Wednesday, June 10, 2015

Limited Resources v/s Economic Growth

Economic growth needs many supply side resources such as food & water for the population, fossil fuels, metal ores etc. There is a growing concern that we would run out of resources impacting economic growth. But at the tipping point, when many predicted worse, things seem to change for better. Read more on this.

The biggest debate on this subject was at the rate we were burning oil, we would run out of them in few decades. Economy won’t advance if we don’t have sufficient energy to produce goods or services or transport them around. So the oil prices went up above $100/barrel increasing inflation in the importing countries and many thought oil prices would never soften. But shale technology changed the industry landscape. Last year, US produced more oil than Saudi. And oil is traded at the half-price sustain-ably for many months now. Forget inflation, welcome deflation! Those who predicted high price of oil are licking their wounds.

Similarly in the agriculture domain, when there was no additional arable land was available, use of fertilizers took up the productivity. Now advances in bio-technology seem to be the next wave to improve agricultural output. World’s population has more than doubled in the last 50 years while the available land did not double up but yet this population is fed better comparatively.

Many are concerned that water would become the reason for the next world war. But we are finding ways to recycle water, preserve rain water, or cut water use in agriculture through drip irrigation etc. Those who are predicting water shortfall might be overestimating the demand or ignoring the improvements which would come in time.

Before coal runs out, wind and solar would have become significant sources of energy production.

Whenever we approach the limits of available resources, a new vista opens up taking these limits higher.

Though the depleting resources have some irreversible impacts on ecology, focus of this blog post is on its impact on economic growth.

In the debate between Environmentalists (who find limits to growth) versus Economists (who are helped by innovation to overcome the limits), the optimists have had the last laugh always. Next time when you get into similar debate, do remember there is no reason to get pessimistic completely and hoping for better would not prove you wrong.

[Inspired by the book ‘Rational Optimist’ by Matt Ridley]