5. Can People Be Trusted with Natural Resources?

5 Can People Be Trusted with Natural Resources?1 J. w. MILLIMAN It is the clear duty of government, which is the trustee for unborn generations as well as for its present citizens, to watch over, and if need be, by legislative enactment, to defend the exhaustible natural resources from rash and reckless exploitation. -A. C. Pigou There are a great many people in favor of conservation no matter what it means. -We H. Taft If the resource problem is serious, then the price of a wide choice now is a sharply restricted choice later on. Surely even those who adhere to the biggest supermarket theory of liberty would agree that their concept has a time dimension. -John Kenneth Galbraith I Throughout history most of the scrutiny given to policy for the use and development of natural resources 2 has been the province of tribal medicine men, religious thinkers, philoso phers, poets, novelists, as well as physical and natural scientists.

Only in the last century, and indeed only in the last few decades, 72 Can People Be Trusted with Natural Resources? 73 have economists and other social scientists given much attention to the normative principles that should govern the exploitation (why are natural resources always "exploited"?) of natural re sources. This newly found interest in natural-resource policy is in an embryonic state, however, and much current thinking is still enmeshed and clothed with the traditional moralistic and honorific trappings concerning the irrationality of man in deal ing with the bounties of Nature. In few other fields of analysis is there such a widespread feel ing that private and individual decisions are to be deplored. Time and time again we are told that the innate selfishness of man causes him to take a myopic view of the future and thus to deplete "our precious hoard" of natural resources. The result is the standard old refrain that "future, unborn generations are being deprived of their just heritage." We shall explore this question at greater length in the body of the paper, but it is crucial at this point to ask: Which future generation? To infinity?

Can we know what future generations will require? Who is society? Why does society know better? What is the proper dis tribution of wealth between generations, even assuming we know the quantity of wealth over time? Are men myopic and selfish only in the private sector of the economy? Apparently, conservation of natural resources has achieved widespread, indeed universal, support largely on the basis of a guilt complex concerning the rapaciousness, induced by the profit motive and by individual self-interest, of men in using the f'God-given" natural-resource heritage. On this score, some writers go so far as to deny the proposition that the ultimate end of policy is human welfare. Rather, they often imply that it is desirable to conserve natural resources in themselves apart from human ends and activity. In any event, this feeling that private decision-making is suspect when it deals with natural resources is widespread, not only by many twentieth-century liberals and progressives, but also by gr<pups and individuals normally opposed to infringements upon private property and a "free" economy. In fact,. if I sense the current scene correctly, there is very little acceptance of the thesis that the market system 74 The New Argument in Economics and. private property can be used to deal effectively with many, perhaps most, of our natural-resource problems.

I do not wish to suggest that public control over naturalre sources is abhorrent; indeed, it is extremely necessary in some cases. As· I read popular and academic sentiment, however,. I find· very little. support for an appreciation of the large part the price system can play in the development of natural resources. Some conservatives, on the other hand, refuse to admit that gov ernmental action and control have a role to perform in situations where private property and the price system cannot exist or per form satisfactorily. Of course, neither public nor private decision making is free of blemish and imperfection. A summary of popular thinking on natural-resource use seems to run as follows: 1) Natural resources are disappearing rapidly. 2) l.-'his disappearance is totally undesirable. 3) The major reason for this disappearance is the greed of individuals pursuing selfish and profit motives.

4) The result is that the well-being of posterity is being sacri ficed for the satisfaction of the whims of present generations. In this essay I wish to comment first upon the question of the adequacy of the supply of natural resources. Second, I want to examine some of the premises upon which one might base a choice of public versus private decision-making for natural resource use and development. II It is often asserted that the natural-resource base of the United States economy is the basic ingredient of our industrial and military power. This hypothesis is usually coupled with the notion that natural resources are becoming increasingly scarce. The usual pessimistic forecast is that this scarcity will lead, pos sibly even in the next few decades, to an impairment in the rate of economic growth, to a weakening of our power position in the Can People Be Trusted with Natural Resources? 75 world, and to a decline in the welfare of future generations. A recent example of this point of view is found in the opening remarks of President John F. Kennedy's message on natural resources to the Congress: From the beginning of civilization, every nation's basic wealth and progress has stemmed in large measure from its natural resources.

This nation has been, and is now, especially fortunate in the blessings we have inherited. Our entire society rests upon-and is dependent upon-our water, our land, our forests, and our minerals. How we use these resources influences our health, security, economy, and well-being. But if we fail to chart a proper course of conservation and develop ment-if we fail to use these blessings prudently-we will be in trouble in a short time. In the resource field, predictions of future use have been consistently understated. But even under conservative projections, we face a future of critical shortage and handicaps.8 More fearful views are to be found in the writings of Samuel H. Ordway, Fairfield Osborn, William Vogt, Robert C. Cook, Harrison Brown, Charles Galton Darwin, Hyman Rickover, and Palmer Putnam. At first blush this position seems so obvious, alarming, and critical that to express doubt or skepticism would brand one either as a fool or as a blind, unthinking optimist. It is the purpose of this section to demonstrate that it is not at all obvious that our basic strength lies in our supplies of natural resources or that these supplies are necessarily becoming increasingly scarce. And it is even less evident, perhaps, what an increase in the scarcity of resources might mean with regard to the rate of economic growth and to the welfare of future generations. I should caution, however, that this discussion is far too brief and cursory, to do more than pose the questions in such a way that historical evidence and growth projections can be used to high light the basic policy considerations.

76 The New Argument in Economzcs FALSE NOTIONS CONCERNING NATURAL SCARCITY It is not at all clear to me that "any diminution in the re source base involves, a potential reduction in output over-all." 4 The important question (from the standpoint of the economy as a whole) is not so much a concern of our natural resource base per se but rather with our total capital base and with all the forces that make for economic growth. 5 I would argue that natural resources are only part of the total stock of capital and that there is no a priori reason for believing that natural-resource capital is any more productive than other types of capital. It is not the origin of capital that is important, man-made or natural, but rather its total amount and the relative productivity at the margin of alternative forms of capital. According to this line of reason ing, a decline in a country's resource base may be offset by an increase in other types of capital, and indeed would be if invest ment in natural resources were less productive than alternative kinds of capital formation. Should our attention be focused upon natural resources as such, as many writers seem to urge, or should it be'concerned with the maintenance and expansion of our total capital base? From this point of view, it is true that a diminu tion of our stock of total capital may lead to reduction in total output, but the emphasis is then directed to the over-all prob lems of consumption, savings, and investment rather than to natural resources as such.

The careful reader will note, however, that the preceding argument on whether or not natural resources-particularly land and energy resources-should be treated as a special category apart from other forms of capital depends upon two major as sumptions. The first has to do with the question of the sub stitutability of other forms of capital for natural resources. Could it be argued that substitution is not always possible and that beyond a certain point substitution becomes prohibitively costly? The second condition is concerned with the risk factor involved in projected future "requirements" for "key" natural resources Can People Be Trusted with Natural Resources? 77 such as land and water. Could it not be that mistakes of judg ment and estimation of certain resources might have irreparable or irreversible consequences for the future well-being of society and that such consequences may not apply with comparable seri· ousness to other forms of capital? If either or both of these two conditions were present, one might well argue that preservation of natural-resource capital should receive special consideration.

