand as rather from supply side constraints.

Neo-Malthusian Models n Incorporate the effects not only of population and resource scarcity but also of technology and human institutions in their consideration of environmental sustainability. n The emphasis has been shifted from concerns about limits to economic growth to worries about environmental sustainability.

Neo-Malthusian Models n increased human activities would lead to increasing stress on the functioning of the environment and in so doing ultimately lead to environmental degradation. n if degradation of the environment is not restricted to the point that it is considered sustainable, biophysical limits will eventually place bounds on the growth of human activity.

Neo-Malthusian Models: Ehrlich–Commoner Model I=Px. F I: total environmental effect or damage, measured in some standard units. P: population size F: an index that measures the per capita impact (or damage) to the environment. (ecological footprint of the average person)

Ehrlich–Commoner Model n at any given point in time, the total environmental impact of human activities is a product of the underlying population size, P, and the per capita damage to the environment. n total environmental impact equals total population multiplied by the average impact that each person has on the environment.

Ehrlich–Commoner Model F = f[P, c, g] c: per capita consumption or production g: composition of inputs and outputs in an economy, expressed in terms of their impact on the environment δF/δc > 0 δF/δg > 0 δF/δP > 0 (the law of diminishing marginal returns)

Ehrlich–Commoner Model n Shows the fundamental positions of neo-Malthusians regarding the link between environmental sustainability and economic growth. n Neo-Malthusian starts with a view that the current rate of world economic growth, (in terms of GDP), cannot be environmentally sustainable. n The major issues of interest have been to identify the causes and possible remedies for the damages that have been inflicted on the natural environment from various forms of human activity over the past century.

The Ehrlich–Commoner (E-C) model suggests that neo-Malthusians would tend to claim that; ¨ the steady increases in population ¨ the steady increases in per capita consumption ¨ the proliferation of products that are harmful to the environment are the major factors contributing to continued global environmental degradation.

No consensus on the relative impacts these three key variables have on the environment. n Ehrlich and his followers: rising human population is a predominant factor in accelerating pollution and other resource problems in both the developed and the developing countries of the world.

n Commoner and his associates: population growth plays only a minor role in explaining the environmental and resource condition of the modern era, especially in the developed world. Instead, a major part of environmental damage results from inappropriate applications of modern technologies in the extraction, production and consumption sectors of the economy. Technological choices are often made purely on the basis of profitability considerations rather than environmental sustainability

Neo-Malthusian Policy Implications Policies are directed to achieving a combination of: (i) (iii) Control population growth; Moderate or reduce per capita resource use; and Promote the development of technologies that are environmentally benign.

use policy instruments that permit direct government intervention n n ending environmentally damaging subsidies by government decree, penalizing wasteful consumption habits by means of income redistribution, implementing family planning programs with considerable governmental supervision, providing subsidies to promote the development of environmentally benign technology such as solar energy, putting broadly based strict quotas on the amount of fish to be harvested or forest area to be cleared on an annual basis, etc…

n Neo-Malthusians are skeptical about the notion that all resource allocation problems can be solved by market or extra-market mechanisms. n The private market tends toward overexploitation and degradation of resources that are externality-ridden (environmental resources) n Not all technological changes favor the environment. Thus, environmental sustainability requires specific consideration of the impacts new technologies have on the environment, not just on the production and delivery of goods and service.

Weaknesses of the Neo-Malthusian Model n n No clear definition of ‘sustainability’ in the E-C model. Ignore the potential for resource conservation through technological means, such as factor substitution and technical progress. Consider resources, consumption and population only at an aggregate level, without adequate reflection on the social, technological and political aspects of resource use. Predictions of catastrophe politically not useful.

‘If the present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years. The most probable result will be a rather sudden and uncontrollable decline in both population and industrial capacity’ The Limits to Growth (Meadows et al. 1971)

‘Let us face the uncomfortable truth. The model of development we are accustomed to has been fruitful for the few, but flawed for the many. A path to prosperity that ravages the environment and leaves a majority of humankind behind in squalor will soon prove to be a dead-end road for everyone’ Kofi Annan, 2002

How should we deal with the existence of the seemingly perennial Malthusian specter? Sustainable economic growth that will necessitate the design and implementation of social and technological conditions that ensure both environmental and economic stability concurrently. Which view? Neo-classical or ecological?

