Download Biophysical Limits to Economic Growth

Biophysical Limits to
Economic Growth
Neo-Classical Perspective
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.
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.
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 for
self-destruction; underestimate human creativity and
instinctive capability for self-preservation.
 have the strong tendency to lump all resources
together without regard to their importance, ultimate
abundance or substitutability
 do not comprehend the possibility of there being an
infinite amount of resource substitutability, even in a
world with a finite resource endowment
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
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).
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.

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.

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.
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 higherquality energy resources for labor and capital
in the extraction of resources

Decline in output
per unit of
energy used
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.

Environmental
Damage
Environmental Kuznets Curve
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.
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.