Let us examine each of these two points in turn. Despite com mon belief, it is quite clear that there is no such thing as a fixed, inflexible requirement for individual natural resources that is impossible of variation. That is to say, there is some degree of substitutability for each and every kind or class of inputl It may be helpful, nevertheless, to admit that there are problems of easy substitutability between various kinds of capital, but it is difficult for me to see how this really constitutes an argument for special treatment of natural resources. First of all, it is not a question of "all or none," but a question of a little more versus a little less. In other words, we are concerned with marginal adjustments, I.e., marginal rates of substitution. And at the margin it is doubtful if the difficulties of substitution are of special concern. I know of no important policy decisions that are of this "all or none" variety. Even though it is quite true that a particular resource-say water-is necessary to human life and thus has in finite value, the question is never posed in these terms. Rather, policy questions are concerned, for the most part, with whether or not a certain incremental supply is justified; this is to ask what the value and the cost of water is at the margin. And at the margin, the value of extra water may be very low, particularly if it is to be used for the irrigation of low-valued crops already in surplusl For example, the Missouri River Basin Project is being constructed at a cost approaching three billion dollars.

Approximately thirty per cent of the estimated benefits from the irrigation of an additional five million acres are attached to the production of sugar beets. Yet every acre of· sugar beets will probably have to be protected by an acreage allotment, import 78 The New Argument in Economics restrIctIons on foreign sugar, and a government subsidy. This new production will constitute a seventy-five per cent increase in total United States sugar-beet output. 6 It is also clear, moreover, that so-called "needs" or "require ments" computed purely on the basis of the physical possibilities for substitution are relatively meaningless in an economic con text. Time and time again we study projections for the future based purely upon crude extrapolations of present usage without any consideration of the possibilities of changes in the combina tions of inputs in the light of their changing economic feasibility.

Economic demands must consider relativ~ prices and costs, and the degree of substitution of various inputs will reflect these relationships. An example of this failing is found in a recent United States report on water resources. This report is now being widely quoted as the authoritative study of the prospective demand for and supply of water in the United States in 1980 -and 2000. Although the report was prepared by an economist, these projections of demand and supply were developed without refer ence to such basic factors as prices, costs, alternative uses of water, interregional shifts, and most of the factors affecting the elasticities of demand and supply.7 Second, the fact that the cost of substitution increases the more it is extended is true for all capital inputs and does not appear to be a special attribute of natural-resource capital. That is to say, beyond a certain point substitution may become prohibitively costly for all forms of capital. It seems likely that the productivity of capital at the margin will tend to reflect the relative difficul ties of substitution of all kinds of capital for one another and that conceptually it is possible to. say that the cost of substitution has already been taken into account.

Of course, there may be special problems of imperfection in the functioning of capital markets, and this may be true of nat ural-resource markets in particular. For example, I have argued elsewhere that water law tends to hinder the transfer of water resources between competing uses.S And many other institutional and technological roadblocks for natural-resource allocation can be cited. This general question will be discussed in section III.

Can People Be Trusted with Natural Resources? 79 Proper policy here would seem to call for attempts to mitigate the imperfections directly, but it does not seem to call for a special capital theory for natural resources as such. In other words, the current opportunity cost of resources at the margin may not be optimum in a strict welfare sense, but it still re flects the current marginal productivity of capital. And to neglect the marginal productivity of capital when one is concerned with investment policy for natural resources is certainly incorrect. In regard to the problems of risk and uncertainty in the use of natural-resource capital, it is difficult to understand why risk and uncertainty may be greater here than they are in the case of general capital investment. Risk and uncertainty are per vasive, but we never jump suddenly from 1963 to the year 2000. Rather, the future is approached day by day. We can continu ally alter our decisions in the light of new information and changed expectations.

This is not to say that the market as it presently functions is optimal or to deny that long-run commitments sometimes have to be made. I do suggest, however, that there is much greater flexibility with regard to future "needs" than is often consid ered. I know of no examples throughout history where any civi lization suddenly "ran out" of this or that mineral. The "one horse shay" concept of natural-resource deterioration must be discarded. Deterioration in the quality or quantity of natural resources does not come about suddenly, but rather gradually. All of this implies that we should distinguish rather carefully between economic scarcity as opposed to physical scarcity. Re source limits, assuming we know what they are, refer to physical quantities and qualities of resources in a given form or state. Economic scarcity, on the other hand, must depend upon the general determinants of demand, i.e., the marginal rates of sub stitution. Economic scarcity is sociotechnological in character.

It cannot be deduced from data on physical supplies; rather, economic scarcity can be judged only in the light of all the forces that influence demand. 9 Economic scarcity is reflected in increasing relative costs. It encourages economizing and the search for substitutes and new 80 The New Argument in Economics techniques of production. The search for lower-cost substitutes is always present and, indeed, may actually take place before cost increases resulting from prospective shortages occur. The record of aluminum in replacing copper in several important uses is illustrative of this activity. Other common reactions to a prospective economic shortage include increased concern on the part of producers to be more efficient in methods of production, to turn to lower-quality sources, and to increase the intensity of exploration efforts. For individual countries the attractiveness of imports from sources abroad increases. Therefore, a whole host of market reactions will be induced by the rising prices accompanying a current or prospective shortage, tending to offset the decline in supplies, on the one hand, and also to redirect economic demands, on the other hand. 10 I shall explore the qualifications to these procedures in section III.

SOME NEW EVIDENCE ON RESOURCE SCARCITY Within the last ten years, mainly under the sponsorship of Resources for the Future, Inc., a number of economists have begun to examine in careful fashion the question of the adequacy of our natural-resource base and the role natural resources play in economic development. Although these studies are not fully completed, and although they have not yet been subjected to widespread review, it is clear that the conclusions of the studies are not in accord with the popular views of resource scarcity. A summary of these findings seems to indicate that there are a number of resource problems and difficulties, but there appears to be no significant danger of a general resource shortage in this country within the next thirty to forty years and perhaps longer. Furthermore, the historical evidence does not lend support to the hypothesis that the United States economy has been subject to diminishing returns from its natural-resource base.

I hope that some readers can find time to examine a number of these studies. It is important that they be given widespread circulation among students of natural resources and among Can People Be Trusted with Natural Resources? 81 framers of public policy. 11 I should hasten to add, however, that each of these studies qualifies its optimism; each admits that, at best, the future can be seen only dimly, and that we cannot always be sure what the past means. It is also true that there are some apparently competent earlier studies which come to more pessimistic conclusions.l 2 Even though one may not accept most of the conclusions of these recent studies as I tend to do, it is evident that there are solid grounds for doubting that the general resource position of the United States is really critical. It is important to stress, however, that the arguments against special treatment of natural resources do not hinge upon the relative optimism or pessimism of the future outlook. Actually} if the more pessimistic views about future supplies are correct} it is even more important that the correct principles of resource use and development be followed!

