Economic Theories of Exhaustible Resources

T. J. C. Robinson

• Publisher: Routledge
• Year: 2017
• Print ISBN: 9781138083608
• eBook ISBN: 9781351621359
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Originally published in 1989. Professor Robinson begins by examining natural resource classification and the nature of return in mining, giving particular emphasis to different sources of long-run price changes in mining and their relevance for user cost and the economic treatment for exhaustible resources. He then traces the development of the economic theory of exhaustible resources from the last quarter of the eighteenth century to the first quarter of the twentieth, documenting the differing views of various authors about the future availability of mineral resources and the extent of user cost involved in their exploitation. He identifies a link between the perceived availability of exhaustible resources and the nature of the economic theory used to explain their exploitation. This book should be of interest to students and researchers of Economic Theory and Policy.

Part I: Some Conceptual and Theoretical Issues

1

Introduction

This work studies the development of the contemporary economic theory of exhaustible resources. It does so by examining the literature produced in the one hundred and fifty year period extending from the last quarter of the eighteenth century to the first quarter of the twentieth. Apart from this time frame, two further limitations have been set to the range of works eligible for review in this study. Firstly, it considers only the work of authors who discussed theoretical mineral economics. Secondly, it is concerned only with contributions to the literature which were either first published in English or translated into English during the period under review. While this work involves reviews of the literature it is, however, not merely a simple account or translation of what the authors reviewed had to say. In tracing developments in the literature it also documents changes in the views which its authors held about the future abundance of mineral resources. This thematic treatment of the contrast between optimistic and pessimistic views of mining also involves comparison, throughout this work, of these developments with the more extensive and better documented development of views about the future abundance of agricultural lands. As the conclusion to this study will show, in spite of wide acceptance of optimistic views about agriculture, the culmination of one hundred and fifty years of analysis of the economics of mining involved the triumph of a generally pessimistic approach.

This chapter serves as both a general introduction to this study and as an introduction to the first of its two parts. Part I of this study is concerned with definitions and ideas, while Part II which is the major part is concerned with assessment of authors who qualify for consideration according to the criteria which have been set down above and which will be further explained later in this chapter.

In 1931 Harold Hotelling’s famous article ‘The Economics of Exhaustible Resources’ was published. This work is considered more than any other to be the seminal work dealing with this topic.¹ In the fourteen years since Robert Solow so effectively brought the thrust of this paper to a contemporary audience in his 1973 Richard T. Ely Lecture there has been a huge growth in the literature dealing with the theoretical treatment of the economics of mining.² This literature has been produced in the era of the second modern conservation movement and much of it has been written from a broadly conservationist standpoint; certainly much of it has emphasised the so-called ‘cake eating’ problem - the problem of the appropriate time-profile of the exploitation of the finite contents of the mine.³

This literature is, in this respect, thus essentially similar to Hotelling’s earlier treatment. Although Hotelling’s paper was written at the end of the period of influence of the first conservation movement at a time when more pressing problems were entering the economic stage, he also saw the problem of the rate at which ‘cake’ should be eaten as central to a theoretical discussion of mining. That is, he considered the economics of mining to involve the question of the optimal intertemporal allocation of output from the mine (or the nation’s mines). A fundamental premiss upon which Hotelling based his analysis of mining was that the ‘cake’ which might be eaten had not gone stale or mouldy, had not fallen from favour as a result of the superior talents of competing ‘bakers’, nor had it been found to be carcinogenic or a threat to human happiness in some other way. Hotelling’s analysis thus relied on the assumption that the in situ mineral deposit or deposits about which production decisions were made had a capitalised value.⁴ However, unlike many of his successors, Hotelling was careful to indicate that the environment in which mineral deposits were assumed to have such a characteristic was one in which resources were exploited in order of accessibility - commencing with the most accessible.⁵ As the next two chapters will show, decreasing mineral abundance associated with the need to resort to inferior resources when deposits which are currently being worked are exhausted, confers a capitalised value on these deposits.

