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Use and Abuse of the “Natural Capital” Concept

by Herman Daly

Herman DalySome people object to the concept of “natural capital” because they say it reduces nature to the status of a commodity to be marketed at its exchange value. This indeed is a danger, well discussed by George Monbiot. Monbiot’s criticism rightly focuses on the monetary pricing of natural capital. But it is worth clarifying that the word “capital” in its original non-monetary sense means “a stock or fund that yields a flow of useful goods or services into the future.” The word “capital” derives from “capita” meaning “heads,” referring to heads of cattle in a herd. The herd is the capital stock; the sustainable annual increase in the herd is the flow of useful goods or “income” yielded by the capital stock–all in physical, not monetary, terms. The same physical definition of natural capital applies to a forest that gives a sustainable yield of cut timber, or a fish population that yields a sustainable catch. This use of the term “natural capital” is based on the relations of physical stocks and flows, and is independent of prices and monetary valuation. Its main use has been to call attention to and oppose the unsustainable drawdown of natural capital that is falsely counted as income.

Big problems certainly arise when we consider natural capital as expressible as a sum of money (financial capital), and then take money in the bank growing at the interest rate as the standard by which to judge whether the value of natural capital is growing fast enough, and then, following the rules of present value maximization, liquidate populations growing slower than the interest rate and replace them with faster growing ones. This is not how the ecosystem works. Money is fungible, natural stocks are not; money has no physical dimension, natural populations do. Exchanges of matter and energy among parts of the ecosystem have an objective ecological basis. They are not governed by prices based on subjective human preferences in the market.

Furthermore, money in the bank is a stock that yields a flow of new money (interest) all by itself without diminishing itself, and without the aid of other flows. Can a herd of cattle yield a flow of additional cattle all by itself, and without diminishing itself? Certainly not. The existing stock of cattle transforms a resource flow of grass and water into new cattle faster than old cattle die. And the grass requires sunlight, soil, air, and more water. Like cattle, capital transforms resource flows into products and wastes, obeying the laws of thermodynamics. Capital is not a magic substance that grows by creating something out of nothing.

While the environmentalist’s objections to monetary valuation of natural capital are sound and important, it is also true that physical stock-flow (capital-income) relations are important in both ecology and economics. Parallel concepts in economics and ecology aid the understanding and proper integration of the two realities–if their similarities are not pushed too far!

The biggest mistake in integrating economics and ecology is confusion about which is the Part and which is the Whole. Consider the following official statement, also cited by Monbiot:

As the White Paper rightly emphasized, the environment is part of the economy and needs to be properly integrated into it so that growth opportunities will not be missed.

—Dieter Helm, Chairman of the Natural Capital Committee, The State of Natural Capital: Restoring our Natural Assets, Second report to the Economic Affairs Committee, UK, 2014.

If the Chairman of the UK Natural Capital Committee gets it exactly backwards, then probably others do too. The environment, the finite ecosphere, is the Whole and the economic subsystem is a Part–a completely dependent part. It is the economy that needs to be properly integrated into the ecosphere so that its limits on the growth of the subsystem will not be missed. Given this fundamental misconception, it is not hard to understand how other errors follow, and how some economists, imagining that the ecosphere is part of the economy, get confused about valuation of natural capital.

Natural Capital, James Wheeler

How can we correctly price natural capital in a full world? Photo Credit: James Wheeler

In the empty world, natural capital was a free good, correctly priced at zero. In the full world, natural capital is scarce. How do we take account of that scarcity without prices? This question is what understandably leads economists to price natural capital, and then leads to the monetary valuation problems just discussed. But is there not another way to recognize scarcity, besides pricing? Yes, one could impose quotas–quantitative limits on the resource flows at ecologically sustainable levels that do not further deplete natural capital. We could recognize scarcity by living sustainably off of natural income rather than living unsustainably from the depletion of natural capital.

In economics, “income” is by definition the maximum amount that can be consumed this year without reducing the capacity to produce the same amount next year. In other words, income is by definition sustainable, and the whole reason for income accounting is to avoid impoverishment by inadvertent consumption of capital. This prudential rule, although a big improvement over present practice, is still anthropocentric in that it considers nature in terms only of its instrumental value to humans. Without denying the obvious instrumental value of nature to humans, many of us consider nature to also have intrinsic value, based partly on the enjoyment by other species of their own sentient lives. Even if the sentient experience of other species is quite reasonably considered less intrinsically valuable than that of humans, it is not zero. Therefore we have a reason to keep the scale of human takeover even below that indicated by maximization of instrumental value to humans. On the basis of intrinsic value alone, one may argue that the more humans the better–as long as we are not all alive at the same time! Maximizing cumulative lives ever to be lived with sufficient wealth for a good (not luxurious) life is very different from, and inconsistent with, maximizing simultaneous lives.