I now wish to summarize and analyze some of these newer studies. First, I shall look briefly at the historical background of resource use in the United States, and next I shall turn to the question of the adequacy of the resource base for the future. 13 Major reliance for historical findings will be placed upon the work of Herfindahl, Fisher and Boorstein, and Barnett. Herfindahl attempts to discover what has happened .to the long-run cost of minerals in the United States. Has there been any persistent drift in prices up or down to indicate changes in relative costs? All of his data were deflated by the BLS Wholesale Price Index in an attempt to rule out changes in the general price .level. Herfindahl is quite careful to point out the deficien cies in his data and the difficulties of his techniques. Also, each class or kind of mineral has had a somewhat different history, so that it is not easy to generalize. He finds that long-run price levels for the rnajor classes of minerals do not show sharp or per sistent upward trends. Apparently, any deterioration in the qual ity of natural resources has been offset by cost reduction' within the mineral industries as compared with other industries. He also feels that: 82 The New Argument in Economics So far as major metals are concerned-and on the basis of other information, coal and oil could just as well be added, although there are some difficulties in interpreting their price records-difficulties in supply at or near present prices do not appear imminent.I 4 The Fisher and Boorstein paper was prepared for the well known study by the Joint Economic Committee dealing with employment, growth, and the price levels. Their paper deals with the adequacy of natural resources for economic growth. I shall refer to this paper again when we shift our attention to the future outlook. Here I shall summarize some of their historical findings: 15 1) The rapid rate of economic growth in the United States has resulted from an interplay of forces and cannot be ascribed to any single cause (p. 39).

2) Since the beginning of this century, the resource base has been playing a smaller role in economic growth. Growth is less closely tied with abundant natural resources than before (p. 42). 3) Relative costs of some resources have fallen while others have risen, depending upon a complex of factors. The de cline in importance of natural resources does not seem to have resulted from any general rise in the cost of resources or from a slow-down in over-all growth (p. 42). 4) Foreign-trade statistics show a general tendency to rely more on imports of resources from abroad. Although this tendency may present problems for military defense, it does not mean necessarily that American sources have become scarce [in a physical sense], but rather that foreign sources have often become even more abundant or inexpensive (p. 45). 5) Relative price movements are important indicators of long run trends. The picture here is mixed, with no easily dis cernible general trend (p. 45).

6) The economy is securing more output from its resource base than it used to, and with fewer workers (p. 47).

Can People Be Trusted with Natural Resources? 83 Professor Barnett is intrigued with the possibility that resources are not becoming increasingly scarce after all. He attempts to test for national-resource scarcity in a model that exhibits general increasing returns in a dynamic sense. In Barnett's formulation an increase in resource scarcity would produce: 1) an increasing trend of labor input per unit of output in extractive sectors relative to the whole economy and 2) an increasing trend of unit prices of extractive goods relative to all goods.I6 Relying on data prepared by Potter and Christy 17 covering the period from 1870 to 1956, Barnett finds that the scarcity hypothesis is unambiguously supported only in the case of timber. Here is a summary of his quantitative findings: 18 RESOURCE All extraction Agriculture Minerals Timber RELATIVE PRICE INDICATOR Does not support hypothesis Does not support hypothesis Supports hypothesis ambiguously Supports hypothesis RELATIVE LABOR PRODUCTIVITY INDICATOR Adverse to hypothesis Adverse to hypothesis Adverse to hypothesis Supports hypothesis Now let us turn to the future resource outlook. The tentative findings of Herfindahl, Fisher-Boorstein, and Barnett are helpful in questioning the dogma of historical resource scarcity. In them selves, however, they are not conclusive as to the future. The attempt to look into the future is full of speculation and pitfalls.

What will be the rate of population increase? Can we rely on technology to develop substitutes and to open up new avenues of growth? A myriad of such questions blunt the attempt to make such estimates. Actually, I shall do no more than stress the general nature of the conclusions of three studies presenting a future orientation for normal resource use. These studies are authored by Fisher and Boorstein; Clawson, Held, and Stoddard; and Schurr and Netschert. My purpose here is not to develop a comprehensive set of 84 The New Argument in Economics future projections. Rather, I merely want to show that there appears to be no cause for panic or alarm, at least within the next three· or four decades, with regard to our general resource base. The relatively favorable short-run outlook is, of course, no cause for complacency. There are certainly enough specific short-run problems to keep us occupied, even if the long-run future outlook were to turn out to be equally promising. The important thing, however, is that: We need not foresee everything in exact detail. There will be ample opportunity for restudy and for new adjustments in later decades.

One advantage of long-range planning is that it affords general guides as to potential change and problems, but leaves to the future some, perhaps most, of the necessary adjustments.I 9 Fisher and Boorstein present a series of projections for the United States for 1980 and 2000. The projections cover such variables as size of population, work force, labor productivity, and Gross National Product. Along with these projections are given "estimated demands" for 1980 and 2000 for such mate rials as timber, wheat, cotton, feed grains, oil, coal, iron are, aluminum, copper and fresh water. 20 After making allowances for the use of foreign, as well as domestic, sources of supply and for the likelihood of some technological responses to higher costs of particular materials, Fisher and Boorstein conclude that: The upshot of all this seems to ·be that, despite the prospects for very rapid population increase during the next two or three decades, the o:utlook for resources supplies at reasonable prices is favorable for this country. Even with this generally optimistic pitture, difficult problems of increase in cost and shortage for particular resources ma terials and services undoubtedly will be encountered-for example, ground water in many places, a number of alloy and other metals, high-grade saw timber, and desirable outdoor recreation areas.21 Clawson, Held, and Stoddard develop a series of projections for changes in land use from 1950 to 2000. They examine uses Can People Be Trusted with Natural Resources? 85 of land for urban purposes, public recreation, agriculture, for estry, grazing, transportation, watershed management, and min eral production. In general, they find that use of labor, capital, and new technology will combine to prevent an increase in the demand for land as an input despite a large increase in the products from land. Changes within each type of land use will be more important than the allocation of land between uses.

Major changes in land uses will tend to be localized. The greatest difficulties ahead appear to be land-use adjustments in urban use of land and in lands devoted to public outdoor recreation. Schurr and Netschert almost overwhelm the reader with a lengthy survey of energy use by all major classes of fuels and power sources for the American economy from 1850 to the present. In addition, projections are presented for the energy supply-demand balance outlook through 1975. Their conclusion is that the United States can supply its demands for all energy through 1975 at no significant increase in costs from the con ventional domestic sources. This finding places Schurr and Net schert across the street from the earlier pessimistic findings of Ayres and Scarlott and Putnam. 22 Beyond 1975, Schurr and Net schert foresee a possibility for an increase in the cost threshold of fossil fuels. There is a strong possibility, however, that im provements in nuclear power technology can set a relatively low ceiling on the cost increase.

Apparently, the next three or four decades will not bring a general shortage of natural resources, but what about the far-off future? Will the forces of rapid population growth prove in exorable and place an impossible burden upon the resource base leading to a destruction of the human race? Perhaps so. Why is it that compound rates of growth in regard to population always produce fright and gloom? Population experts seem to startle people by asserting that a rate of population increase of one and one-half per cent a year means that the United States population will double in approximately forty-seven years! Yet a three per cent annual rate of increase in national production or in pro86 The New Argument in Economics ductive capacity, providing for a doubling every twenty-four years, seems to excite no one. Indeed, we are concerned that the rate of growth is not higher. My own feeling is that extreme pessimism is unjustified. The far-off future will present problems, but future generations will approach the future gradually, and human institutions can be modified to exhibit viability in the face of changing problems.

