To Karla Lopez: The Myth of Nonrenewable Resources

One of the charges most frequently leveled against capitalism is that this social system must necessarily lead to ecological disaster. After all, the earth’s resources, the ecosocialist argument goes, are finite. Evil capitalists and greedy businessmen will gradually exploit nonrenewables until we are doomed because we are out of natural resources. Karl Marx proposed this hypothesis as early as 1867, lamenting:

[A]ll progress in capitalistic agriculture is a progress … of robbing the soil; all progress in increasing the fertility of the soil for a given time, is a progress towards ruining the lasting sources of that fertility. The more a country starts its development on the foundation of modern industry, like the United States, for example, the more rapid is this process of destruction. Capitalist production, therefore, develops technology, and the combining together of various processes into a social whole, only by sapping the original sources of all wealth—the soil and the labourer.¹

Inspired by Jean-Jacques Rousseau, Marx believed that the cause for ecological disaster is to be found in the introduction of private property rights. According to this view, people originally lived in environment-friendly communities. Motivated by their desire to leave enough reserves for their offspring, they cautiously safeguarded the earth’s finite resources. With the introduction of private property, however, man became greedy and started to egotistically exploit the earth without any concern for future generations. Paraphrasing Rousseau, Marx writes:

From the standpoint of a higher economic form of society, private ownership of the globe by single individuals will appear quite as absurd as private ownership of one man by another. Even a whole society, a nation, or even all simultaneously existing societies taken together, are not the owners of the globe. They are only its possessors, its usufructuaries, and, like boni patres familias, they must hand it down to succeeding generations in an improved condition.²

Rousseau and Marx’s solution to this alleged problem was the abolition of capitalism and property rights, a solution which has presently been voiced as vociferously as never before by the ecosocialists. A lack of private property and personal profit, both Rousseau and Marx reasoned, would ultimately result in a revival of early, allegedly environment-friendly communities. Devoid of the evil, all-too-human temptations of private wealth and personal possessions, man, the Rousseauian/Marxian fairy tale concludes, would start to live in perfect harmony with his brothers again, collectively preventing evil entrepreneurs from exploiting the earth’s finite resources for selfish gain.

While reading fairy tales and fables can certainly be an entertaining pastime activity, it is by now about time to return to reality and probe this ecosocialist narrative. Since it would probably take an entire book to discuss all the absurdities in the Rousseauian/Marxian account, the subsequent analysis is limited to challenging its main fallacies. In short, and contrary to popular wisdom, it is not true that entrepreneurial activity leads to ecological disaster and must therefore be combated by socialist policies. Rather, for three interrelated reasons (all of them related to the scarcity and prices of commodities), entrepreneurial activity is the one and only mechanism that can prevent the doomsday scenario the ecosocialists are so passionately obsessed with.

In a free-market economy, the price of a resource is determined by its scarcity. If a resource becomes more abundant due to an increase in supply and/or a decrease in demand, its price will typically drop. If a given resource, vice versa, becomes more scarce due to a decrease in supply and/or an increase in demand, its price will usually rise.³ This change in scarcity and price, in turn, affects the behavior of any rational market participant with an entrepreneurial mindset, producer and consumer alike. In his groundbreaking monograph, The Ultimate Resource, American economist Julian L. Simon observes, “Heightened scarcity causes prices to rise. The higher prices present opportunity and prompt inventors and entrepreneurs to search for solutions.”⁴ In a capitalist society, the depletion of a nonrenewable resource is prevented by three emerging patterns of behavior, all of them caused by the increase in the resource’s price.

First, the profit motive incentivizes the rational businessman to obtain and store more units of the nonrenewable resource in question. The rise in price provides him with the opportunity to increase his income if he manages to increase his supply of the nonrenewable. One strategy typically pursued by entrepreneurs is hoarding. Expecting a further increase in the price of the nonrenewable and intent on making more money, the rational entrepreneur is incentivized to store the units of the resource he possesses rather than to sell them now. Another sound strategy is the exploration of new territories. There are, for instance, myriad oil reserves yet unexplored because the costs of extracting oil from these oil fields would make its extraction an unprofitable enterprise. A rise in oil prices, however, might well make the extraction of these oil resources a commercial enterprise. Yet a third strategy the rational businessman can be expected to follow is to improve production methods. Given the increased value of oil, the entrepreneur is incentivized to produce the product or service he sells on the marketplace more efficiently by minimizing the use of this nonrenewable. All three strategies, in sum, will actually increase the supply of a nonrenewable which has become scarce.