At much the same time as Hotelling was formulating his elegant mathematical treatment of the ‘cake eating’ problem as it related to mining, an Australian author F.R.E. Mauldon, who was responsible for that country’s first thoroughgoing mineral industry study, had this to say about conditions in the domestic coal mining industry:

‘It does not, of course, follow from the fact of great resources that the richest deposits are the first to be worked, though clearly the most remunerative will have prior exploitation. Thus it is true in Australia, as it is in the United States, that the newer mines opening up can be worked under easier rather than harder conditions “imposed by nature.” This observation does not overlook the fact that knowledge of the coal resources of the country is not to be gained quickly or purchased without considerable cost. Time and means are needed for both preliminary geological surveys and for the “proving” of coal deposits. This is true of an old coal-producing country like Great Britain, as it is more obviously true of a new country like Australia. Not the costs imposed by nature, however, but the costs imposed by man himself multiply the hazards which, paradoxically enough, make a wide range of coal resources dangerous and embarrassing. The economic problems of coal in no small measure are the difficulties of adjustment to these perils and embarrassments.’⁶

In the Australian coal industry at the time that Hotelling’s discussion of the ‘cake eating’ problem was published, the problem was not one of being unable to ‘have cake and eat it too’ but rather, a problem of ‘having too much cake and eating too little’! Mauldon argued that this problem was the result of a significant increase in supply in an environment of relatively stable demand. As Mauldon notes in the quotation above, in Australia, as in America, there had been a tendency for discovery of richer deposits to follow that of the poorer thus leading, cet. par., to an increase in abundance of the mineral over time. An environment such as this is one which will be shown in the next two chapters to be conducive to low or even zero mineral deposit values.

In the forty years following the publication of Hotelling’s and Mauldon’s works a generally optimistic attitude to mineral resource availability prevailed and, as is well documented elsewhere, the progeny of Hotelling’s seminal work was a long time coming - not until the mid 1970s was the growing concern with the natural resource endowment fertilised in the literature of economics with the seed from Hotelling’s article.⁷ The outcome of this union was a formalised and well integrated economic treatment of mineral extraction which generally involved the ‘cake eating’ problem and often took the form of exercises in optimal control theory. Since the mid 1970s there has been a huge growth in this literature; and the volume of material relating to theoretical mineral economics produced after Hotelling’s seminal paper but prior to the mid 1970s is miniscule in relation to it. That is, in the period between the influence of the first and second modern conservation movements there were relatively few contributions to the theoretical literature of the economics of mining. Not only were there relatively few contributions made during this period but these contributions also typically gave much less emphasis to the ‘cake eating’ problem than was given to it in the literature which appeared from the mid 1970s onwards.⁸

The choice of the subject matter for this book was prompted in part by this contrast between the post-Hotelling literature which was published prior to the mid 1970s and that which was published at the height of the influence of the second conservation movement in the late 1970s. The emergence of a generally pessimistic literature at the end of a long period of indifference to the pessimistic seminal work on which it was based posed the question of the nature of the treatment of the subject prior to the emergence of that seminal work.

As well as this largely theoretical contributing factor there was also another influence of a more practical nature which prompted this study. Presenting a theoretical treatment of the mineral industries based on Hotelling’s model, Orris Herfindahl in a 1964 paper considered the possible long run progress of output price in contemporary mineral industries⁹. He concluded that the most likely scenario was one in which mineral output prices were roughly equal to extraction costs and, cet. pam, remained relatively constant over time. Relating this theoretically explained conclusion to real world events in the mineral industries Herfindahl argued that it shows why practical men in these industries are not particularly concerned to emphasise the finite nature of resource stocks but observe that ‘the economic activity of the minerals industries proceeds in much the same way as that of other industries.’¹⁰ Indeed, in spite of the impact of the second conservation movement, many practical men may still be observed to perceive the mineral industries as being economically similar to other industries. Although the question of whether these men of the world are correct or not will shortly be seen to be of particular significance in the context of the review of the literature which follows, what is important at this stage is that the views of these practical men are also a factor which prompted this study. For, if practical men have a picture of the mineral industries which is at variance with the pessimistic stance of much of the modern theoretical literature, the question naturally arises as to whether, in an earlier age, a different picture of the economics of the mineral industries was presented in the literature.¹¹

