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Sunday, May 28, 2006

Run, Run, as Fast as you Can! You Can't Catch Me, I'm the Technology Man!

Get out your crystal ball:

In the long, long, long, long-run we'll all be

a) fat and happy.
b) barely surviving.
c) none of the above.

For hundreds of years, people have worried that resource constraints would eventually lead to declining living standards, but so far technology has overcome these gloomy predictions. Can it go on forever?:

What to Do When the Oil (or the Innovation) Is Gone?, by Daniel Altman, Economic View, NY Times: With global economic growth near its fastest pace in decades, is there a chance that we'll finally run out of the resources we need? ...

In the last few years, rapid growth in China, India, Brazil and other emerging economies has coincided, not surprisingly, with an upward trend in the prices of commodities like oil. In the short term, there's not enough time for suppliers to cope with ballooning demand; that's part of why prices rise. But market dynamics in the long term are likely to be more significant.

It's simple mathematics. Even though the world's population may peak sometime in this century, the global economy is likely to keep growing. Yet the planet is, for now, a closed system: we have finite amounts of every single raw material. At some point, surely, we'll use them up.

Or will we? This sort of thing has already happened. "There was a time when whales were being hunted to get oil for lamps," said Jorge E. Montepeque... "The number of whales started to decline. The price for it started to increase and, at some point, new technology kicked in."

Rather than paying higher prices for whale oil, people found new ways to light their homes — kerosene, propane and even electricity. Crude oil, however, may present more of a conundrum.

"Is there any source of energy that will be cheaper, for example, than Saudi oil?" asked Robert U. Ayres... In his opinion, even with conservation and innovation, the answer is no. Professor Ayres said companies and homeowners would eventually have to pay a higher price for their energy. He also said that other commodities were in danger of scarcity, sooner rather than later. ...

Technology and innovation are still likely to find a way around shortages, though, argued Dale W. Jorgenson, a university professor at Harvard. "This debate occurred before," he said. "The very rapid growth of the 1970's, which was fully as impressive as the current growth that we're experiencing now, didn't result in any increase in the price of oil or other commodities, and isn't likely to do so this time, either."

The supply of crude oil will benefit from technological improvements, Professor Jorgenson predicted. "People figure out clever ways to explore for oil, to produce it and transport it," he said. "All of that goes in the other direction."

There is also the chance that a burst of innovation will lay low the entire market. Imagine, for instance, what would happen if scientists finally developed a portable nuclear fusion reactor — the kind that could power a house...

There are a couple of areas, however, where scarcity is more predictable. "The long-run scarcities are for human labor and land," said Peter H. Lindert, a professor of economics at the University of California, Davis. He said their value, in terms of goods and services, would continue to rise forever.

Professor Lindert said the market for low-skilled labor, in particular, was likely to tighten in the coming decades. In the case of high-skilled labor, there are moderating factors.

"Low fertility won't hurt us in that respect, because you will get probably a slight improvement in development per kid by having so few," he said. "The family puts more resources and parental time into each kid, schools are less crowded and so forth."

The competition for talent is already intensifying, Professor Jorgenson said. ... "There is going to be a labor shortage, I don't think there's any doubt about that."

In Europe and Japan, populations are shrinking already — a trend that Professor Jorgenson attributes to hostility to immigration. As this occurs, he said, wages will begin to rise as each worker in the thinning labor force gains access to more capital....

Economic growth will also slow, Professor Jorgenson added, since you can't keep substituting capital for labor forever. "The question is, when do you encounter those diminishing returns?" ...

    Posted by on Sunday, May 28, 2006 at 12:15 AM in Economics, Technology | Permalink  TrackBack (0)  Comments (29)

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