Whether this will in fact happen is beyond the power of present generations to forecast or to determine. In this regard, I agree with Professor Edward S. Mason, who writes in similar fashion: Perhaps because I am merely a pedestrian economist, these alterna tive visions of the future do not greatly stir me. There is really no need to assume that population will increase indefinitely at exponen tial rates, since human institutions and values have shown in the past some capacity for adaptation to changing situations. And while science and technology are wonderful, they show no signs yet of exorcising the persistent fact of scarcity. To undertake a serious discussion of conservation, the period of time under consideration has to be limited to that within which one can perceive, at least dimly, the approximate magnitude of the relevant variables.23 III In this section I intend to examine two kinds of choice processes for determining the direction and the rate of natural resource investment and consumption: the political allocation process and the market allocation process. I shall analyze each process in somewhat general terms within the natural-resource framework.

INDIVIDUALISM VERSUS THE GENERAL WILL Any discussion of the market versus political processes must begin with some assumption about the nature of society. I will assume here that it is desirable to have a democratic society based upon individual choice. This means that the goal of society Can People Be Trusted with Natural Resources? 87 is to satisfy or carry out individual preferences. These preferences can be expressed or "polled" through informal devices such as mores, habits, and customs, or by the more formal devices of the market place and the ballot box. In the latter, the voter is the sovereign agent; in the market place we have the principle of consumer sovereignty. Both devices are individualistic in orienta tion. An alternative view of society is that individuals exist to serve the state. This view assumes that the state somehow gets direction from sources other than the individuals that compose the group -perhaps from their leaders, from "divine" inspiration, or from the group "as a whole." The writings of Hegel, Rousseau, Green, and others express aspects of this view. Individual preferences are subordinate to the "general will." For Hegel, the state repre sented the highest possible ethical value; individual choices were to be subordinated to the national state. In similar fashion, Rousseau asserted that: The social order is a sacred right which serves as a foundation for all other rights.

Each of us contributes to the group his person and the powers which he wields as a person under the supreme direction of the general will, and ":Ve receive into the body politic each individual as forming an indivisible part of the whole. 24 According to Rousseau, individual preferences, expressed either in the market place or at the polls, should not govern. Instead, direction of resources would be above and beyond indi vidual whims and desires. Perhaps some of this point of view is present in Pigou's admonition quoted at the beginning of this paper. It is futile to debate the organic versus the individualistic view of society. My preference is with the latter. Frankly, I have never been comforted by the idea of an all-wise, all-knowing "general will." 'What is the supreme -destiny of society? How can it be expedited? How does one know the desires of persons not yet born?

88 The New Argument in Economics Assume for the moment, however, that Rousseau is correct and that we have a "general will." Does it follow that particular preference should be given to natural resources? Would the organic decision-maker necessarily want to hoard "exhaustible" natural resources or to "plant more trees" as opposed to alterna tive kinds of investment?' All investment involves provision for the future. Natural-resource investment should be undertaken only if it is more productive than alternative types of investment. It would follow also that the centralized or "organic" decision maker would not necessarily wish to construct long-run projects as opposed to short-run projects. Durable forms of investment may provide less return over time and be less productive than less durable types. A series of reinvestment cycles, each with a high return, would contribute more to future generations than investment in a very long-lived project yielding a low return.

How productivity is to be measured, of course, depends upon whose and what preferences are to count. The individualistic theory of value does not deny that men are social beings influenced by the entire physical-social environ ment in which they live. Certainly, individual wants and prefer ences are socially conditioned. Collective wants and desires are also possible. Individuals can and do evaluate social wants. In fact, collective activity can be viewed as a form of individual behavior. 25 It is also possible (though it is fashionable to assert the contrary) that individuals, either in the market place or in the polling booth, are not necessarily grasping, greedy monsters. Individualism does allow for the expression of social, evenaltru istic, patterns of preference. Individuals and households do make provision for generations yet to be born. THE SOCIAL RATE OF INTEREST Perhaps this is the appropriate point to analyze the often stated need for a social rate of interest and for social planning periods for natural-resource investment. Again, why is natliral resource investment so singled out as opposed to other types of Can People Be Trusted with Natural Resources? 89 inv~stment? A rather common argument in the conservation literature runs somewhat as follows: Society's interest in conservation of natural resources is greater than that of individuals. Individuals generally have high time-preference rates and short planning periods. Society, on the other hand, tends to use a longer planning period and also a lower discount rate because of its interest in the welfare of future generations. and also because of its ability to borrow money at low interest rates. 26 I have trouble understanding the logic of this posItIon. The fact that a government can borrow funds at low rates of interest does not reduce the real costs of any particular investment. Real costs must encompass the riskiness of the particular project, which may be much greater than the risk involved in general government borrowing. Second, real costs must reflect the output of alternative projects forgone, Le., the marginal productivity of capital. This would seem to follow regardless of whether the total amount of investment were determined by consumer sov ereignty, voter sovereignty, or by centralized planning. Society, or whoever is the planning agent, can make more provision for the future by first making a choice between the total amount of resources to be devoted to investment in relation to produc tion for current consumption. Once this decision is made, the welfare of future generations can best be served by using dis count rates that measure the marginal productivity of capital.

For any given amount of real savings, the use of an artificially low discount rate will actually lead to a smaller future en dowment. 27 Low interest rates increase the desirability of all forms of investment. Furthermore, they favor durable invest ment as opposed to short-lived capital. This effect upon the time structure of capital is often neglected. There is no reason for individuals or for society to use longer planning periods or lower rates of interest than those dictated by productivity consider ations. As an empirical matter, the concept of a social rate of time 90 The New Argument in Economics preference resulting from the working of the "general will" has not been established in the Western world. There is no evi dence that shows a consistent pattern to shift explicitly the dis tribution of income in society toward the future by public means. This is not to deny that public investment is often ap proved by voters for many other reasons and that as a secondary effect there will be a redistribution of income toward the future.

It is also clear that programs undertaken to redistribute income within the current time period may also have effects upon the distribution of income between present and future generations. On a similar point, many writers fail to distinguish between social benefits and the concept of a social rate of interest for evaluating these benefits. There is no necessary reason why bene fits, just because they are social, should also be discounted at a low rate of interest. I suggest that social benefits, somehow measured, should be subject to a rate of discount that reflects the marginal productivity of capital (with allowance for risk) as well as time preference. 28 FUTURE GENERATIONS AND MORALITY When all is said and done, it is clear that investment in nat.. ural resources has a moral flavor not deserved. All kinds of in vestment (public and private) may affect the welfare of future generations; 29 all investment involves some redistribution of in come and wealth toward the future. Obviously, the more any society restricts its current consumption (increases real savings), the more resources can be devoted to investment in productive capacity, and the better off future generations will become. The inescapable moral question, then, is: What is the proper level of current consumption, i.e., what is the proper amount of total real investment? Can we rely upon the social consensus achieved in the market? Should we turn to the ballot box for an answer to this question? In fact, can we use individualistic preferences at all?