Second, the profit motive also incentivizes the rational businessman to start developing substitutes for the nonrenewable resource in question. The increase in scarcity offers the entrepreneur the rare chance of making a fortune by inventing and creating man-made products and technologies which can be used in lieu of the nonrenewable or reduce man’s dependency on it. It was due to the increase in oil prices, for instance, that businessmen began to artificially produce biofuel, a renewable resource which can be used for transportation, heating, and electricity alike. Also, entrepreneurs started to develop new technologies, such as electric motors, which can be powered not by nonrenewable but renewable resources. Hence, while the price of the nonrenewable resource gradually rises due to ever-increasing scarcity, the price of the alternative, renewable resource steadily drops due to technological advances, a change in conditions propelling market participants to change their consumer behavior.

Third, the desire to economize incentivizes rational buyers to become less dependent on the nonrenewable resource in question. The rise in price propels consumers who are determined to save money to decrease their demand for the nonrenewable. Buyers usually do so in two ways. On the one hand, they tend to voluntarily ration their consumption of the resource. A rise in the price of oil, for instance, will make rational consumers reflect on whether or not certain automotive trips are still lucrative given the increase in costs. Many of them can be expected to postpone, reduce, or cancel certain of these activities, such as regularly visiting relatives or going on long-distance road trips. On the other hand, rational consumers will start looking for substitutes to reduce their increased expenses. They might do so by trading their petrol-powered vehicles for electric cars or by using public transport more frequently. While these changes in consumer behavior arguably do not increase the supply of the scarce nonrenewable in question, the decrease in demand nevertheless drastically reduces its consumption. In addition, once the price of said nonrenewable skyrockets, consumers can be expected to completely switch to newly developed substitutes, thereby preventing its depletion.

The ecosocialists are undoubtedly right in pointing out that the earth contains only a certain amount of nonrenewable resources in a fixed quantity. They fail to notice, however, that it is impossible to accurately determine this amount due to the existence of yet undiscovered reserves. As Simon explains in The Ultimate Resource:

Consider the definition of the potential supply of oil that is implicitly or explicitly used by many people: the amount that would be recorded if someone conducted an exhaustive survey of all the Earth’s contents. This quantity apparently is fixed. But such a definition is not operational, because such a survey is impossible. The operational supply of oil is that which is known today, or that which we may forecast as being known in the future, or that which we estimate will be sought and found under varying conditions of demand. These latter two quantities are decidedly not fixed but rather are changeable, and they are the ones relevant for policy decisions.⁵

More importantly, though, the ecosocialist errs in concluding that natural resources must be finite because the earth contains them in a limited quantity. Rather, in a free-market economy, the price of a natural resource increases as it becomes more scarce. Changes in producer and consumer patterns, in turn, prevent its depletion. In Simon’s words, “Population growth and increase of income expand demand, forcing up prices of natural resources. The increased prices trigger the search for new supplies. Eventually new sources and substitutes are found.”⁶

The preceding remarks help shed light, I hope, on a dialogue from Ayn Rand’s magnum opus Atlas Shrugged that many of my students have asked me about. In the first part of the novel, Rand’s focalizers, Hank Rearden and Dagny Taggart, two ingenious entrepreneurs struggling to keep their businesses alive while the economy collapses due to socialist regulations, discuss the potential exhaustion of the sun. Dagny begins the conversation by stating, “I keep thinking of what they told us in school about the sun losing energy, growing colder each year. I remember wondering, then, what it would be like in the last days of the world. I think it would be . . . like this. Growing colder and things stopping.” When Hank replies, “I never believed that story. I thought by the time the sun was exhausted, men would find a substitute,” Dagny says, “You did? Funny. I thought that, too.”⁷ Shortly after this discussion, Hank and Dagny find the remnants of a motor that, if built, could “draw static electricity from the atmosphere, convert it and create its own power as it went along.” If used as an engine, the motor, they conclude, could turn a train into “[a] self-generator working on a few drops of fuel, with no limits to its energy. The cleanest, swiftest, cheapest means of motion ever devised.”⁸