In addition, speaking for myself, and I expect many others, there is a deeper consideration. I cannot reasonably conceive (pace neo-Darwinist materialists) that our marvelous world is merely the random product of multiplying infinitesimal probabilities by infinitely many trials. That is like claiming that Hamlet was written by infinitely many monkeys, banging away at infinitely many typewriters. A world embodying mathematical order, a system of evolutionary adaptation, conscious rational thought capable of perceiving this order, and the moral ability to distinguish good from bad, would seem to be more like a creation than a happenstance. As creature-in-charge, whether by designation or default, we humans have the unfulfilled obligation to preserve and respect the capacity of Creation to support life in full. This is a value judgment, a duty based both historically and logically on a traditional theistic worldview. Although nowadays explicitly rejected by materialists, and by some theists who confuse dominion with vandalism, this worldview fortunately still survives as more than a vestigial cultural inheritance.

Whatever one thinks about these deeper issues, the point is that determination of the scale of resource throughput cannot reasonably be based on pseudo prices. But scale does have real consequences for prices. Fixing the scale of the human niche is a price-determining macro decision based on ethical and religious criteria. It is not a price-determined micro decision based on market expression of individual preferences weighted by ability to pay.

However the scale of the macro-limited resource flow is determined, we next face the question of how to ration that amount among competing micro claimants? By prices. So we are back to pricing, but in a very different sense. Prices now are tools for rationing a fixed predetermined flow of resources, and no longer determine the volume of resources taken from nature, nor the physical scale of the economic subsystem. Market prices (modified by taxes or cap-auction-trade) ration resources as an alternative to direct quantitative allocation by central planning. The physical scale of the economy has been limited, and the resulting scarcity rents are captured for the public treasury, permitting elimination of many regressive taxes. Dollars become ration tickets; no longer votes that determine how big the scale of the economy will be relative to the ecosystem. The market no longer conveys the message “we can grow as much as we want as long as we pay the price.” Rather the new message is, “there is only so much to go around, and dollars are your ration ticket for a part of the fixed quota, not a vote that can be cast for growth.” Equitable distribution of dollar incomes (ration tickets) will then be seen as the serious matter that it is, to be solved by sharing, not evaded by growth, especially not by uneconomic growth.

Unfortunately, the more common approach in economics has been to try somehow to calculate that price that internalizes sustainability and impose it via taxes. The right price, given the demand curve, will result in the corresponding right quantity. However, there is a two-fold problem: first, methods of calculating the “right” price are usually specious (e.g. contingent valuation); and second, we don’t really know where the shifting demand curve is, except on the blackboard. In fixing prices, errors in demand estimation result in variations in quantity. In fixing quantity, errors result in variations in price. The ecosystem is sensitive to quantity, not price. It is ecologically safer to let errors in estimation of demand result in price changes rather than quantity changes. This is one advantage of the cap-auction-trade system relative to carbon taxes. Although a great improvement over the present, carbon taxes attempt to ration carbon fuels without having really limited their supply. Nor are the “dollar ration tickets” limited, given the fractional reserve banks’ ability to create money, and the Fed’s policy of issuing more money whenever growth slows down.

A monetary reform to 100% reserve requirements on demand deposits would be a good policy for many reasons, to which we can add, as a necessary supplement to a carbon tax. It would not be necessary as a supplement to cap-auction-trade, but should be adopted for independent reasons. A good symbol should not be allowed to do things that the reality it symbolizes cannot do. One hundred percent reserves would require the symbol of money to behave more like real wealth, at least in some important ways. But this is another story.

The Visible Hand: Manipulating Market Prices by Influencing Laws and Regulations

by Max Kummerow

Recently a member of a mailing list for resource economists asked how to value endangered species given that they are not bought and sold in markets. A common method is to infer prices (“existence values”) by indirect methods such as answers to surveys (e.g., “How much would you be willing to pay to keep tigers from going extinct?”). An issue raised in the online discussion was whether species grow more valuable as they become more scarce and their numbers fall toward zero. If prices keep changing, what is the “right” price?

