The visible hand in economics

Growth and resources: Cleaning up a fallacy

Posted on: October 17, 2008

Just quickly, I have to correct this statement by FrogBlog:

In other words if we continue to grow at 3 percent per year every year, as economists would have us do, in 100 years time we will be using and consuming 19 times more than we currently do

No, no we wouldn’t. Remember a little while ago I wrote about technology.

  1. It allows us to create more output with the same input of the resource,
  2. It allows us to access more of the input,
  3. It allows us to speed up the process of creating output from input,
  4. It creates new outputs that can be created with the input,
  5. It creates substitutes for the input.

As a result, even if we assume the worst case scenario that we cannot substitute and that there is no new technology we can discover that will get us access to more resources, technology can help by allowing us to make more with the same level of inputs. Economists target a level of “growth” (when economists have to talk about growth – rather than societies welfare) that they feel relates to growth in resources (such as population) and technology – this does not seem like an unsustainable goal to me.

This is a fundamental part of the “productivity” growth that economists ALWAYS talk about. For some reason Frog Blog seems to believe that technology only performs the third role – and as a result we are spinning towards economic oblivion. If that is the case – then let the price signal do the work. Prices will rise to ensure that we allocate resources appropriately over time as long as society is given information surrounding the scarcity of resources (except in the case of externalities).

I’m not disagreeing the resources are scarce, that is the very issue that economics studies. However, I am disagreeing with the way Frog Blog uses this scarcity to argue for its own, barely related, agenda.


18 Responses to "Growth and resources: Cleaning up a fallacy"

Growth to me is urban sprawl, Mc Mansions, motorways, swimming pools (movie stars), selling off bays and headlands to foreigners…
What am I thinking of in economic terms?

Here’s a seductive video on a no growth (or quality growth) steady state economy, which is the sort of ideal people such as myself envisage. I believe the Green Party can be classified as eco- socialist.

“What am I thinking of in economic terms?”

You are thinking of consumption choices that you don’t agree with. However, as long as people are paying the full social cost for these choices – it shouldn’t have to worry you ๐Ÿ™‚

“Hereโ€™s a seductive video on a no growth (or quality growth) steady state economy”

I can’t watch videos are work, sorry ๐Ÿ˜›

If there was no increase in technology or the capital stock of resources, economists would not ask for growth either – but we believe that technology allows us to make the same amount of things into more stuff over time. This is what we base our “growth” off.

Economics was originally called the dismal science because we ignored the role of technology and thought growth was unsustainable – we like to pass on the lessons we’ve learned to other people that are falling for the same fallacy ๐Ÿ™‚

Really? I thought it was ‘dismal’ because there was always a downside to economic news – ‘growth up! (but so is inflation, threatening to eat away at our hard won gains)’, house prices, etc…

I thought it was because good economists tell people what they dont want to hear.

I thought it was because good economists tell people what they dont want to hear.

“I thought it was because good economists tell people what they dont want to hear.”

It makes sense, after all no-one likes to be told to face a trade-off. However, I believe the term first popped up with regards to us all starving because of population growth – and has just stuck since ๐Ÿ˜‰

No wonder people (i.e non-economists:P) always get shitty with me…..

They’re not real people agnitio.

“No wonder people (i.e non-economists:P) always get shitty with meโ€ฆ..”

“Theyโ€™re not real people agnitio.”

Guys, everyone is an economist – they just don’t know it yet ๐Ÿ˜‰

“Guys, everyone is an economist – they just donโ€™t know it yet ”

Take that back!

“Take that back!”

Why. Being an economist is like being a lover – it is something we all have inside of us. We just need an economics Don Juan to bring it out ๐Ÿ˜‰

I’m scared.

“Iโ€™m scared.”

Scared of what – why are comments on Friday afternoon so short?

Um, diminishing returns?

“Um, diminishing returns?”

Thankyou. If no-one had made that argument by tomorrow I was going to make it myself ๐Ÿ˜› As a result, I have my response all nice and prepared ๐Ÿ™‚

Now, diminishing returns to a specific input is a common – even essential assumption in economics. However, we are not discussing individual inputs persee we are discussing aggregate production.

A single input not only impacts on the production of a good, it also changes the productivity of other inputs. Generally, the major inputs described my economics are complements – insofar as the increase in one input increases the marginal product of other inputs.

As a result, we can have a diminishing marginal product but constant or increasing returns to “scale” – which discusses what happens when we increase all inputs by the same amount.

It is commonly believed that countries at least have constant returns to scale (which would imply the same result as Frog Blog if we ignored any role for technology), however in many cases it is believed that countries face increasing returns to scale – because of the interaction between inputs.

As a result, the assumption of diminishing returns does not lead to a Frog Blog type result – we need to describe the impact of a change in “scale” as that is where our growth is essentially assumed to come from.

When I wrote the post I did not discuss scale – which implies that I implicitly assumed a constant returns to scale environment – which is in itself consistent with what frog blog was saying. However, that leaves us with technology – a factor I believe they have “again” underplayed.

Take that back!

“Take that back!”

What do I need to take back now? Constant returns to scale or the Don Juan business ๐Ÿ™‚

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