Debunking Doomsday

Civilizations don't die by exhausting their resources. They die by consuming the institutions that made their vitality possible.

The doomsday philosophy has more credibility today than it's ever had in the history of mankind. Why that's so is difficult to determine, but no doubt the computer has given new credibility to a type of prediction that is thousands of years old. It's important to realize that all doomsday philosophies have a central scientific core in that they are based on data—or at least purported data—about the world. So we find doomsday philosophies accompanying the rudimentary beginnings of science in the time of the ancient Greeks.

The Greeks viewed the world as possessing a fixed stockpile of resources, and they viewed man's role within this conception as one of adaptation. When man was successful at adapting, he had prosperity and plenty, and when he was unsuccessful he faced hardship and starvation. And using this conception of the fixed stockpile of resources, man has throughout history predicted doom for mankind.

The ancient Athenians, for example, were very concerned about what would happen to the resource base in ancient Greece if the other city states approached the level of living that had been achieved in Athens. Our best economic and anthropological estimates are that, when this concern was a hotly debated topic in Athens, per capita income was eight or ten dollars per annum. Yet the Athenians were probably right in their concern that, given their resource base defined by their technology, it might have been difficult, if not impossible, for the other city states during that period to achieve Athens' level of living.

GLOOM AND DOOM

Using this basic concept of a fixed stockpile of resources as a fundamental assumption about the world, we've seen numerous predictions of doom. Economics has been in the forefront of these predictions—ranging from the new forecasts of ecological collapse to the old Malthusian predictions that we would see exponential growth in population, arithmetic growth in the means of production, and thus ultimate starvation. Of course, Malthus never foresaw the great technological innovations in agriculture and therefore never envisioned the possibility that someday a foolish government might pay people not to grow food.

All the predictions of doom floating around have basically three things in common. One, they assume a fixed stockpile of resources. Two, they assume that technology is either fixed or bounded. Three, all of these predictions that have had a timetable which has elapsed have proven to be wrong. And they've failed to materialize for a fundamental reason: the basic premise is false. Resources are not fixed.

What practical man has known and proven for thousands of years, modern science in this century has finally realized. Resources are not fixed. They are a function of science and technology. Man creates resources like he creates everything else—by rearranging what he finds in nature. As science and technology progress, new resources are born and old resources die. We need only, remember that for the man who ran naked in the forest, the only mineral resource was a stone. Of course, by learning to sharpen that stone he increased his resource state a millionfold. And we, by using resources—mineral resources in particular, which to the man running in the forest were valueless—have been able to walk on the moon. Whether or not that was a productive exercise, it was a tremendous technological achievement.

What this indicates is that there are only two constraints on the resources available to us. One is the limit to our imaginations, but we really shouldn't be particularly concerned about this constraint, because very little that has ever bound society has been caused by its pressures. There is every reason, however, to be very concerned about the second constraint—the limits on our freedom of action.

If one looks at historical experiences, nations and civilizations do not die by exhausting their resource base. Nations and civilizations die by consuming their institutions, by destroying the process that has historically provided the incentive for civilizations to arise and flourish and for people to solve problems. So it seems difficult to believe that the fundamental problem in the American economy today is an energy depletion problem. It seems more likely that the energy problem, "the energy crisis," is simply a manifestation of another problem, a very real problem, in society.

THE PRICE STORY

In fact, there is no evidence whatsoever to substantiate on a historical basis the contention that we woke up in October of 1973 and found the world had run out of petroleum products. There is no radical change to be seen in the factors that economists have to rely on to judge the economic scarcity of a resource. History has seen its "resource crises," and by studying them economists have discovered a traditional price pattern for a resource that is becoming exhausted in an economic sense. First, there is a prolonged period of increase in the price of that resource relative to the general increase in prices. Such a process continues until the same creative genius that is at first diverted to trying to augment the supply of the diminishing resource finally is transferred to producing an alternative to that resource and ultimately destroys its market.

The history of the whale oil crisis is a perfect example of the exhaustion of a natural resource in an economic sense—exhaustion to a point. There were clear indications by 1800 that whales were being killed more rapidly than they were replenishing themselves, and by 1820 it started to show up in price. Then, over a 40-year period there was a sustained, consistent increase in the price of whale oil. Whale oil increased 400 percent in constant purchasing power dollars. And it elicited the standard consumer response and called forth the standard producer response—tremendous technological innovation in the whaling industry. Production in the industry increased 1,000 percent in these 40 years, despite clear evidence that fewer whales were available in 1860 than in 1820. The rise in relative price year after year triggered a transformation of investments in the whaling industry and, ultimately, in the energy industry, so that we see man moving from the Arctic Ocean to Pennsylvania, looking for a new energy resource.

Now, if one looks at the price pattern of energy in the American postwar period, it does not fit the historical pattern of resource exhaustion. If we take the prices of energy resources consumed by the American public—gasoline, heating oil consumed directly, and natural gas—and we weight each of these prices by the amount spent by the public on them, we can create an energy price index much as the Bureau of Labor Statistics calculates a consumer price index. If we then take this energy price index and deflate it by the wholesale price index, we get real energy prices, adjusted for the increase in the general price level. So we can look at what happened from 1950 until the Arab embargo.