Thought experiment: suppose a keystone species is about to go extinct, but few people know about the threat. Oh, heck, let’s be more realistic. Leading ecological authorities believe that the effects of climate change will drive 1/3 or more of the world’s species to extinction by 2100 with unpredictable system-wide effects. Meanwhile, the owners of $17 trillion of fossil-fuel reserves are spending hundreds of millions of dollars to convince the public that the threats from climate change are overstated or non-existent (See Bill McKibben’s Rolling Stone article or Oreskes and Conway’s Merchants of Doubt).

How can we have any idea about fundamental values (that is, “correct” utility-maximizing efficient market prices) with so much misinformation floating around? Advertising creates a set of consumption preferences tilted towards items sold by companies more concerned about profits than benefits to society.

Prices depend on preferences, and preferences depend on information. Knowledge of the unhealthy and even fatal effects of smoking changed preferences about and prices of tobacco. Such changes would also occur over time as people gain knowledge about the threats of extinction and climate change.

By similar means, misinformation and strategic uncertainty lead to mispricing. If such mispricing in the carbon market continues, the predicted result is a “tragedy of the commons” (collective irrationality, market failure) with features like Miami, Washington, DC, and Los Angeles ending up below sea level, mass species extinctions, crop failures, etc.

Economic systems are complex, and many external costs and benefits are not factored into prices or people’s decisions in the market. Time lags add to the complexity. What if it will take 2,000 years before climate change makes the planet too hot for human life? Such a time lag makes it harder to come to the best decision about whether to build a new coal-fired power plant.

Species extinctions may be portents of broader problems (e.g., climate change), akin to canaries in a coal mine. The same factors driving them extinct — various impacts of growing human populations and economies — may be driving us extinct in the longer run. Does it make sense to value threatened species without considering the linkage to these other related problems? An endangered species itself might be worth $1, yet the factors driving it toward extinction might cause $100,000 worth of damage over the long run, or maybe even infinite damage from our point of view if extinction extends to humans. We need a better benefit-cost picture — a larger, genuine, and more complete accounting.

Another major problem with prices is that they only reflect the preference of those who hold power in markets. Perhaps polar bears should have standing when it comes to determining prices. They are intelligent, sentient beings with the most at stake when ice melts, so maybe their preferences ought to be factored into decisions about the Keystone Pipeline and exploitation of tar sands oil. What about future generations? Nobel Prize winner Joseph Stiglitz called this problem “incomplete markets” leading to market failure and universal mispricing.

There are some things markets do very well, but only if the institutional framework (rules of the game) ensures that prices reflect all costs and benefits. Laws, lobbying, culture, taxes, regulations — all kinds of institutions collectively created by societies — have enormous influences on market prices or even the existence of markets. So, to some degree, through these institutions, we choose price levels through a “visible hand” of policies and institutions. Stiglitz points out that the deregulation policies that led to the Global Financial Crisis of 2008 did not come out of nowhere, but rather from intense lobbying by stakeholders at banks and other people whose profits were restricted by regulations — a situation in which prices were set by something like a visible-policy hand instead of the invisible hand of the market.

Because of the difficulty of getting prices right, we might do better to regard creation as sacred and take the conservative position of Aldo Leopold who said, “The first rule of intelligent tinkering is to save all the parts.”

Valuations always depend on preferences. Economists call prices “revealed preferences.” If we “prefer” to settle for a world without many wonderful creatures, then we won’t attach much worth to them. But if we value them for their intrinsic beauty and their relationship to us (we do share DNA with every living thing), then we’ll attach more worth to them. So rather than measuring values, perhaps we should be trying to create value by improving preferences.

Examples of worldwide mispricing and market failures that need institutional corrections include:

  • Energy — too cheap due to climate change, extinctions, and negative effects on future generations.
  • Having children — too cheap since growing population will raise real prices of land, food, and energy, and contribute to climate change and other global environmental problems.
  • Endangered species — too cheap because ecosystem interrelationships are poorly understood, and indirect effects could be enormous.
  • Economic growth — overvalued because growth negatively affects aggregate utility and public goods (“the commons” such as air, water, soil, species diversity, ecosystem health, and climate) once we begin to reach the limits to growth.

