The Age of Scarcity? Not

Some thoughts on the age of scarcity.... my latest musings....

Is the ghost of Thomas Robert Malthus stalking the global economy? Sad to say, it sure seems like it.

Malthus was a key figure in the 18th and early 19th century in developing modern mainstream economics. (And Darwin hit on the idea of natural selection after reading Malthus' Essay on Population.) But Malthus is best remembered for his grim argument that there is a tendency from "the wretched inhabitants of Tierra del Fuego" to "the beggars of Teshoo Loomboo" for population growth to outstrip resources.

The grim dynamic runs along these lines: Growing incomes lead to increased fertility and reduced mortality. That means there are more mouths to feed on the same land. Growth and income fall. The process repeats itself, over and over again. Little wonder the Victorian historian Thomas Carlyle described Malthus as "Dreary, stolid, dismal, without hope for this world or the next."

Evidence for the Pessimists
In the 21st century, the worry revolves around the dramatic expansion of the global economy and consumer purchasing power in China, India, Brazil, Chile, Mexico, Russia, and other emerging markets. The rise of the frontier economies is putting too great a strain on natural resources. The price increases we're witnessing aren't a temporary market dislocation, but a permanent shift into an Age of Scarcity.

Could the pessimists be right?

They have some evidence in their corner. Certainly, despite some recent declines, commodity prices are at nosebleed heights. The Rogers International Commodities Index, made up of 36 different commodities ranging from agriculture to energy to metals, is up 383% over the past 10 years. Oil prices have jumped from $23 a barrel in 2003 to around $100 currently. Part of that oil price hike could also reflect that the world is near "peak oil," the term used to define the transformative moment when global oil production starts declining gradually over time.

China Putting Price Controls on Food
Food prices are skyrocketing, too. The Food & Agricultural Organization of the United Nations says its food index is at its highest level since its creation in 1990. High food prices are pinching household pocketbooks in developed nations like the U.S. But they are catastrophic to incomes in developing ones. That's why Mexico has seen mass protests about the cost of tortillas, Senegal, Mauritania, and other parts of Africa have had riots over grain prices, and children have marched in Yemen protesting child hunger.

Governments are also getting nervous. They're taking various measures to restrain price increases and secure supplies. For instance, according to the Asian Development Bank's latest outlook, import duties on food and cereals are being temporarily cut in some countries and in others exports are being taxed or restricted to increase domestic supplies of food. A number of countries, like China, are also putting on price controls on food. "Artificial restraints on prices and inflation today that blunt market incentives are only likely to lead to higher prices in the future," worry the authors of the Asian Development Report for 2008.

Still, there's good reason to believe the Age of Scarcity isn't here. For one thing, the long-term impact of steep market prices and technological innovation shouldn't be underestimated. The late Julian Simon, an iconoclastic environmental optimist and professor of business administration, captured the essential dynamic in the introduction to his essay "Forecasting the Long-Term Trend of Raw Material Availability."

"The key sequence runs as follows: (1) increased pressure of population and income growth upon resources, causing an increase in prices; (2) perception of the scarcity problem with its attendant opportunities; (3) search for new solutions to the problem; (4) discovery of solutions that leave us better off than if the original problem had never risen."

What Would Schumpeter Say?
Indeed, instead of Malthus, the touchstone economist for our era is Joseph Schumpeter. He's best known for his metaphor of "creative destruction," the process by which new technologies, new markets, and new organizations supplant the old. Knowledge, innovation, and entrepreneurship are what count. Just ask the risk-takers in Silicon Valley, Route 128, and the Beltway who are eagerly pursuing alternative energy technologies with the price of oil so high.

But equally important in the shorter run is public policy--specifically poor public policy. Take the surge in food prices. "I'm not with Malthus on this one," says C. Ford Runge, agricultural economist at the University of Minnesota. "The phenomenon is the result of a conscious, rational, self-interested claim with horrendous collateral consequences."

Diversion of Food Crops into the Energy Supply
To be sure, the demand for better foodstuff partly comes from increased wealth in developing nations. People can afford better diets, and that demand is putting long-term pressure on supply.

That said, Runge is scathing about the massive subsidies shoveled at the biofuel industry in the U.S., Europe, and elsewhere. One cost of propping up the industry is a global runup in food in grain prices. This can be traced in part to energy legislation enacted by Congress and signed into law by President George W. Bush in 2007.

Talk about unintended consequences. The diversion of food crops into the energy supply--and the attendant runup in prices--has been a disaster for the nearly 1 billion of the world's poor who are chronically food-insecure. Runge notes that in Asia grains account for 63% of diet, 60% in the former Soviet Republics and North Africa, 50% in sub-Saharan Africa, and 43% in Latin America. Here's a thought: Before painting nightmarish visions of a Malthusian moment, why not get rid of biofuel subsidies first?

Remembering the Club of Rome
And then governments in the developing nations can focus on improving their farming techniques and yield. The Asian Development Bank calls for governments to accelerate their efforts to improve technical progress and productivity "through infrastructure, especially irrigation systems, and institutional support through credit markets and extension services."

Commentators and analysts have periodically predicted a Malthusian nightmare--wrongly. Remember the Club of Rome and its terrible forecast about the limits to growth published during the 1970s oil and food crisis? How about the 1980 bet between population pessimist Paul Ehrlich, the brilliant biologist, and the eternal optimist we mentioned earlier, Julian Simon. Ehrlich picked five metals on Sept. 29, 1980 that he thought would rise in price, figuring that a Malthusian squeeze would send natural-resource prices soaring.

The wager? If inflation-adjusted prices rose, Simon would pay Ehrlich and if prices fell Ehrlich would pay Simon. The payoff date: Sept. 29, 1990. Well, the 1980s came and went, and despite a stunning 800 million increase in world population in the '80s, the metal prices dropped. Ehrlich settled the bet with Simon for almost $600.

Almost two decades later, we'll make our own wager: We won't enter an era of scarcity today so long as we embrace public policies that encourage lots of innovation and bigger markets.