These passages from Atlas Shrugged exemplify the points made above. In a capitalist society, man is free to venture forth and come up with new ideas and innovations, such as the mysterious motor, to prevent ecological doom. Ultimately, there is only one resource which is necessary to replenish all others, namely the human mind. It is for this reason that Julian Simon chose to name his groundbreaking study The Ultimate Resource. “The main fuel to speed the world’s progress,” he explains, “is our stock of knowledge, and the brake is our lack of imagination. The ultimate resource is people—skilled, spirited, hopeful people—who will exert their wills and imaginations for their own benefit.”⁹

Rand’s Atlas Shrugged is not set in a capitalist society, though. Rather, throughout the novel, power-hungry politicians gradually curtail individual liberty by passing an ever-increasing amount of socialist policies. Consequently, the men of the mind, the creators and entrepreneurs who carry the world on their shoulders, mysteriously disappear, leaving behind their innovations which become useless in a mindless world. At the same time, those left behind start fighting about the earth’s remaining resources in civil war-like conflicts, unable to extract and/or create sufficient supplies to ensure their livelihood.

A cautionary tale, Atlas Shrugged painfully reminds us that it is not capitalism and the free market but socialism and the controlled economy which necessarily lead to ecological doom. The key economic problem of a socialist economy is that the price of a resource will not rise if it becomes more scarce. Price ceilings effectively prevent an increase in price, thereby disincentivizing businessmen from increasing their supply of nonrenewables and developing substitutes for them. The result, as can be witnessed in socialist countries all over the globe, are shortages and famines.

Thus, if people are truly concerned with the potential depletion of finite resources, they should start questioning their political convictions. The solution to preventing the exhaustion of the earth’s resources are not government controls but free markets and free minds. To paraphrase Rand, “If concern with [the environment] and human suffering were the [ecosocialists]’ motive, they would have become champions of capitalism long ago; they would have discovered that it is the only political system capable of producing abundance.”¹⁰

1. Karl Marx, Capital: A Critique of Political Economy: Volume I: A Critical Analysis of Capitalist Production (Moscow: Progress Publishers, [1867] 1974), 474-475. For an even earlier formulation of this thesis, cf. Karl Marx, The Poverty of Philosophy: Answer to the “Philosophy of Poverty” by M. Proudhon (Moscow: Progress Publishers, [1847] 1973), 139: “As for the farmer, the industrial capitalist and the agricultural worker, they are no more bound to the land they exploit than are the employer and the worker in the factories to the cotton and wool they manufacture; they feel an attachment only for the price of their production, the monetary product.”

2. Karl Marx, Capital: A Critique of Political Economy: Volume III: The Process of Capitalist Production as a Whole (Moscow: Progress Publishers, [1894] 1974), 776. For Rousseau’s view, cf., e.g., Jean-Jacques Rousseau, Discourse on the Origin and Foundations of Inequality among Men (Amsterdam: Marc Michel Rey, 1755), 43 [emphasis in the original]: “The first person who, having fenced off a plot of ground, took it into his head to say this is mine and found people simple enough to believe him, was the true founder of civil society. What crimes, wars, murders, what miseries and horrors would the human Race have been spared by someone who, uprooting the stakes or filling in the ditch, had shouted to his fellows: Beware of listening to this impostor; you are lost if you forget that the fruits belong to all and the Earth to no one!”

3. By “typically” and “usually,” I mean under ceteris paribus conditions, i.e. without any changes other than the one in question. All other things equal, the increased scarcity of a resource will lead to an increase in its price. Since we live not in a static but in a dynamic economy, though, other simultaneous changes might, in mild cases, counteract or, in extreme cases, even neutralize this effect.

4. Julian L. Simon, The Ultimate Resource 2 (Princeton: Princeton UP, [1996] 1998), 59.

5. Simon, The Ultimate Resource 2, 42.

6. Simon, The Ultimate Resource 2, 579.

7. Ayn Rand, Atlas Shrugged (London: Penguin, [1957] 2007), 170-171.

8. Rand, Atlas Shrugged, 289.

9. Simon, The Ultimate Resource 2, xxxviii.

10. Ayn Rand, “The Anti-Industrial Revolution,” Return of the Primitive: The Anti-Industrial Revolution, edited by Peter Schwartz (New York: Meridian, [1971] 1999), 281.