Tuesday, March 1, 2011

Malthus Part III

This post will essentially be a Julian Simon love fest (even though we'll mainly be talking about his ideas). And, it will be useful to talk about Julian Simon in the sense that he parallels Malthus. Economic Historian Ross Emmett writes,
 "In [Malthus' and many earlier economists'] view, human societies will overrun their natural resources if they do not have the right kind of institutions. But that will not happen in societies that have property rights, markets, and some means (for example, marriage) of ensuring that fathers are responsible for the costs of rearing their own children. In such societies, economic growth and moderate population growth can be sustained indefinitely, bringing steadily rising real incomes to everyone."

Emmett places Malthus in the Neo-Institutionalist camp rather than the camp which bears his name. That is a pretty bold move. So, the question is who are Neo-Institutionalists, and, what is the evidence that Malthus believed like them?

Julian Simon is the quintessential neo-institutionalist because he believed that problems would be solved by people with an incentive to fix them. Human ingenuity was the "ultimate resource" and anything that hindered the practice of this ingenuity would hinder the opportunity space for solutions. He thought it was a pity that the "ultimate resource" was not on the radar of the Neo-Malthusians.

Without getting too technical let's take two examples:

1) Whaling. Whale oil was used as a lubricant in industrial processes and for lighting candles. In the mid 1800s whaling represented the fifth largest industry in the United States (see this short article from NYT). What happened? As whales became more scarce the price of whale oil increased. The higher price led people to search for alternatives. Petroleum, which people learned how to refine, proved to be a viable alternative because it could be used to produce kerosene.

2) Horse manure. The Great Horse Manure Crisis of 1894 heralded the coverage of London in multiple feet of dung. Likewise, the same problem was going on in New York. As wealth increased and more and more people were able to afford horses urine and manure became more prevalent. What should they do with all of the manure? Happily this did not become a difficult question to answer. The invention of the car happened.

In both of these examples human ingenuity saved the day. Many Neo-Malthusians are mum on technological innovation. Although he ultimately comes down on the Neo-Malthusian side, Joel E. Cohen discusses the problems associated with systems-based population models in his book "How Many People Can the Earth Support?", "The model omits technolgoical progress, the discovery of resources, and the invention of substitute materials. The model has no system of prices to reflect scarcities and induce substitutions and shifts in behavior . . .".

On the other hand, technological innovation is the bread and butter of the Neo-Institutionalists. If people have an incentive to fix the problem and you allow people to pursue various avenues for fixing a problem it will be fixed. At an enivronmental luncheon one professor said, "Gee. It seems to me that if you just allowed someone to get rich from solving these problems they're more likely to get solved." While riches are not the only motivator for invention the fact that the market economy will dangle a prize should help.

Malthus also believed in the strength of human ingenuity; but, was skeptical that any single body would have an adequate answer to solve the problems. Remember, Malthus understood his assumptions about population were very strict. In fact, Malthus believed there was even more of a chance the assumption would be incorrect if customs and laws provided people with the incentive to innovate. In one hilarious passage Emmett recounts the,"The Bitter Dispute Between Economists and Human Beings":
From the economists standpoint, it is better to construct policies that do not require for people to be good, but, allow for imperfections and to work themselves out for the social good (kind of like the invisible hand argument). From the standpoint of "human beings" people needed to change in order to create utopia. The argument was simply about which would be more successful. 
This argument persists today. Which is more promising? Having a few people trying to construct utopia through their keen foresight (or not so keen!) or having many trying to solve small problems as they come along? Malthus also understood that there were social assumptions that could be made. For example, "The Fundamental Rule" was that each father incurred the cost of their child. If that were true that would be less incentive to have more children.

Neo-Institutionalists focus on the institutions which are the legal and social rules governing human action. These rules shape our incentives. So, the question going forward is what motivates people to invention, and, what supports the marriage? I'll close with a quote from Julian Simon about why economics is not well understood in conversation of population growth: 

"Lacking the economic habit of thought, laypeople tend to be susceptible to Malthusian thinking that takes into account only the obvious negative effects of additional persons, and that presents these ideas in the seductively fascinating context of exponential growth and the 'law of diminishing returns.'"

In other words, the average person does not recognize that as wealth increases 1) People tend to have less children, and 2) People invest more in environmental quality (the notion of the Environmental Kuznets Curve). That is the Neo-Institutionalist school in a nutshell.

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