The search for a criterion that will point toward the "ideal"

Can People Be Trusted with Natural Resources? 91 distribution of wealth over all future time periods is an im possible task. Interpersonal comparisons within a given time period are difficult enough. How can we go about making inter generational comparisons? I see no way out but to count the preferences of those now .living. Can we do otherwise? This, of course, can be done through either the ballot box or the market place. Personally, I see no reason why the question can be solved more readily by one process than by the other. There is need for the use of both processes here. Apparently, some writers in the field of welfare economics believe that these questions are ones to be decided solely in the political realm and not in the market place: We can safely conclude that no real solution to the problems we have been discussing in this chapter is to be found in concentrating on contemporary households and letting them decide how far to look ahead and how much to provide for posterity. These are not decisions which households, acting separately, are equipped to make. There is no satisfactory "competitive solution" to the problems of the horizon and terminal capital equipment or of investment generally. House holds must act collectively-if they are to act at all. And, in the absence of unanimity, the decisions must be imposed on those who disagree with them. Politics-or paternalism-is involved. 3o I do not accept this position. Can contemporary individuals make more nearly optimal decisions in regard to the welfare of future generations through political processes than in the market process? How does one derive a standard for intergenerational ethics? More importantly, it is clear that this position explicitly says that households acting in the market place should not and cannot be allowed to determine the general level of investment and consumption! Instead, these matters are deemed to be collec tive, political, and undoubtedly paternalistic. All this raises basic questions as to the assumed wisdom of the paternalistic decision ..

maker and the validity of denying individual choice. Why is it that individuals are assumed or believed to act more rationally in the polling booth? Why are elected political repre92 The New Argument in Economics sentatives all-wise and free from fault? Why is it that so many writers fail to analyze in comparable fashion all the alternative means for making economic decisions for the future? Most wel fare economists are extremely facile in demonstrating the "short comings" of individuals acting in the market, but very little of their keen analytical talents are applied to alternative choice mechanisms. Analysis of the defects in the market mechanism does not prove that political choice processes are any more free of error. About the only thing we can be fairly sure of from a study of history, barring the possibility of nuclear wars, is that future generations will be wealthier than we are. Deliberate redistri bution in favor of the future may well involve a transfer of wealth from a poorer to a richer group.

IMPERFECTIONS IN THE MARKET AND POLITICAL PROCESSES Each process has a number of similarities to the other; each has unique features. Both have a role to play in natural-resource policy. Neither can be used to the exclusion of the other . For example, the market process always has to function within a system of property rights and general rules of the game. These considerations are basically political in nature. Furthermore, market-generated prices and costs are always conditioned by the existing distribution of means and wealth. When this distribu tion is altered by political decisions, market relationships may change. It is difficult to imagine, however, that any socially sanctioned redistribution of income would change the struc ture of market prices very much for natural resources. Actually~ there is reason to believe that the present distribution of income has considerable social sanction. 31 Above all, it should be stressed that governmental intervention to deal with market imperfec tions mayor may not improve matters-depending upon the imperfections in governmental processes. The choice processes may not function smoothly in terms of their own framework.

Real-life operation may fall short of theoretical standards. SecCan People Be Trusted with Natural Resources? 93 ond, they may fail to produce "correct" decisions because their theoretical frameworks do not take into account all the variables required for ideal solutions. Certainly, this discussion is not more than suggestive of the general terrain. 32 Turning to the first consideration, we must note that econo mists are prone to stress the operational imperfections in the market mechanism. Some of these faults are monopoly, problems of scale, indivisibility, capital-market imperfections, external ities, ignorance and imperfect knowledge, inertia and immobility of resources, desire for the quiet life, and so on. My feeling is not to belittle or underplay any of these imperfections. Some of them will be explored below. I do wish to emphasize two points: 1) All these imperfections are applicable to the operation of the price system in gen~ral and do not have, for the most part, special meaning for natural-resource use.

2) Most of the' items on the list have their counterparts in the democra tic political process. In the political sphere we find such operational imperfections as voter ignorance and apathy, bureaucracy, log-rolling, the spoils system, party machines, corruption, failure to represent minority views, and the like. Lack of competition for votes may lead to the same sort of results that obtain from business monopoly. Economies of scale in the operation of political parties may make it difficult to have "workable competition" for votes.33 Ignorance on the part of voters and elected officials can be deadly. Brand names, the "hard-sell," the "waste-makers," and the hucksters are not uncommon in the political arena. Perhaps all this appears as heresy to "true" believers in each process. My feeling is that each process works imperfectly. This means that a choice between them should be determined by analysis of their relative desirability, and not by blind assertion of "faith." Some element of 'sheer belief is probably involved in all such judgments. I must confess to a preference for use of a 94 The New Argument in Economics system of market values in many cases. The conclusion still re mains, however, that the selection of choice processes for natural resource decisions should be made upon a case-by-case basis.

I shall comment in mote detail upon three types of market imperfections often said to raise special problems for natural resources: ignorance on the part of resource owners, imperfec tions in capital markets for resources, and the presence of ex ternalities. My view is to question the degree of relevance in the first two cases. I believe that these problems are applicable to almost all economic decisions. This position is not widely ac cepted. Most writers argue that many resources, particularly soil and forests, are exploited on a small scale. Small wood-lot owners and small farmers are said to lack adequate knoWledge of the technical conditions of production and of prices and costs. Moreover, limited access to capital markets in rural areas by small resource entrepreneurs tends to cause diseconomies of small-scale operation and undesirable resource depletion. All this, of course, is quite plausible and possible. The eco nomics of ignorance has received insufficient attention. Even the ascertainment of market price is not an easy task.34 Actually, at least two sorts of questions are involved here. One concerns the special ignorance of small resource owners in relation to igno rance displayed by other types of small business, by individual voters, and by small units of government. A second level of questioning might deal with the issue of whether size and knowl edge are positively correlated. I am not aware of studies showing either that smallness generally leads to more ignorance than large ness or that small resource owners are necessarily more ignorant than decision-makers in other small business and political units.

My guess is that problems of ignorance are pervasive and are not strongly correlated with scale or size or type of activity.35 Be that as it may, the cure for ignorance is knowledge. Knowl edge can never be perfect, especially in regard to the future. Neither perfectly functioning markets nor wise governments can escape this fact. Although reduction of ignorance provides bene fits, provision of education is costly. Do the returns more than offset the costs? To whom do the benefits accrue? Who pays the Can People Be Trusted with Natural Resources? 95 costs? There is widespread acceptance of the need for govern .. ment to support education in general. In addition, a case can often be made for dealing with particular pockets of ignorance in natural resources and elsewhere by public means.S6 Many of these same considerations also apply to resource capitaJ markets. Are capital markets more imperfect for resource production than for other types. of economic and political activ..

ity? What is meant by imperfection? Is this imperfection reduced by an increase in the scale of activity? Prevailing opinion seems to say yes to the last question, to be divided on the second, and to be silent on the first. I do not know how imperfect capital markets are in general. In my opinion, they are much more competitive than is com.. monly granted. The wide spectrum of money rates that exists at anyone time, or even over time, may indicate a failure of competition; it may also be due in large part to variations in length of loan, cost of administration, and riskiness. Interest rates are generally high to all small borrowers. Is this due to the lack of bargaining power on the part of the borrower or to higher risk for the lender? Probably both factors are present. In so far as natural-resource firms are small, they are subject to high interest costs. No one has shown that this is necessarily an imperfection or that owners of natural resources are victims of special .discrimina tiona Perhaps the best case for taking market imperfections into account may be found under the general label of externalities.