On a five-year basis, this is the pattern: from 1950 to 1955 real energy prices fell 3.1 percent. From 1955 to 1960, real prices fell 3.9 percent. In the next period they were down 6.5 percent, and in the next, 8.1 percent. And from 1970 to October 1973 real energy prices fell by 9.4 percent on a five-year basis. This is not the price pattern of a resource becoming depleted in an economic sense. Quite the contrary. It's the price pattern of a resource becoming more abundant. What happened with the Arab embargo was the imposition of political constraints that reacted with a deep-seated problem that had been building in American energy production for two decades and, in the process, triggered a worldwide energy problem. But this is a far cry from the traditional price pattern of the economic depletion of a resource.

CHEAP ENERGY

There is no doubt that the petroleum era will come to an end—but not because we've run out of petroleum. The era will come to an end because as we begin to press up against economic constraints we will, if individual initiative is maintained, experience the kind of stimuli that can function through the system to engender the creation of a new energy resource, or a myriad of new energy resources. So we must totally reject the notion espoused by President Carter and the president of Exxon and the great bulk of the petroleum industry—that the age of cheap energy is over. There is absolutely no historical evidence to suggest that. In fact, the evidence is that, in the whole energy- consumption history of mankind, there has not been a new energy resource that in terms of a fundamental measure of constant value did not ultimately turn out to be cheaper than the previous energy resource. New energy resources come on line only when they're cheaper than old energy resources in terms of new technological development—at least in a society that allows any semblance of a market system to function.

Our "energy problem" is not that we are running out of petroleum—or "cheap energy." The real problem is that we have not let the market system work. We have stifled the production of energy in the United States. There has been a great deal of discussion about the impact of Federal Power Commission price controls on natural gas; how this has stifled the development of a cheap and clean-burning domestic fuel; how by maintaining an artificially low interstate price, the consumer in the Midwest and Northeast has gotten away with paying lower prices than the Texas consumer. The last is political rhetoric and nonsense. They should be so lucky to pay $2.25 per thousand cubic feet for the natural gas. The really significant result of the artificially low prices for natural gas is that they have been forced to buy substitutes that have cost them as much as $6.25 per thousand cubic feet. In the recent past the pipelines going into the Northeast have been 15 percent empty, which is by no means a measure of the real shortage of natural gas in the Northeast. Just to make up for the shortage—in buying synthetic gas, in buying liquified Algerian gas, and in buying heating oil—consumers there have spent more money to make up that 15 percent shortage than they spent to buy the 85 percent of natural gas that was delivered. In reality, FPC regulation of natural gas prices, like every price ceiling ever imposed in the whole history of mankind, drives up prices to the American consumer, stifles technological development, and benefits in overall economic terms only those who produce more expensive fuels than natural gas.

BREAD AND ENERGY

Similar considerations apply to the petroleum industry, to environmental restrictions that have held up drilling in the continental shelf, to the Alaska pipeline, to the lag in licensing of nuclear reactors. All point to the conclusion that the real constraint that we face—and probably the most serious constraint that faces the American people today—is a constraint on our initiative and a constraint on our freedom of action. We could face a real energy crisis. Our children might live in a world that is "incapable" of meeting its energy demands. That will not occur, however, because people are too stupid to do something about it. It will not occur because our schools stop turning out people who can drill oil and gas wells, who can convert coal, who can find and produce and market resources that we've never dreamed of. It will only happen if we foolishly destroy the incentive system that rewards the hard-working and the inventive. That system, of course, is the free enterprise system—the only legitimate consumer movement in the whole history of civilization.

The real issue is not how much oil and gas exists in the continental shelf of the United States, or what volume of natural gas can be found in tight gas formations all over the country. There are those who are competent to make those assessments, although they're still not very good at it. It's important to remember that scientists have a terrible record of predicting the future In the 1870's, after crude petroleum had broken the whale oil market, the US Revenue Commission sought to get Congress to invest in the development of new technology to gasify coal for use in the 1880's and 1890's, when our petroleum deposits were to be exhausted. In December of 1900 the US Geological Survey, which basically was in cahoots with Standard Oil, went to Beaumont, Texas; did a study of Spindle Top; and concluded in a report that would be published after January 10 that, despite some favorable findings in Corsicana, Texas, oil would never be produced west of the Mississippi. On January 10, of course, a well came in on that hill outside Beaumont that, while it flowed, produced more oil than all the other wells in all the rest of the world combined. If you want to know about the future, you need to talk to science fiction writers, not scientists. Science fiction writers generally share a belief, borne out by history, in human inventiveness, in humans' capacity to solve problems.

And when we ponder how that creativity is to be directed toward our present problem, it is important to look at the system that has worked in the past. There's a cliche among collectivists to the effect that, "Sure the market system will work in doing things that are not very important. But in crucial areas, upon which our very existence depends, we can't rely on the market." That's a falsehood. We might rely on collectivism to produce goods that we don't really need and goods that we have a lot of substitutes for; but those things that we must have—that we cannot live without, at least in the manner in which we choose to live—those things have got to be reserved for private production, not government production. The sooner we let the same system that put bread on our table for lunch put gasoline back in our cars and cooling and heating back in our homes, the sooner we're going to get on with solving the "energy problem."

Dr. Gramm teaches economics at Texas A&M University and has testified before Congress and several state legislatures on many occasions. During the past year he has been on leave from the university in order to campaign in the Texas Democratic primaries for a seat in the US Congress. Having won a run-off election in June, he will be running on the Democratic ticket in the November election.