Peak Prosperity?

Greg Clark on whether we can preserve prosperity as world growth increases demand for limited resources:

How we can preserve prosperity, by Gregory Clark: ...Thomas Malthus warned in 1798 that population pressures would forever keep food and energy scarce and incomes low. In the 200 years since, world population has grown sevenfold, to 6.7 billion. Yet food and energy have become cheaper and more abundant. Malthus's dystopia, it seemed, belonged in history's junkyard.

But, suddenly, rapid growth in China and India and the consequent scramble for increasingly scarce resources has revived the Malthusian specter. ... Is the future a world of $10-a-gallon gas and $20 Big Macs?

Two things allowed growth to occur from 1750 to 2000 with declining commodity prices. First, only a small fraction of the world grew rapidly. Living standards for 2 billion Indians and Chinese even by 1990, for example, barely exceeded pre-industrial levels. The West was alone in its voracious appetite for raw materials and energy. Second, fossil fuels cheaply substituted for land in agriculture by increasing crop yields.

But now,... China and India will potentially also become frantic importers. The downward march of food and energy prices since 1800 has ended. Current high prices may presage a food-scarce/energy-scarce future.

What will happen depends on the race between technological improvement and growing demand. As I emphasized earlier, no one can predict which force will win. ... But suppose the worse. Suppose abundance is over. Must we fear that?

The answer is no. First, the share of modern U.S. consumption devoted to raw food and energy purchases is small: 1.4% for food raw materials, 7% for energy.

The U.S. economy can withstand enormous increases in food and energy costs with little damage because food and energy are even now so extravagantly cheap...

Currently in the U.S., we consume the energy equivalent of six gallons of gas per person per day. Some rich countries manage on much less. The Danes, for example ... use the equivalent of only three gallons of gas per person. The Danes are not suffering much from their missing three gallons a day. Reducing food consumption in our high-consumption society is equally easy: a bit more bread, a bit less steak.

Given that we can easily reduce consumption when costs go up, a permanent doubling of the prices of food and energy would reduce income by less than 6%. At current rates of economic growth, incomes would recover from such a shock in less than three years. After that, onward on our march to ever greater prosperity.

Comments

[reason]

The answer is no. First, the share of modern U.S. consumption devoted to raw food and energy purchases is small: 1.4% for food raw materials, 7% for energy.

I call money illusion. Do the same calculation for water and see if what he is saying makes sense. The value of something is not the same as its price. (What do they say about traders - oh yea - they know the price of everything and the value of nothing.) Who is to say the terms of trade won't change dramatically as scarcity increases.

[reason]

He is right in a way that there is plenty of low hanging fruit (in the US at least). But as I pointed out on another thread, if we look at growth in a different paradigm from what we are used to, growth presently is x% increase in resource use and y% increase in efficiency of resource use. That y% is not actually easy to influence. If that x% now goes negative, I don't see how the same rate of growth can be maintained.

[ajay]

reason, that's a huge leap of logic that I'd like to see backed up a little more. Why is y so inflexible?

[reason]

I didn't say it is inflexible, I said it is difficult to control (particularly in the long run once the low fruit has been picked). Do you know anyone who can honestly claim they now how to control the rate of productivity improvements? And the there is the old law of diminishing returns to worry about.

[reason]

ajay... basically to argue the other way, that an increased rate of growth of efficiency will allow us to maintain our growth rate, you have to explain why it isn't already happening.

[Gil]

There's nothing wrong with Malthus' reasoning - it's the 2nd Law of Thermodynamics applied to humans. In a closed system there's going to be overall downward spiral. As long as humans pursue a case of taking more than what the natural world provides given the technology at hand then without changes the resources will be surely depleted as wealth and population takes an overall downward spiral. The trick is however being one of technically efficiency - getting more results from less resources with less wastage which buys more time. E.g. incandescent bulbs versus fluorescent bulbs versus LEDs - increasing light production from less electricity and less energy being wasted as heat. But there's has to be an maximum technical efficiency with a given resource (such as electons to visible light conversion). The only two long-term solutions is to either develop interstellar travel (or does this just buy even more time?) or use sustainable resources (heaven forbid!).

[zinc]

At current prices, the reserves of oil and metals have expanded significantly.

The economic cut-off grade for production is dependent on the market price. For instance, the cut-off grade for copper production at $US 0.65 per lb is significantly higher than the cut-off grade at $US 3.00 per lb. Many of the waste piles of the last 150 years are available for reprocessing at the current market prices.

