“If resources are not fixed but created, then the nature of the scarcity problem changes dramatically. For the technological means involved in the use of resources determines their creation and therefore the extent of their scarcity. The nature of the scarcity is not outside the process (that is natural), but a condition of it.”
– Tom DeGregori (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, p. 1258.
The confounding of physics with economics has plagued a real-world understanding of mineral resource developments. The phenomenon of entropy and the laws of thermodynamics rule in their domain. But there is no economic law analogous to the physical conservation of matter. There is no law of conservation of value; value is continually, routinely created by the market process. And this value creation does not deplete–just the opposite.
This insight reorients the peak-oil debate from pessimism about hypothetical future physical resources to here-and-now concerns over incentives and institutions–or the ability of a free market to create a robust energy future.
Market Entrepreneurship … Mineral ‘Resourceship’
Israel Kirzner in the Austrian-School tradition has emphasized the open-endedness of market entrepreneurship. “Entrepreneurial alertness [is] in principle inexhaustible,” Kirzner has stated, (1) wholly rejecting the notion of a “potential stock of entrepreneurial alertness in a society as some quantity ‘available to be used by society’.” (2) In the vernacular of the oil industry, there are no reservoirs of proved, probable, or speculative quantities for entrepreneurship.
The institutionalist conception of knowledge as the ultimate resource powerfully complements an Austrian theory of resources. Thomas DeGregori has defined resources as “a set of capabilities” (3) and “finite but unbounded” (4). He restated and embellished the “resources are not, they become” thesis of his mentor Erich Zimmermann as follows:
Technology as ideas and as the creator of resources is not only correct, it is also liberating. It provides a conceptual basis for understanding the fact that the resource base of civilization has expanded, not contracted, with use. It gives us the kind of operational understanding necessary to frame the policies to sustain this resource-creating process. It provides a reasonable basis for optimism that the human endeavor can continue and can expand. It is, finally, the key component of a structure that challenges traditional ways of thought about the economy and opens new possibilities for creative inquiry and dialogue. (5)
By the same token, however, “We will exhaust resources if we exhaust creative imagination.” (6)
The open-endedness of entrepreneurship is an implication of the fact that, in the words of Joseph Schumpeter, “there is no law of decreasing returns to technological progress.” (7) New knowledge and discovery open up the opportunities for more and greater discoveries from a rich, non-inventoried earth.
The central role of knowledge as the ultimate resource and creator of minerals is—or should be—“a fundamental principle of economics.” (8) Still, the resource of the human mind is only potential unless ingenuity turns into result. The central role of institutions in the capitalist discovery process cannot be underestimated.
Land: Another Open-Ended Resource
Land, not only minerals, is an open-ended resource. Land in the economic process is not fixed but fashioned from the neutral stuff of the earth. Irrigation, fertilizing, planting, and tilling turn a physical good into an economic one. There is also surface creation where human action creates surface space below or above the original ground level.
Land augmentation can also come from surfacing water areas with temporary or permanent structures. The natural scientist can estimate the total area of the Earth’s raw (ground-level) surface. But this is a bare minimum given the ability of science and technology to create (“manufacture”) land, as it can minerals. “Land as a human resource is created by technology and science in the same manner as minerals become resources.” (9)
Estimating Future Supply
The total supply of any mineral is unknown and unknowable because the future knowledge that would create mineral resources cannot be known before its time. (10)
This said, estimates can and have been made as to the raw physical (in-place) supply. A subset of this quantity is economical supply. “What we observe in the real world are not one-time stocks immaculately created to be consumed,” M. A. Adelman stated, “but inventories of ‘proved reserves,’ constantly renewed by investment in finding and development.” (11)
Substitutability within Open-Endedness
Substitutability is part, but only part, of open-endedness. Minerals have sister resources that can perform the same or a similar function, although often at a higher cost, at least for the transition period.
Tar sands in the Canadian province of Alberta can be manufactured to produce a substitute for crude oil for petroleum refining. Gasified coal can substitute for natural gas. Natural gas can be manufactured into liquids, even motor gasoline. Recycling can create resources where none were before.
Human ingenuity and capital investment under a regime of economic calculation can lead society to new combinations of minerals—or minerals and non-minerals—to perform the same (or better) economic services over time. The process can even morph between goods that are considered depletable (in the natural science sense) and ones that are considered nondepletable, for example, between crude oil and agricultural oils (ethanol, biodiesel).
Those in the mineral-resource world think in terms of proved, probable, and speculative quantities. Should another category be added–resourceship–that would make such supply open-ended? Unless peak-oil proponents can demonstrate peak-resourceship, open-endedness should be elevated in the debate.
(1) Kirzner 1980, p. 25
(2) Kirzner, 1980, p. 23.
(3) DeGregori, 1987, p. 1243.
(4) DeGregori, 1987, p. 1259.
(5) DeGregori, 1987, p. 1258.
(6) DeGregori, 1987, p. 1260.
(7) Schumpeter, 1954, p. 263.
(8) DeGregori, 1987, p. 1243.
(9) DeGregori, 1987, p. 1254.
(10) Popper, vi–vii.
(11) Adelman, 1991, p. 241.
Adelman, M. A. (1993). “User Cost in Oil Production.” In Adelman, ed., The Economics of Petroleum Supply. Cambridge, MA: MIT Press, pp. 241–267.
DeGregori, Tom. (1987). “Resources Are Not; They Become: An Institutional Theory.” Journal of Economic Issues, 21, 3: 1241–1263.
Kirzner, Israel (1980). “The Primacy of Entrepreneurial Discovery,” in Kirzner, Discovery and the Capitalist Process. Chicago: University of Chicago Press, 1985), 15–39 at 25.
Popper, Karl (1957). The Poverty of Historicism. New York: Harper.
Schumpeter, Joseph (1954). History of Economic Analysis. New York: Oxford University Press (reprint), 1976.
Note: This post is taken in part from Sec. 5.1 of my essay, “Resourceship: An Austrian Theory of Mineral Resources” (2007), Review of Austrian Economics (2007: 20), pp. 63–90 (see here).