7.06. The Depletion of Natural Resources

0:006. The Depletion of Natural Resources One category has been purposely omitted so far from the discussion of land factors. At first we defined land as the original nature-given factor. Then we said that land which had been improved by human hands but which is now permanently given must also be considered as land. and then became the catalactically permanent non-reproducible resource, while capital goods are those that are non-permanent and therefore must be produced again in order to be replaced. But there is one type of resource that is non-replaceable but also non-permanent, the natural resource that is being depleted, such as a copper or a diamond mine.

0:56Here the factor is definitely original and nature given. It cannot be produced by man. On the other hand, it is not permanent, but subject to depletion, because any use of it leaves an absolutely smaller amount for use in the future. It is original, but non-permanent. Shall it be classed as land, or as a capital good? The crucial test of our classificatory procedure is to ask, must labor and land factors work in order to reproduce the good? In the case of permanent factors, this is not necessary, since they do not wear out. But in this case, we must answer in the negative also.

1:42For these goods, though non-permanent, cannot be reproduced by man despite their depletion. Therefore the natural resource comes as a special division under the land category. Professor Hayek criticizes the criterion of reproducibility for classifying a capital good. He declares, the point that is relevant is not that certain existing resources can be replaced by others which are in some technological sense similar to them, but that they have to be replaced by something, whether similar or not, if the income stream is not to decline. But this is confusing value with physical considerations.

2:31We are attempting to classify physical goods here, not to discuss their possible values, which will fluctuate continually. The point is that the resources subject to depletion cannot be replaced, much as the Hayek also raises the question whether a stream is land if a new stream can be created by collecting rainwater. Here again, Hayek misconceives the issue as one of maintaining a constant income stream instead of classifying a physical concrete good. The stream is land because it does not need to be physically replaced.

3:20It is obvious that Hayek's criticism is valid against Kaldor's definition. Kaldor defined capital as a reproducible resource which it is economically profitable to produce. In that case, obsolete machines would no longer be capital goods. Would they be land? The definition should be physically reproducible resources. Hayek's criticism that then the possibility of growing artificial fruit, etc., would make all land capital, again, misconceives the problem, which is one of the physical need and possibility of reproducing the agent. Since the basic land, not its fruit, needs no reproduction, it is excluded from the capital good category.

4:14The fact that the natural resources cannot be reproduced means that they earn a net rent, and that their rent is not absorbed by land and labor factors that go into their production. Of course, from the net rents, they earn the usual interest rate of the society for for their Owners, interest earnings being related to their capital value, increases in capital values of natural resources go ultimately to the resource owner himself and are not absorbed in gains by other land and labor factors. There is no problem in capitalizing a resource that is subject to depletion, since as we We have seen capitalization can take place for either a finite or an infinite series of future rental incomes.

5:09There is, however, one striking problem that pervades any analysis of the resource subject to depletion and that distinguishes it from all other types of goods. This is the fact that there can be no use for such a resource in an evenly rotating economy. For the basis of the ERE is that all economic quantities continue indefinitely in an endless round. But this cannot happen in the case of a resource that is subject to depletion, for whenever it is used, the total stock of that good in the economy decreases. The situation at the next moment, then, cannot be the same as before.

5:54This is but one example of the insuperable difficulties encountered whenever the ERE is used not as an auxiliary construction in analysis, but as some sort of ideal that the free economy must be forced to emulate. There can be a reserve demand for a depletable resource, just as there is speculative reserve demand for any other stock of goods on the market. This speculation is not simple wickedness, however, it has a definite function, namely that of allocating the scarce depletable resource to those uses at those times when consumer demand for them will be greatest.

6:40The speculator, waiting to use the resources until a future date, benefits consumers by shifting their use to a time when they will be more in demand than at present. As in the case of ground land, the permanent resource belongs to the first finder and first user, and often some of these initial capital gains are absorbed by interest on the capital originally invested in the business of resource finding. The absorption can take place only insofar as the finding of new resources is a regular Continuing Business, but this business, which by definition could not exist in the ERE, can never be completely regularized.

7:30Minerals such as coal and oil are clearly prime examples of depletable resources. What about such natural resources as forests? A forest, although growing by natural processes, can be produced by man if measures are taken One of the frequent attacks on the behavior of the free market is based on the Georgist bugbear of natural resources held off the market for speculative purposes. We have dealt with this alleged problem earlier.

8:16Another and diametrically opposite attack is the common one that the free market wastes resources, especially depletable resources. Future generations are allegedly robbed by the greed of the present. Such reasoning would lead to the paradoxical conclusion that none of the resource be consumed at all, for whenever at any time a man consumes a depletable resource. Here we use consumes in a broader sense to include uses up in production. He is leaving less of a stock for himself or his descendants to draw upon. It is a fact of life that whenever any amount of a depletable resource is used up, less is left for the future, and therefore any such consumption could just as well be called Robbery of the Future, if one chooses to define robbery in such unusual terms.

9:17Unusual terms because robbery has been distinctively defined as seizure of someone else's property without his consent, not the use of one's own property. Once we grant any amount of use to the depletable resource, we have to discard the robbery of of the Future argument and accept the individual preferences of the market. There is then no more reason to assume that the market will use the resources too fast than to assume the opposite. The market will tend to use resources at precisely the rate that the consumers desire. Having developed in Volume 1 our basic analysis of the economics of the isolated individual, In the latter and indirect exchange, we shall now proceed in Volume 2 to develop the analysis further by dealing with dynamic problems of a changing economy, particular types of factors, money and its value, and monopoly and competition, and discussing in necessarily more summary fashion the consequences of violent intervention in the free market.