Similiarly, we are likely to see a reduction in unit consumption as well as gross consumption in response to price. The relative resource base automatically expands with efficiency of use. The transition to efficiency is expensive and generally requires a price shock to stimulate development and implementation.

In the 70's, high prices were transitory caused by short term financial muscle by the producers. Billions were spent in developing alternative fuels and processes, most of which went south when the price collapsed. Without $20 per barrel oil, the SUV craze would not have developed. We still managed a 100 % increase in energy use efficiency. Not bad.

Do not listen to the wingnut republicans calling for development of ANWAR. Higher prices open the door for plenty of development opportunities of lower grade resources in present industrial zones. The ANWAR can never be replaced. Let's think of it as a strategic petroleum reserve.

[odograph]

Does the earth's closed system include geothermal power? Or for that matter the sun?

On broader material issues, my brief experience as a chemist tells me that there is a lot that can (and has) been done with common elements, natural products chemistry etc.

... they had silk before they had nylon.

[odograph]

(To address the broader issue, I can see a resource "pinch" sure. It might even be a painful pinch, but there are certainly a myriad of research and business opportunities in the search for replacements.)

[reason]

Zinc,
one of the issues with peak oil is that more expensive reserves (including reserves of metals) require more energy to extract. Going to lower quality reserves implies more energy use. And global warming complicates the issue. I think say The Long Emergency is a ridiculous exageration, but Panglossianism is also way off the mark.

[VennData]

Once result will be that, as an economic unit, the SMSA (Standard Metropolitan Statistical Area,) can contract in size.

While there are certain step-function like attributes inhibiting the change for each family (McMansion in edge-burbs, SUV's, quasi-rural-lifestyle housing tracts) The ramifications are clear. The price of the suburban lifestyle is going up, dramatically.

The political affiliation, thinking, and rationales they have used in the past of these families will be challenged, and overturned at the margin.

[ken melvin]

What we're seeing more here, what the third world has always known, only a small fraction of the population will be able to afford a decent home, a decent lifestyle; this is what lies ahead.

says...

Where does the assumption come from that food and energy prices will double and then stop? That seems very arbitrary. And who says that economic growth is boundless as well? Clearly, there must be a limit proscribed by physics - the earth is largely a closed system, with the only major input being solar energy. Assuming 100% efficiency, total economic output can not exceed the value of captured solar energy + discovered energy stores (fossil fuels, nuclear fission).

[hari]

Whose peak prosperity?

From logic of development economics, mainland China and India have a lot of underutilized resources to develop and land is not an issue. Their domestic problem is population pressure - while food production must keep pace with it - and consequently priority investments in agri-industrial production systems must reflect their cultural heritage and whatnot.

India (after Green Revolution) became a net exporter of grains...and continues today.

GWB/Rice blamed escalating food and grain prices on +300 million Indian who have entered the middle class consumption society. I can tell you that not only Indian Gov but ALL political parties have gone *ballastic* against statements coming out of GWB/Rice and their WH sopokesman.

It's coming down to *white racism* against resurgent Asian cultures....Chinese simply disregard the *barbarians* because in the *Middle Kingdom* they knew how to handle the likes of todays *new mandarins* who want to not only control the global strategic reserves but also manipulate market prices.

[reason]

anonymous...

Assuming 100% efficiency, total economic output can not exceed the value of captured solar energy + discovered energy stores (fossil fuels, nuclear fission).

... well no that is not necessarily true, since not all economic output uses energy (of that sort anyway). Economic growth uses energy less intensively over time because more of what is produced is the product of what people like to call "the knowledge economy". But is also true that economic output is not completely fungable, like some people who naively look at GDP figures and think they can be interpreted as something literally proportional in value (ultimately utility). That you can substitute for not having enough food by having a surplus of DVDs.

[robertdfeinman]

Resource arguments can be divided into two classes: the pessimists and the optimists.

The optimists believe that technology will find a way. They cite history as their "proof". Malthus was wrong in the past so he will be wrong in the future.

The pessimists cite examples which make this period different that prior ones in several essential ways. The most important is that shortages are now occurring on a global, rather than regional scale. They also point to the exponential increase in world population over the past 100+ years. They also use historical analogy, but point to all the failed civilizations as examples.

I'm a pessimist, so the optimists are going to dismiss my main point. This is that prudence demands that we take steps now which reflect a worst case scenario. Its the story of the grasshopper and the bee, or saving for a rainy day.