Finally, this review of the development of the economic analysis of mining in the approximately one hundred and fifty years prior to the publication of Hotelling’s paper was also prompted by its seeming, after some initial exploratory research, to be a worthwhile exercise in the history of economic thought.¹²

It was earlier remarked that this study has a leitmotif which relates to contrasting views about the way in which mineral abundance changes over time. As has already been indicated, the contemporary theoretical economic treatment of mining is generally presented as involving the aforementioned ‘cake eating’ problem and thus takes an essentially pessimistic view of mineral resource availability - emphasising that physical depletion of in situ mineral deposits involves an economic cost. Although this emphasis is apparent in the contemporary literature and although it was found in Hotelling’s seminal work, this study will show that it has not always been a feature of the literature. Indeed, the first major theoretical treatment of mining in modern economics is found in the Wealth of Nations and there Adam Smith takes an essentially optimistic stance in relation to the extent of economic cost involved in mineral depletion. This optimism was later confirmed by some of the authors to be reviewed here while others suggested that a pessimistic stance was warranted. In other cases, authors suggested that, depending on relevant circumstances, either of the pessimistic or optimistic scenarios may characterise the mining process.

The question of whether or not physical depletion involves economic depletion is one of particular significance for the assessment of the literature contributed during the period under review here and a major objective of the remainder of Part I is to provide a background which will enhance the reader’s understanding of this issue. The practice of introducing an economic work with some background analysis of the terms and concepts employed is one which is perhaps less common today than previously. Regardless of whether or not this perceived change is generally justified, it will become clear that insofar as the subject matter of this work is concerned, there is much to be gained by maintenance of the practice of providing introductory background material. One of the major reasons for the suitability of such an approach is the clear lack of contextual material offered in the contemporary theoretical literature dealing with the subject area under review. Much of this literature eschews the idea of presenting introductory methodological material relating to definitions and ideas; rather, it simply starts where other authors have left off. That is, much of this literature is restricted to refinement, correction or modification of the work of previous authors - and even the work of these previous authors often lacks explicit treatment of underlying assumptions and definitions. The theoretical analysis of mining in the contemporary economic literature is, in many cases, thus bereft of the sort of rigorous background information which befits scientific investigation. Although this literature often has an internal rigour of high order associated with the use of mathematical techniques, it typically proceeds on the basis of a series of crucial but tacit assumptions about aspects such as the type of resource being discussed and the nature of the relevant aspects of physical return involved. The next two chapters which complete Part I are designed to ensure that no such omission occurs in this work.

Chapter 2 deals with the definition of natural resources. At the risk of introducing ‘arguments over the exact definition and typology of natural resources [which] provide little more than an intellectual exercise for the tidy mind’¹³, this chapter endeavours to put the current system of classification of natural resources into context. In so doing it suggests the use of a classificatory criterion which would not only facilitate a better general appreciation of the natural resource economics literature - including that under review here - but will also help clarify the question of whether mining occurs in an environment of increasing or decreasing mineral resource scarcity.

Chapter 3 deals with the nature of physical return in mining. Its purpose is twofold: firstly, it discusses the nature of historical return with the objective of shedding more light on important aspects of the thematic question of whether mining exists in an environment of increasing or decreasing resource scarcity, secondly, it discusses the particular nature of short run return in mining. ...

Table of contents

• Cover Page
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Foreword
• Part I: Some Conceptual and Theoretical Issues
• Part II: The Economics of Exhaustible Resources
• Bibliographical References
• Index