This is sort of a catch-all category for all cases in which a decision maker fails to take into account the impact of his actions upon other units. Externalities are also known as spill-overs, neigh .. borhood effects, external economies· and diseconomies, and diver .. gencies between private and social costs (and benefits). Quite glaring examples of externalities exist in the field of natural resources, though they are not confined to this field b}f, any means. It is important to distinguish between technological and pecuniary externalities. 37 Pecuniary spill-overs are external can· sequences that affect the prices or incomes of other units in the 96 The New Argument in Economics economy but do not affect their physical or technical ability to produce. In the case of any interdependent economy, every action is bound to have some effects upon others. Pecuniary ef fects are manifested by changes in economic rents, incomes, and prices of competing and complementary inputs and outputs. This pecuniary effect may be illustrated by the development of a new oil field that reduces the value of old oil reserves. Technological spill-overs, on the other hand, are those actions which do change the physical productivity of other units; for example, the pump ing of oil from a common pool by separate decision-makers .. or the pollution of water by upstream users. Such actions also have price and income effects upon other producers and products, but these stem from changes in the technical ability to produce.

Should these spill-over effects be taken into account, and, if so, how? Both types have implications for the distribution of wealth and income. When distributional matters are under con sideration, it follows that both pecuniary and technological externalities should be counted. Only technological effects should be counted, however, when we are concerned with questions of economic efficiency. In general, the solution to a technological spill-over problem is to expand the scale of decision-making to correspond with the effects of the action. This can very often be done by co ordinating fragmented property rights, as in the case of unitiza tion of oil pools and ground water basins. An incomplete definition of property rights is usually at the heart of the matter. Changes in these property rights, either to make them specific or to enlarge the scale of action, are frequently called for. Very often the pricing system itself may take into account many types of spill-over costs and gains. 38 In some cases direct governmental intervention is the only available solution. This is the case when the scale of action is too large to be encompassed by ordinary property rights, as in a river basin or an ocean, or when it is simply impossible to establish a mechanism to give private owners incentives to take into account spill-over social benefits and costs, as in the case of air pollution.

It should be clear that large river basins cannot be exploited Can People Be Trusted with Natural Resources? 97 efficiently in piecemeal fashion. Upstream and downstream uses are interdependent and must be co-ordinated somehow. Incom plete property rights limit the use of the price system as a guide to costs and benefits. Furthermore, production of multiple prod ucts-such as hydroelectric power, stream regulation, navigation, and water supply-requires co-ordination. Governmental inter vention to centralize or to co-ordinate these interdependent decisions would seem to be mandatory to maximize economic returns. But this is where some sheer irony comes in: political pr?cesses, ostensibly required to promote economic efficiency, often produce partial or complete abandonment and disregard of economic principles. An outstanding example is found in the operation of the Texas Railway Commission. Under the guise of promoting efficiency in a classic commonality situation, the Commission actually functions as a price-raising cartel. Political imperfections are then substituted for market imperfections.

This is another case in which we have failed to compare the total product yielded by alternative social choice mechanisms. We cannot assume that an ideal political alternative is available to deal with an imperfect market situation. Even if one is avail able, what assurance is there that it will be used? 39 In my opinion, pressure for federal development of river basins may stem not from sound legal and economic reasons, but often from special-interest groups that hope to profit from the provision of subsidized benefits. Typically, navigation and flood control facilities are provided almost entirely at federal expense; the costs of hydroelectric power and irrigation features are partially borne by federal taxpayers. Because of this, prospective beneficiaries have extremely strong incentives to push for more federal development. All projects benefit some groups, but the difficult questions are concerned with determining how great the costs will be and who is to bear them.

But it may be asserted that the goal of river-basin development or of other public-resource projects is not economic efficiency at all; instead, the goal may simply be a deliberate redistribution of income and wealth from the taxpayers to the project bene ficiaries. Furthermore, it could be argued that the fact that the 98 The New Argument in Economics projects are approved indicates political acceptance of this redis tribution on the part of the majority. The point is well taken, but I would question this line of reasoning. I doubt that the electorate is really informed at the time the decision is made, because accurate information as to what the costs and benefits are and who is to bear and receive them is seldom provided. Neglect of economic analysis and provision of subsidies for special-interest groups have long been characteristic features of political decision-making processes for natural-resource develop ment. Is this an imperfection comparable in magnitude to market externalities? Should we view many federal water and soil proj ects as the operation of the "pork-barrel system"? Or, instead, do these projects represent the attainment of "distributive jus tice" for the underprivileged? Perhaps the answer is yes to all three questions.

Apart from the perplexing and ever-pl~esent operational imper fections, it is important to acknowledge that each process has some inherent and unique limitations. The market process can not work· in the provision of two types of want-satisfaction-the provision of intangible services and the provision of collective goods. It is also not a useful device for determining rules of the game. Intangibles are those wants or values that cannot be directly measured by the common denominator of dollars and cents. Major gains and costs to society cannot be ignored just because they are incapable of dollar measurement, because they cannot be bought and sold, or because organized markets for them do not exist. Examples of alleged intangible values in the resources field stem from national defense considerations, the theme of balanced development, the family farm, the saving of human life, and the preservation of historical or scenic sites. But the inade quacy of the market in providing intangibles does not mean that they should be exempt from rational consideration or from at least some economic analysis. No intangible has infinite value.

All intangibles have costs. The least that can be done is to specify and to make very clear to all concerned the cost of obtaining the intangible. As a minimum the intangible must be Can People Be Trusted with Natural Resources? 99 worth as much as it costs in terms of alternatives sacrificed if it is to be approved. Second, it is often possible to place a. maxi .. mum value on the ittangible if it can be produced by alternative :;~~::~ ~~:~~~e ~~;~~~~~~:rt~:~l~~:~~~t~ff;~:~~~ human life in othe· ways. Such considerations may reduce the common tendency to consider intangibles as exceptions to eco.. nomic calculation. Undoubtedly there are even alternative ways of saving human souls that vary in cost and productivity. Collective goods may be defined as those that are consumed collectively by the entire community rather than by individuals as such. An important aspect of such goods is the inability of the market to provide them because of the absence of the power of "exclusion"; i.e., individual sellers must be able to deny access to the service if prices are to be charged. National defense is a classic example of a collective good. Flood-control protection is another example. The establishment of flood-control facilities upstream will inevitably protect all persons and lands located in the flood plain. Provision of flood control, national defense, or lighthouses for one person means that all of the group auto ..

matically receive benefit. Rational choice, just as with intangibles, will be furthered if a careful study is made of the costs and the benefits. The mere fact that consumption must be collective does not mean that economic principles should be scrapped. Allocation and identification of benefits accruing to individuals within a flood plain may be difficult, but it is clear that they can be calculated in rough fashion for the basin as a whole. Land values usually rise in dramatic fashion as testimony to the capitalization of these benefits. Why is it that the costs of federal flood-control protection are always borne by all taxpayers rather than by· just those persons living in the flood plain? Perhaps we should consider the provision of .collective goods apart from attempts to redistribute income and wealth. The ballot-box process also has its inherent limitations. Short of unanimity or complete social consensus, it is necessary to rely upon some form of majority rule. This will always involve some coercion of the minority. Once individual preferences are polled 1 100 The New Argument in Economics the collective choice becomes binding on all. Other voting limita tions are involved in the indivisibility of votes and of choices, the infrequency of voting, and the necessity of predicting how other voters will vote. To this latter uncertainty is added uncertainty concerning the consequences of a particular decision. 40 Further more, how much incentive does an individual voter have to study issues carefully? For one thing, an individual vote has only an imperceptible effect on the outcome. The decision will be reached whether a particular individual votes or not; so why study the issues?

