Biophysical Limits to Economic Growth

1. Biophysical Limits toEconomic Growth Neo-Classical Perspective

2. 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.

3. 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.

4. Neo-classicals have a strong skepticism to collapse scenarios, as technology overcomes resource scarcity. • According to neo-classicals, Malthusians; • view humankind as having a natural propensity forself-destruction; underestimate human creativityand instinctive capability for self-preservation. • have the strongtendency to lump all resources together without regard to their importance, ultimateabundance or substitutability • do not comprehend thepossibility of there being an infinite amount of resource substitutability, even in a worldwith a finite resource endowment

5. Neo-classical Empirical Studies Against Malthusian Thesis(before 1970) • 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. (αLE + βKE) / QE

6. Barnett and Morse test of the Ricardian scarcity • 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. • Real costs per unit of extractive goods did not rise. In fact, they fell (except in forestry).

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

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

9. 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.

10. 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 • 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

11. Decline in output per unit of energy used

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

13. Environmental Kuznets Curve Environmental Damage

14. Implications of the Environmental Kuznets curve • 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.

15. Criticisms of the Environmental Kuznets curve hypothesis • 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.