Most economics students are still taught that following market price signals leads to the best of all possible worlds (market efficiency and maximum aggregate utility). But the examples of under- and over-valuation contained in the short list above suggest that humanity is headed for trouble if we choose to let market prices and self-interested institutions’ manipulation of prices control outcomes. The markets we rely on fail to generate utility-maximizing prices for goods and services and for the future of humanity. Thinking of ourselves as an endangered species, what is it worth to keep us alive?

Max Kummerow has a Ph.D. in urban and real-estate economics.  He is currently studying population issues in Perth, Australia.

Wealth, Illth, and Net Welfare

by Herman Daly

Adapted from an article published in Resurgence.

Herman DalyWellbeing should be counted in net terms — that is to say we should consider not only the accumulated stock of wealth but also that of “illth;” and not only the annual flow of goods but also that of “bads.” The fact that we have to stretch English usage to find words like illth and bads with which to name the negative consequences of production that should be subtracted from the positive consequences, is indicative of our having ignored the realities for which these words are the necessary names. Bads and illth consist of things like nuclear wastes, the dead zone in the Gulf of Mexico, biodiversity loss, climate change from excess carbon in the atmosphere, depleted mines, eroded topsoil, dry wells, exhausting and dangerous labor, congestion, etc. We are indebted to John Ruskin for the word “illth,” and to an anonymous economist, perhaps Kenneth Boulding, for the word “bads.” In the empty world of the past these concepts and the names for them were not needed because the economy was so small relative to the containing natural world that our production did not incur any significant opportunity cost of displaced nature. We now live in a full world, full of us and our stuff, and such costs must be counted and netted out against the benefits of growth. Otherwise we might end up with extra bads outweighing extra goods, and increases in illth greater than the increases in wealth. What used to be economic growth could become uneconomic growth — that is, growth in production for which marginal costs are greater than marginal benefits, growth that in reality makes us poorer, not richer. No one is against being richer. The question is, does growth any longer really make us richer, or has it started to make us poorer?

I suspect it is now making us poorer, at least in some high-GDP countries, and we have not recognized it. Indeed, how could we when our national accounting measures only “economic activity.” Activity is not separated into costs and benefits. Everything is added in GDP, nothing subtracted. The reason that bads and illth, inevitable joint products with goods and wealth, are not counted, even when no longer negligible in the full world, is that obviously no one wants to buy them, so there is no market for them, and hence no price by which to value them. But it is worse — these bads are real and people are very willing to buy the anti-bads that protect them from the bads. For example, pollution is an unpriced, uncounted bad, but pollution clean-up is an anti-bad which is accounted as a good. Pollution cleanup has a price and we willingly pay it up to a point and add it to GDP — but without having subtracted the negative value of the pollution itself that made the clean up necessary. Such asymmetric accounting hides more than it reveals.

In addition to asymmetric accounting of anti-bads, we count natural capital depletion as if it were income, further misleading ourselves. If we cut down all the trees this year, catch all the fish, burn all the oil and coal, etc., then GDP counts all that as this year’s income. But true income is defined as the maximum that a community can consume this year, and still produce and consume the same amount next year — maximum production while maintaining intact future capacity to produce (capital in the broadest sense). Nor is it only depletion of natural capital that is falsely counted as income — failure to maintain and replace depreciation of man-made capital, such as roads and bridges, has the same effect. Much of what we count in GDP is capital consumption and anti-bads.

As argued above, one reason that growth may be uneconomic is that we discover that its neglected costs are greater than we thought. Another reason is that we discover that the extra benefits of growth are less than we thought. This second reason has been emphasized in the studies of self-evaluated happiness, which show that beyond a threshold annual income of some $20-25 thousand, further growth does not increase happiness. Happiness, beyond this threshold, is overwhelmingly a function of the quality of our relationships in community by which our very identity is constituted, rather than the quantity of goods consumed. A relative increase in one’s income still yields extra individual happiness, but aggregate growth is powerless to increase everyone’s relative income. Growth in pursuit of relative income is like an arms race in which one party’s advance cancels that of the other. It is like everyone standing and craning his neck in a football stadium while having no better view than if everyone had remained comfortably seated.

Check out the wellbeing issue of Resurgence Magazine.