IV AN OVERVIEW In this paper I have attempted to explore some of the economic considerations that should govern natural-resource policy. For the most part, I have not tried to break new ground either in the field of economics or in social-welfare theory. Instead, I have argued that much of existing theory in both areas, while often crude to the purist, can be directly carried over to the field of natural resources. Over and over, I have stressed that natural resources are not to be given any special considera tion; they are only a part of our total social capital. Evidence was reviewed suggesting that our natural-resource picture is not critical. Special problems do exist. This is espe cially true in situations where property rights are incomplete or nonexistent. The problem of externalities is perhaps best illus trated in the cases of air and water pollution. Here the major hurdle to be overcome is the lack of an adequate structure and organization of business and political leadership to tackle the problem. Devices can be suggested for the establishment of co-ordinated or centralized decision-making so that these spill over effects can be taken into. account. The use of centralized decision-making, however, makes it all the more important that an accepted method of attaining efficiency be applied. I am sure Can People Be Trusted with Natural Resources? 101 that a rational benefit-cost calculus can be developed for both public and private investment here. Such a calculus is particularly needed to deal with the investment and planning soon to be required within the urban resources setting. We need to base public policy for common resources on much more than an emotional reaction to the obvious failings of fragmented decision-making.

I have not implied that all is well with the world. It is evident that both the market and the political allocation processes have theoretical as well as operational imperfections. Little comfort is given to the extreme positions in the debate between proponents of the public sector and the private sector. Neither sector can function well without the other. The market system has a much greater role in natural-resource: direction than is usually admitted. The public sector, on the other hand, should not be starved, although in some areas it is clear that a change of menu is required-more lean meat at the expense of surplus fat from the "pork barrel." The cry of natural-resource scarcity should not be used to frighten the electorate into hasty, ill-considered action. There is nothing mystic about natural resources, the market system, or the political process. No earth-shaking action is called for.

Indeed, what is needed is calm and deliberate appraisal. With all their imperfections these two allocation processes probably satisfy most of the goals and axioms of individual choice. It is perhaps "poetic," but true, that the heritage of unborn genera tions will be enriched only if freedom of individual choice is protected and preserved in both the public and the private sectors. NOTES 1. I wish to acknowledge helpful comments received from Jack Hirshleifer, Joseph L. Fisher, Vernon W. Ruttan, Marshall R. Colberg, and from the participants in the Symposium. 2. I shall not dwell here on what constitutes a natural resource as opposed to so-called man-made resources. Obviously, in some contexts man him self is a natural resource. Distinctions can also be made between re· 102 The New Argument in Economics newable versus exhaustible resources; stock versus flow resources; and migratory or fugitive resources versus fixed resQurces. It is also clear that resources become economic goods only in so far as they become scarce in relation to demands placed upon them. This latter point means that the world's resource base should not be viewed apart ~rQm an assumed structure of demand. For a definitive discussion of the concept of re sources, the reader should consult: Erich W. Zimmermann, World Resources and Industries (New York: Harper & Bros., rev. ed., 1958), chap. I.

3. Message from the President of the United States Relative to Our Natural Resources, U.S. 87th Cong., 1st Sess., House Doc. 94 (February 23, 1961), p. 1. 4. Edward S. Mason, "The Political Economy of Resource Use," in Henry Jarrett, ed., Perspectives on Conservation (Baltimore: Johns Hopkins Press, 1958), p. 184. 5. James W. Knowles, The Potential Economic Growth in the United States, prepared for the Joint Economic Committee of the United States Congress, U. S. 86th Cong., 2nd Sess., Study Paper, No. 20 (January 20, 1960), chap. II. Edward F. Denison, The Sources of Economic Growth in the United States and the Alternatives before Us, Committee for Economic Development, Supplementary Paper, No. 13, 1962. 6. Edward F. Renshaw, Toward Responsible Government (Chicago: Idyia Press, 1957), pp. 22-24. 7. Nathaniel Wollman, Water Resource Activities in the United States: Water Supply and Demand, for Select Committee on National Water Resources, U. S. 86th Cong., 2nd Sess., S. Committee Print, No. 32 (Washington, D.C.: Government Printing Office, 1960). These limita tions are explicitly recognized by Wollman, but nQt by most of the persons citing the study.

8. J. W. Milliman, "Water Law and Private Decision-Making-A Critique," Journal of Law and Economics, II (October, 1959), pp. 41-63. 9. For an incisive discussion of the meaning of resource scarcity, see Harold J. Barnett, The Measurement of Change in Natural Resource Scarcity, Reprint No. 26, Resources for the Future, Inc. (March, 1961). 10. For a more complete dicussion, see Anthony Scott, Natural Resources: The Economics of Conservation (Toronto: University of Toronto Press, 1955), chap. 1. A less comforting view may be found in Resources for Freedom, President's Materials Policy Commission (Washington, D.C.: Government Printing Office, June, 1952), I, 17-18. 11. Here are some of these recent studies. The list is by no means complete 1) The Adequacy of Resources for Economic Growth in the United States, by Joseph L. Fisher and Edward Boorstein, prepared for the Joint Economic Committee, U. S. 86th Cong., 1st Sess., Study Paper, No. 13 (December 16, 1959).

2) Harold J. Barnett, Measurement of Change in Natural Resource Scarcity and Its Economic Effects; Neal Potter and Francis T. Christy, Jr., Employment and Output in the Natural Resource Industries, Can People Be Trusted with Natural Resources? 103 J870-1955. Both of the studies appear in Reprint No. 26 (March, 1961), published by Resources for the Future, Inc. 3) Orris C. Herfindahl, Three Studies in Minerals Economics} Re sources for the Future, Inc. (1961). See especially the essay entitled, "The Long-Run Cost of Minerals." 4) Orris C. Herfindahl, Copper Costs and Prices: 1870-1957 (Baltimore: Johns Hopkins Press, 1961). 5) Sam H. Schurr and Bruce C. Netschert, Energy in the American Economy~ 1850-1975 (Baltimore: johns Hopkins Press, 1961). 6) Bruce C. Netschert, The Future Supply of Oil and Gas (Baltimore: Johns Hokins Press, 1958). 7) Tin1,ber Resources for America's Future~ U. S. Dept. of Agriculture (Washington, D.C.: Government Printing Office, 1958).

8) Marion Clawson, Burnell Held, and Charles H. Stoddard, Land for the Future (Baltimore: Johns Hopkins Press, 1960). 9) Harvey S. Perloff, Edgar S. Dunn, Eric E. Lampard, and Richard F. Muth, Regions} Resources and Economic Growth (Baltimore: Johns Hopkins Press, 1960). 10) Neal Potter and Francis T. Christy, Jr., Trends in Natural Resource Commodities (Baltimore: Johns Hopkins Press, 1962). 11) V. W. Ruttan and J. C. Callahan, "Resource Inputs and Output Growth: The Contest Between Agriculture and Forestry," Journal Paper No. 1698, Purdue University Agricultural Experiment Station, Lafayette, Indiana (November 28, 1960). 12. See the work of the following authors for extreme pessimistic views: Harrison Brown, Robert C. Cook, Charles Galton Darwin, Samuel H. Ordway, Fairfield Osborn, Palmer Putnam, Hyman Rickover, and Wil liam Vogt. Earlier studies that are fairly optimistic are: America's Needs and Resources} A New Survey} J. Frederic Dowhurst and Associates (New York: Twentieth Century Fund, 1955), and Resources for Free dom} President's Materials Policy Commission, Faley Report (Washing ton, D.C.: U. S. Government Printing Office, June, 1952).