The problem is that those being asked to make a sacrifice now are not those who will reap the reward 100 years hence. We can't even get those in the wealthiest countries to make a sacrifice which will help those in need now. We will spend trillions keeping the economically disaffected down by means of intimidation or military force, but won't even spend 1% of our GDP on foreign aid (excluding military systems).

Rather than looking at the issues from humanitarian, ethical or even self-interest viewpoints (economically well off societies don't breed many "terrorists") we quibble about what the future value of the present discount rate should be when making economic projections of the "cost" of taking steps now.

Cutting back consumption in the wealthiest nations is not adequate, we also need to discuss what all these people will be doing to earn a living. If there is no reason to drink bottled water in a major metropolis then what happens to the delivery men, the bottlers, the recyclers (if any) and the shop keepers who sell this unneeded commodity? Now multiply this by 1000 such products and services.

Things will change, they have to. The only issue is will we lead or be dragged along by uncontrolled events? The US has already shown that it can't deal with a regional disaster like Katrina, what happens if our transportation system collapses due to the high cost of fuel?

To cite Pogo once again: "We have met the enemy and he is us."

[OhNoNotAgain]

"That you can substitute for not having enough food by having a surplus of DVDs."

You see that argument a lot in the comments - "But, but, they have a cable TV and a DVD player, so how could they be considered poor ?" Easy, they live in a rat-hole of a dwelling, eat fast-food and pre-packaged food every day, and can't afford a car.

[reason]

OhNoNotAgain...
of course I was speaking on a global scale. If one individual has a surplus of DVDs and another a surplus of food they can trade. If the world has a surplus of DVDs and too little food, then someone is in big trouble.

[cm]

I would like to throw in "quality of life" as a counterweight to "prosperity" which in the West appears to be defined largely in materialistic (and perhaps more precisely consumerist) terms.

Of course, many "quality time" pursuits are linked to resource consumption of one sort or another. But there is a lot of almost frivolous resource consumption/expenditure just to keep the rat race running at full speed. I suspect the resource consumption on account of many a rather marginal "business" is a serious contender in the total resource consumption game.

[Gil]

The world might still end yet! >:P (though it probably won't)

[reason]

cm...
Yes - the Sydney Morning Heralds Ross Gittins favourite theme, efficiency of consumption not just efficiency of production.

[Bob]

Many of these "prosperity is over" type posts are so lame because they are contextless.

And contextless in the same way that conservatives are when they talk about how they are going to spend so much money that there won't be anything left for social programs (like Stockman wrote about).

The con fantasy ends with hundreds of millions of people passively accepting an end to their social security checks or any of the other social programs that their lives depend on.

Yeah right.

If you look at how pissed off the public is now just think about what it would be like when "prosperity is over".

The Bolshevick uprising will be like a walk in the park.

[Dunc]

It would take an area the size of Austria covered in solar thermal generating capacity in the Sahara to meet the world's current electricity needs, so there's little doubt that we get enough energy for free from the sun - we just need to use it. Ultimately, lack of cheap energy isn't going to be a problem if we have the technology to take advantage of it, which we increasingly do. There is presumably a limit at which energy can no longer replace land for food production but the lack of energy is itself not the problem.

The second law of thermodynamics, meanwhile, states that in a closed thermal system you cannot convert all heat into work, nor all work into heat. This is often bowdlerised as "entropy always increases". I don't think it's very applicable to this discussion.

[Machines]

Modern prosperity is built upon machines producing what manual labor used to produce. People were freed up to produce other consumer items, increasing the total quantity of consumer items extant. Machines need energy to run. We find a new source, or go back to producing via manual labor.

Lots of sunlight, but no economical way to convert enough of it to run the machines. Maybe someone will figure it out, maybe not.

[Spectator]

The earth and human ingenuity are more than capable of supporting many times the population we have today. The tragedy is the other side of the human equation - our inability to learn from history. The pessimists are often temporarily right, but only due to human screwups with earth's resources.

The three main causes of resource-driven hardships seem to be wars, government waste due to socialist policies, and resource misallocation due to monetary distortions, primarily inflation. Most people understand the dangers of the first two quite well, but few realize the enormous impact of the third.

Monetary distortions have increased wasteful consumption everywhere, and led to serious misallocation of resources. If the US Fed had not sought growth at all costs, we would have had a slow and steady march to a better future. People would consume less, save and be prepared for change, and invest more wisely. Instead we have allocated valuable resources via monetary inflation to paper pushers on Wall Street and MEW spending on trinkets from China. Now we have to prepare for a period where the pessimists will be right. Seems we always have to learn the hard way.