As aggregate growth beyond sufficiency loses its power to increase welfare, it increases its power to produce illth. This is because to maintain the same rate of growth ever more matter and energy has to be mined and processed through the economy, resulting in more depletion, more waste, and requiring the use of ever more powerful and violent technologies to mine the ever leaner and less accessible deposits. Petroleum from an easily accessible well in East Texas costs less labor and capital to extract, and therefore directly adds less to GDP, than petroleum from an inaccessible well a mile under the Gulf of Mexico. The extra labor and capital spent to extract a barrel in the Gulf of Mexico is not a good or an addition to wealth — it is more like an anti-bad made necessary by the bad of depletion, the loss of a natural subsidy to the economy. In a full employment economy the extra labor and capital going to petroleum extraction would be taken from other sectors, so aggregate real GDP would likely fall. But the petroleum sector would increase its contribution to GDP as nature’s subsidy to it diminished. We would be tempted to regard it as more rather than less productive.

The next time some economist or politician tells you we must do everything we can to grow (in order to fight poverty, win wars, colonize space, cure cancer, whatever…), remind him that when something grows it gets bigger! Ask him how big he thinks the economy is now, relative to the ecosphere, and how big he thinks it should be. And what makes him think that growth is still causing wealth to increase faster than illth? How does he know that we have not already entered the era of uneconomic growth? And if we have, then is not the solution to poverty to be found in sharing now, rather than in the empty promise of growth in the future? If you get a reasoned, coherent answer, please send it to me!

Sustaining Our Commonwealth of Nature and Knowledge

by Herman Daly

Herman DalyLet’s start with this phrase: “sustaining our commonwealth.” By sustaining, I don’t mean preserving inviolate; I mean using, without using up. Using with maintenance and replenishment is an important idea in economics. It’s the very basis of the concept of income, because income is the maximum that you can consume today and still be able to produce and consume the same amount tomorrow – that is, maximum consumption without depleting capital in the broad sense of future productive capacity. By commonwealth, I mean the wealth that no one has made, or the wealth that practically everyone has made. So it’s either nature – nobody made it, we all inherited it – or knowledge – everybody contributed to making it, but everyone’s contribution is small in relation to the total and depends on the contributions of others. In managing the commonwealth of nature, our big problem is that we tend to treat the truly scarce as if it were non-scarce. The opposite problem arises with the commonwealth of knowledge, in which we tend to treat what is truly not scarce as if it were.

Clarifying Scarcity

There are two sets of important distinctions about goods, and they make four cross-classifications (see figure below). Goods can be either rival or non-rival, and they can be either excludable or non-excludable. My shirt, for example, is a rival good because if I’m wearing it, you can’t wear it at the same time. The warmth of the sun is non-rival because I can enjoy the warmth of the sun, and everyone else can enjoy it at the same time. Rivalness is a physical property that precludes the simultaneous use of goods by more than one person. Goods are also excludable or non-excludable. That’s not a physical concept, that’s a legal concept, a question of property. For example, you could wear my shirt tomorrow if I let you, but that’s up to me because it’s my property. My shirt is both rival and excludable, and that’s the case with most market goods. Meanwhile, the warmth of the sun is both non-rival and also non-excludable. We cannot buy and sell solar warmth; we cannot bottle it and charge for it. Goods that are rival and excludable are market goods. Goods that are non-rival and non-excludable are public goods. That leaves two other categories. Fish in the ocean are an example of goods that are rival and non-excludable. They are rival, because if I catch the fish, you can’t catch it. But they are also non-excludable, because I can’t stop you from fishing in the open seas. The management of goods that are rival and non-excludable gives rise to the famous tragedy of the commons – or the tragedy of open-access resources, as it’s more accurately called. Now, the other problematic category consists of goods that are non-rival and excludable. If I use the Pythagorean Theorem, I don’t prevent you from using it at the same time. Knowledge is non-rival, but it often is made excludable through intellectual property and patent rights. So those are two difficult categories that create problems. One is the tragedy of the commons, and the other we could call the tragedy of artificial scarcity.

The Commonwealth of Nature

Fish in the ocean are an example of the commonwealth of nature. I’ll ague that natural goods and services that are rival and have so far remained non-excludable should be enclosed in the market in order to avoid unsustainable use. Excludability can take the form of individual property rights or social property rights – what needs to be avoided is open access. For dealing with the broad class of rival but, up to now, non-excludable goods, the so-called cap-auction-trade system is a market-based institution that merits consideration.