13. It is interesting to see that an examination of United States political and economic history shows that the birth and continuation of the "conservation movement" in this country can be explained largely on grounds other than a general economic scarcity of natural resources. Much of the impetus for conservation has come from: 1) Forces of nationalism and national self-sufficiency. 2) Identification of big business and financial power with "waste" of natural resources. 3) A desire to stop the fraud and violence that accompanied the use and disposal of public lands, forests, oil reserves, and minerals. Many of the problems here arose from the interests of special groups in the division of the "spoils." It is clear that the problem was not so. much a failure of the system of private property as a lack of it. 4) Desire to "develop the West" and to foster certain interest groups, particularly agrarian interests.

104 The New Argument in Economics 5) With the coming of the "New Deal," public-resource projects were used as tools to attack unemployment and to achieve social redistri bution of wealth. Multipurpose projects in river basins were also designed to achieve co-ordination of interdependent activities. For penetrating discussions of the United States conservation move ment, see Scott, Ope cit., chap. III, and Ross M. Robertson, History of the American Economy (New York: Harcourt Brace and Co., 1955), chaps. XI and XVIII. 14. Herfindahl, Three Studies in Minerals Economics, p. 34. Emphasis added. 15. Fisher and Boorstein, Ope cit. The page numbers in the summary refer to the study. 16. Barnett, Ope cit., p. 91. Agriculture, mining, forestry, and fishing are classified as extractive. All other economic activity is nonextractive. 17. Potter and Christy, Ope cit. 18. Barnett, Ope cit., p. 99.

19. Marion Clawson, "Land Use and Demand for Land in the United States," Modern Land Policy, sponsored by Land Economics Institute (Urbana: University of Illinois Press, 1960), p. 12. 20. It should be pointed out that these projections and estimates were taken "from work in progress" at Resources for the Future, Inc. See Fisher and Boorstein, Ope cit., pp. 47-48. As a result, very few of the crucial assumptions behind the figures are at all evident. I would hazard a guess that the "estimated demands" may be extrapolations of current consumption patterns rather than true economic demands. 21. Ibid., p. 50. 22. See E. Ayres and C. A. Scarlott, Energy Sources-Wealth of the World (New York: McGraw-Hill Pubishing Co., Inc., 1952), and Palmer C. Putnam, Energy in the Future (New York: D. Van Nostrand Co., Inc., 1953). 23. Mason, Ope cit., p. 179. 24. J. J. Rousseau, Social Contract, Bk. I, chaps. i, vi.

25. James M. Buchanan, "Social Choice, Democracy, and Free Markets," Journal of Political Economy, Vol. LXII, No.2 (April, 1954), p. 119. 26. Raleigh Barlowe, Land Resource Economics (Englewood Cliffs: Prentice Hall, 1958), pp. 310-311. The statement in the text is paraphrased from Barlowe's discussion, which generally supports the statement. For other examples of this general point of view, see Robert Dorfman, "Water and Welfare," paper delivered at Econometric Society meeting, St. Louis, Dec. 27, 1960, and Edward S. Mason, Ope cit., p. 185. Mason says: "In estimating, for purposes of projection, the relationship between present costs and future benefits in this area [land resources], the appropriate rate of interest may well be close to zero." Dorfman argues that public water projects should be appraised with the use of a discount rate based upon social time preference. 27. Jack Hirshleifer, James. C. de Haven, and Jerome W. Milliman, Water Supply: Economics, Technology and Policy (Chicago: University of Chi cago Press, 1960), pp. 116-121.

Can People Be Trusted with Natural Resources? 105 28. I have argued this point previously: J. W. Milliman, Decision-Making for Public Investment: Discussion (Santa Monica: RAND Corporation, January 15, 1961), P-2252, p. 11. 29. Perhaps it should be stressed again that the market system usually gives private entrepreneurs incentives to plan for the future. 30. J. de V. Graaff, Theoretical Welfare Economics (London: Cambridge University Press, 1957), p. 105. 3!. These last two statements apply primarily to the United States. In some countries of the world there might be a question about consensus in support of the existing distribution of wealth. Also, radical changes in this distribution could well exert a large change in the structure of prices. 32. For more complete discussions of market imperfections, see: I) Francis M. Bator, "The Anatomy of Market Failure," Quarterly Journal of Economics, Vol. LXXII, No.3 (August, 1958), pp. 351-379.

2) R. A. Dahl and C. E. Lindblom, Politics, Economics and Welfare (New York: Harper & Bros., 1953). 3) De Graaff, Ope cit. 4) Hirshleifer, De Haven, and Milliman, Ope cit., chap. IV. Some excellent insights concerning the political process are to be found in: 1) Gary S. Becker, "Competition and Democracy," Journal of Law and Economics, I (October, 1958), 105-109. 2) James M. Buchanan, "Individual Choice in Voting and in the Market," Journal of Political Economy, Vol. LXII, No.2 (August, 1954), pp. 334-343. 3) Anthony Downs, "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, Vol. LXV, No.2 (April, 1957), pp. 135-150. 4) Richard A. Musgrave, The Theory of Public Finance (New York: McGraw-Hill Publishing Co., Inc., 1959), especially chap. 6, "Budget Determination Through Voting." 5) Hirshleifer, De Haven, and Milliman, Ope cit., chap. IV. 33. For a discussion of the role of competition in the democratic process, see Becker, Ope cit.

34. George J. Stigler, "The Economics of Information," Journal of Political Economy, Vol. LXIX, No.3 (June, 1961), pp. 213-225. 35. It may be true that a large firm might be able to spend more money in pursuit of knowledge than a small firm, but it is not clear that this action will make the large firm more knowledgeable in relation to the larger size of its market. It is quite conceivable that a small firm may know more about its market than a large firm. All this does not deny that there may be economies of size in the development of knowledge or even that there may be optimum levels of ignorance. 36. Compare with F. A. Hayek, The Constitution of Liberty (Chicago: Uni versity of Chicago Press, 1960), p. 371: "It cannot be denied that there are some facts concerning probably future developments which govern ment is more likely to know than most of the individual owners of 106 The New Argument in Economics natural resources. Many of the recent achievements in science illustrate this. There will always exist, however, an even· greater store of knowl edge of special circumstances that ought to be taken into account in decisions about specific resources which only individual owners will possess and which can never be concentrated in a single authority.

Thus, if it is true that government is likely to know some facts known to few others, it is equally true that the government will necessarily be ignorant of an even greater number of relevant facts known to some others. We can bring together all the knowledge that is relevant to particular problems only by dispersing downward the generic knowledge available to government, not by centralizing all the special knowledge possessed by individuals." 37. A most helpful discussion of this point is found in Roland N. McKean, Efficiency in Government through Systems Analysis (New York: John Wiley and Sons, 1958), chap. 8. 38. Ronald A. Coase makes this point in convincing fashion in a critique of the current economic literature relating to the problem of externali ties. See "The Problem of Social Cost," Journal of Law and Economics] Vol. III (October, 1960), pp. 1-44. 39. Vernon W. Ruttan has suggested to me that governmental control may not necessarily provide centralized operation for dealing with inter dependencies. Instead, the management may be parceled out among different agencies with varying objectives and constituencies, thus eroding the potential for an efficient system of operation even under government development, as in the Columbia River Basin System.

40. Buchanan, "Individual Choice in Voting and the Market," op. cit., p.335.