[Hedonic]

"You see that argument a lot in the comments - "But, but, they have a cable TV and a DVD player, so how could they be considered poor ?" Easy, they live in a rat-hole of a dwelling, eat fast-food and pre-packaged food every day..."

Yeah, hedonic adj is a joke. No amount of DVDs can make up for an unhealthy environment/food supply. The afford-ability of essentials should be tracked as a measure of consumer quality of living. Luxuries like DVDs are nice, but they just don't compensate for a lack of essentials.

[Prodigal]

"Monetary distortions have increased wasteful consumption everywhere, and led to serious misallocation of resources."

I agree. Borrowers have consumed wantonly, due to sustained negative real interest rates.

[Bruce Wilder]

reason: "growth presently is x% increase in resource use and y% increase in efficiency of resource use. That y% is not actually easy to influence. If that x% now goes negative, I don't see how the same rate of growth can be maintained."

ajay: "that's a huge leap of logic"

If I could make a suggestion: think about growth as a result of investment, where investment is the assembling of resources now in anticipation of greater production later.

The industrial revolution(s) were driven by the combination of 1.) applying fossil fuels to generate and use energy, beyond what was available from human and animal sources; 2.) applying scientific knowledge and increasing specialization to better control production processes to reduce error and waste.

So, yes, as reason says, every advance was partly a gain in productivity from using more energy to do more work, and partly a gain in productivity from using energy (and other resources) more efficiently. With the unit cost of fossil fuel energy declining, returns on investment to make these advances were an additive combination of more work getting done and getting the work done more efficiently (with less error and waste).

If investment returns are exclusively about reduced error and waste offsetting reduced output from reduced energy use -- well, that's a much tougher path for growth.

I think the labor productivity statistics since the mid-1970's already reflect the reality. We have not been able to add energy consumption to amplify the productivity of labor and other resources.

[Patricia Shannon]

As usual pop psychology has distorted psychological findings. The positive effects of "positive" thinking people refers to not to people who don't believe there are any problems. It refers to people who believe they can cope with their problems. Also, people who tend to be depressed are also, on average, more in touch with with reality. We can't solve problems if we don't acknowledge they exist.

Just this morning on NPR, it was reported that there is a cutback on plans by private companies to build windmills, because the cost of materials (steel and copper, I believe they mentioned) has increased so much that they would be uneconomical to build. How much of the price increase is due to the supply of the materials, and how much to the price of the energy used to produce and transport the materials, I don't know. The report said that the private firms want government to give them subsidies.

I am optimistic we can solve our problems, but I am pessimistic that we will. I guess I am pessimistic that our human nature, which is adapted to a hunter-gatherer lifestyle, is suited to prolonged survival in the modern world.

[Robert Edeley]

"Just this morning on NPR, it was reported that there is a cutback on plans by private companies to build windmills, because the cost of materials (steel and copper, I believe they mentioned) has increased so much that they would be uneconomical to build."

I believe it has a lot to do with how cheap electricity is. Rates have barely increased in the past 5 years compared to the increases in raw material and energy prices.

[cm]

reason: There are at least two aspects to consumption efficiency: (1) getting the same consumption/entertainment "bang" with fewer resources, (2) emphasizing "simple pleasures" low in resources.

Back in the days we played cards or board games instead of watching TV, read books. If in the dark, the only resource consumption was having the light on (possibly the radio). Or took walks.

My grandma never owned a TV. Presumably by choice; TVs were available and affordable.

[reason]

cm
Actually Ross Gittins likes to talk about the importance of quality time (with friends and family in particular). He thinks we should take more of our increased productivity in leisure.

[reason]

And he thinks we spend too many resources on pointless expenditure on "positional goods".

[reason]

Dunc...
a quick question - if it is so easy - then why hasn't it been done already?

[Dunc]

It has been (partially) done already. It's expensive, but there are vast areas of both California and Spain already using this technology. see http://www.spiegel.de/fotostrecke/0,5538,31097,00.html.

[reason]

What I mean Dunc is why don't (say) Western Sahara, Mali or Chad already augment there meager foreign exchange earnings with energy exports. Surely they could get the world bank to put up some finance as the running costs are so low? I suspect the energy economics (i.e. the real material costs) and the problem of storing the energy in the night and transporting to markets are not so easily solved as you think.