In addition to its practical value, the cap-auction-trade system also sheds light on a fundamental issue of economic theory: the logically separate issues of scale, distribution, and allocation. Neoclassical economics deals mainly with the question of allocation. Allocation is the apportionment of resources among competing uses: how many resources go to produce beans, how many to cars, how many to haircuts. Properly functioning markets allocate resources efficiently, more or less. Yet the concept of efficient allocation presupposes a given distribution. Distribution is the apportionment of goods and resources among different people: how many resources go to you, how many to somebody else. A good distribution is one that is fair or just – not efficient, but fair. The third issue is scale: the physical size of the economy relative to the ecosystem that sustains it. How many of us are there and how large are the associated matter-energy flows from producing all our stuff, relative to natural cycles and the maintenance of the biosphere. In neoclassical economics, the issue of scale is completely off the radar screen.

The cap-auction-trade system works like this. Some environmental assets, say fishing rights or the rights to emit sulfur dioxide, have been treated as non-excludable free goods. As economic growth increases the scale of the economy relative to that of the biosphere, it becomes recognized that these goods are in fact physically rival. The first step is to put a cap – a maximum – on the scale of use of that resource, at a level which is deemed to be environmentally sustainable. Setting that cap – deciding what it should be – is not a market decision, but a social and ecological decision. Then, the right to extract that resource or emit that waste, up to the cap, becomes a scarce asset. It was a free good. Now it has a price. We’ve created a new valuable asset, so the question is: Who owns it? This also has to be decided politically, outside the market. Ownership of this new asset should be auctioned to the highest bidder, with the proceeds entering the public treasury. Sometimes rights are simply given to the historical private users – a bad idea, I think, but frequently done under the misleading label of “grandfathering.” The cap-auction-trade system is not, as often called, “free-market environmentalism.” It is really socially constrained, market environmentalism. Someone must own the assets before they can be traded in the market, and that is an issue of distribution. Only after the scale question is answered, and then the distribution question, can we have market exchange to answer the question of allocation.

Another good policy for managing the commonwealth of nature is ecological tax reform. This means shifting the tax base away from income earned by labor and capital and onto the resource flow from nature. Taxing what we want less of, depletion and pollution, seems to be a better idea than taxing what we want more of, namely income. Unlike the cap-auction-trade system, ecological tax reform would exert only a very indirect and uncertain limit on the scale of the economy relative to the biosphere. Yet, it would go a long way toward improving allocation and distribution.

The Commonwealth of Knowledge

If you stand in front of the McKeldin Library at the University of Maryland, you’ll see a quotation from Thomas Jefferson carved on one of the stones: “Knowledge is the common property of mankind.” Well, I think Mr. Jefferson was right. Once knowledge exists, it is non-rival, which means it has a zero opportunity cost. As we know from studying price theory, price is supposed to measure opportunity cost, and if opportunity cost is zero, then price should be zero. Certainly, new knowledge, even though it should be allocated freely, does have a cost of production. Sometimes that cost of production is substantial, as with the space program’s discovery that there’s no life on Mars. On the other hand, a new insight could occur to you while you’re lying in bed staring at the ceiling and cost absolutely nothing, as was the case with Renee Descartes’ invention of analytic geometry. Many new discoveries are accidental. Others are motivated by the joy and excitement of research, independent of any material motivation. Yet the dominant view is that unless knowledge is kept scarce enough to have a significant price, nobody in the market will have an incentive to produce it. Patent monopolies and intellectual property rights are urged as the way to provide an extrinsic reward for knowledge production. Even within that restricted vision, keeping knowledge scarce still makes very little sense, because the main input to the production of new knowledge is existing knowledge. If you keep existing knowledge expensive, that’s surely going to slow down the production of new knowledge.

In Summary

Managing the commonwealth of nature and knowledge presents us two rather opposite problems and solutions. I’ve argued that the commonwealth of nature should be enclosed as property, as much as possible as public property, and administered so as to capture scarcity rents for public revenue. Examples of natural commons include: mining, logging, grazing rights, the electromagnetic spectrum, the absorptive capacity of the atmosphere, and the orbital locations of satellites. The commonwealth of knowledge, on the other hand, should be freed from enclosure as property and treated as the non-rival good that it is. Abolishing all intellectual property rights tomorrow is draconian, but I do think we could grant patent monopolies for fewer “inventions” and for shorter time periods.


