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Friday, May 09, 2008

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.

    Posted by on Friday, May 9, 2008 at 12:24 AM in Economics | Permalink  TrackBack (0)  Comments (36)


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