Biophysical Limits to Economic Growth Neo-Classical Perspective

Neo-Classical Fundamentals 1. Market is the medium for resource allocation. 2. Resource valuation depends only on individual ‘preferences’ and initial endowments as determinants of prices. 3. For privately owned resources, market prices are ‘true’ measures of resource scarcity. 4. Price distortions arising from externalities can be effectively remedied through appropriate institutional adjustments. 5. Resource scarcity can be continually augmented by technological means. 6. Human-made capital and natural capital are substitutes.

Malthusian Thesis In the long-run, depletion of some key material resources (e. g. a shortage of global petroleum supply or water, or large scale degradation of land due to desertification and deforestation) would act as a bottleneck to further economic growth.

Neo-classicals have a strong skepticism to collapse scenarios, as technology overcomes resource scarcity. n According to neo-classicals, Malthusians; n ¨ view humankind as having a natural propensity for self-destruction; underestimate human creativity and instinctive capability for self-preservation. ¨ have the strong tendency to lump all resources together without regard to their importance, ultimate abundance or substitutability ¨ do not comprehend the possibility of there being an infinite amount of resource substitutability, even in a world with a finite resource endowment

Neo-classical Empirical Studies Against Malthusian Thesis (before 1970) n Barnett and Morse (1963) tested the hypothesis: (‘the strong hypothesis of increasing economic scarcity’) “The real cost of extractive products per unit will increase through time due to limitations in the available quantities and qualities of natural resources. ” Real cost: labor plus capital per unit of extractive output. (α L E + β K E) / Q E

Barnett and Morse test of the Ricardian scarcity n The U. S. output in extractive sectors (agriculture, forestry, fishing, and mining) increased markedly from 1865 to 1957, yet the statistical record is contradictory to the classical hypothesis. n Real costs per unit of extractive goods did not rise. In fact, they fell (except in forestry).

Possible reasons of the fall in the real cost of extractive resources q Rapid technological progress q Increased efficiency of resource use, in particular energy q Substitution of more plentiful resources for the less plentiful ones q Improvements in transportation and trade q Improvements in exploration techniques and the q Discovery of new deposits q Increased recycling of scrap.

Neo-classical Empirical Studies Against Malthusian Thesis (since 1970 s) Studies in late 1970 s tested Barnett-Morse hypothesis, again found decreasing resource scarcity. n pollution, energy crises, soil erosion, desertification, deforestation, etc. not indicative of emerging resource scarcity, they are only temporary setbacks. n

The Resourceful Earth (1984) ¨ The world in 2000 will be less polluted, more stable ecologically, and less vulnerable to resource supply disruption. ¨ Stresses involving population, resources, and the environment will be less in the future than now ¨ The world’s people will be richer. ¨ The outlook for food and other necessities of life will be better ¨ Life for most people on earth will be less precarious economically than it is now.

Why past trends of decreasing resource scarcity may not be sustainable studies based on statistical trends do not explicitly take environmental quality into consideration – loss of biodiversity n transformations in the use of energy: the decline in real costs of resource extraction observed by empirical studies of the Barnett and Morse (and similar studies) was not solely due to technological changes, but rather due to the substitution of higher-quality energy resources for labor and capital in the extraction of resources n

Decline in output per unit of energy used

Economic Growth and Environment Economic growth is an increase in real per capita income. n Higher per capita income will increase the demand for improved environmental quality. n That will increase expenditure on environmental cleaning. n

Environmental Damage Environmental Kuznets Curve

Environmental Kuznets Curve Grossman and Krueger (1991) World Bank’s World Development Report (1992) E: emissions, P: population

Environmental Kuznets Curve 1. Scale of production implies expanding production at given factor-input ratios, output mix, and state of technology. 2. Different industries have different pollution intensities and typically, over the course of economic development the output mix changes. 3. Changes in input mix involve the substitution of less environmentally damaging inputs for more damaging inputs and vice versa. 4. Improvements in the state of technology involve changes in both: n a. Production efficiency in terms of using less, ceteris paribus, of the polluting inputs per unit of output. n b. Emissions specific changes in process result in less pollutant being emitted per unit of input.

Implications of the Environmental Kuznets curve n n n It is possible for poor countries to ‘grow out’ of some environmental problems once they attain a certain standard of living or per capita income. For the rich countries, continued income growth will invariably be associated with improved environmental quality. Environmental policy should be examined carefully as it has the potential of slowing the pace of economic growth.

Criticisms of the Environmental Kuznets curve hypothesis n n n Relation has been found for only a few pollutants, but does not include deforestation Past trends in technological growth may not justify the claim that the same trend will continue in the future; in fact, the pace of technological progress may decrease. Neo-classical view denies the effect on the biosphere of an infinitely growing human economy. The human economy may grow but it can never break its ecological bounds.