Demand a Supply of Common Sense; Just Don’t Price It

by Brian Czech

“Natural resources originate from the mind, not from the ground, and therefore are not depletable.” Robert Bradley, President, Institute for Energy Research.

Ah, the confusion of economics students when they encounter the subject of supply and demand in introductory “micro.” They learn that prices are determined by supply and demand. Then they’re taught that the quantities supplied and demanded are determined by… prices!

There happens to be no lurking inconsistency here, no magic trick to dazzle us; not even a ridiculous fallacy to accuse the professor of. It’s just a matter of semantics; supply is not the same as “quantity supplied” and demand is not the same as “quantity demanded.” But these semantics do open the door for shenanigans!

The supply (per se) of raw diamonds, for example, is determined primarily by how many diamonds are in the ground and the technology available for mining them. Supply clearly does influence price; diamonds are expensive partly because they are so hard to find and extract. On the other hand, the “quantity supplied” is what is brought to the market by diamond sellers. Price clearly does influence the quantity supplied; the higher the price, the higher the quantity supplied.

So the relationships among supply, price, and quantity supplied are really not so mysterious, at least not until a linguistically reckless or unscrupulous growthman wades in to muddy up the waters. As an example, the late Julian Simon comes to mind, but there are plenty of living counterparts. Robert Bradley, president of the Institute for Energy Research, believes that “Natural resources originate from the mind, not from the ground, and therefore are not depletable. Thus, energy can be best understood as a bottomless pyramid of increasing substitutability and supply.” In other words, innovators supply the world with natural resources, including energy, from their minds. Therefore, the supply of such resources is no problem.

Clearly such a theory induces a healthy supply of corrupt political dialog, in which the word “supply” is, well, over-supplied. I may as well partake!

Consider the number of smokers in a room and the amount of smoke they supply. When we crowd more smokers into the room, we get higher supplies of smoke. As the smoke supply increases, however, non-smokers start to leave. Eventually even the smokers leave, beginning with the lighter smokers who don’t like heavy smoke. So at first, more smokers means a higher supply of smoke, yet eventually a higher supply of smoke means less smokers. In a goofy sort of way, with a touch of linguistic liberty-taking, more smokers means less smokers and cleaner air. (Some of the ex-smokers may have taken up plug tobacco, however, increasing the spittle supply on the sidewalk.) This can be twisted into an insinuation, self-deception, or bald-faced lie that smoking is a self-correcting problem, and that the key to less smoking in society is more smoking!

This ludicrous example mirrors the claim that the invisible hand of the market will “fix” any resource shortages that might arise, which is based on the assumption that increasing price will increase not only the “quantity supplied” but the bona fide supply. After all, supplies come from the mind. It’s smoke-and-mirrors, so to speak.

We’ve all been downwind of cigarette smoke. (Hopefully, few of us have been downstream of plug spittle!) Certainly we have the right to poke a little fun, especially at Big Tobacco’s “Seven Dwarves,” who perjured before a U.S. House of Representatives Subcommittee, “I believe that nicotine is not addictive.” The resulting news broadcast was unforgettable to many Americans, who learned a lot about Big Money that day. We fully expected the Seven Dwarves to announce, as an encore, the Tooth Fairy’s engagement to Santa Claus.

So Americans know quite well how Big Money can pollute the truth. Can we expect the mother of all money-making theories, unlimited growth theory – along with its crazy correlates – to come to us on wings of truth? Sure, sure, higher prices stemming from lowered supplies actually “increase” supplies because they provide an incentive to “supply” even more. And more smoke makes the air “cleaner” by providing an incentive for smokers to increase the “supply” of clean air. More traffic increases the “supply” of open road. More noise actually leads to a greater “supply” of quietness. Less of a good thing leads to more of it! More of a bad thing leads to less of it! Or, if you prefer, less of a good thing leads to less of a bad thing, and more of a bad thing leads to more of a good thing!

So if the growthmen want to claim that oil supplies, for example, are actually increasing, not decreasing, as evidenced by a downturn in price, let them play with the word “supply” like the Seven Dwarves play with “addictive!” Let them use “supply” to mean more, less, an OK mess, anybody’s guess … whatever. But may the rest of us not sound, as one old hand used to say, “Dummer’n a doggone boot!” Supply is how much there is, after all, and as you use it, less remains.

Diamond ring: $5,000.00. Neoclassical economics textbook: $100.00. Common sense: priceless.