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NOTE 7.06. The Depletion of Natural Resources

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6.

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The Depletion of Natural Resources

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One category has been purposely omitted so far from the discussion of land factors.

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At first we defined land as the original nature-given factor.

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Then we said that land which had been improved by human hands but which is now permanently

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given must also be considered as land.

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and then became the catalactically permanent non-reproducible resource, while capital goods

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are those that are non-permanent and therefore must be produced again in order to be replaced.

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But there is one type of resource that is non-replaceable but also non-permanent, the

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natural resource that is being depleted, such as a copper or a diamond mine.

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Here the factor is definitely original and nature given.

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It cannot be produced by man.

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On the other hand, it is not permanent, but subject to depletion, because any use of it

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leaves an absolutely smaller amount for use in the future.

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It is original, but non-permanent.

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Shall it be classed as land, or as a capital good?

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The crucial test of our classificatory procedure is to ask, must labor and land factors work

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in order to reproduce the good?

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In the case of permanent factors, this is not necessary, since they do not wear out.

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But in this case, we must answer in the negative also.

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For these goods, though non-permanent, cannot be reproduced by man despite their depletion.

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Therefore the natural resource comes as a special division under the land category.

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Professor Hayek criticizes the criterion of reproducibility for classifying a capital good.

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He declares, the point that is relevant is not that certain existing resources can be replaced

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by others which are in some technological sense similar to them, but that they have to be replaced

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by something, whether similar or not, if the income stream is not to decline.

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But this is confusing value with physical considerations.

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We are attempting to classify physical goods here, not to discuss their possible values,

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which will fluctuate continually.

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The point is that the resources subject to depletion cannot be replaced, much as the

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Hayek also raises the question whether a stream is land if a new stream can be created by

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collecting rainwater.

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Here again, Hayek misconceives the issue as one of maintaining a constant income stream

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instead of classifying a physical concrete good.

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The stream is land because it does not need to be physically replaced.

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It is obvious that Hayek's criticism is valid against Kaldor's definition.

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Kaldor defined capital as a reproducible resource which it is economically profitable to produce.

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In that case, obsolete machines would no longer be capital goods.

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Would they be land?

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The definition should be physically reproducible resources.

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Hayek's criticism that then the possibility of growing artificial fruit, etc., would make

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all land capital, again, misconceives the problem, which is one of the physical need

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and possibility of reproducing the agent.

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Since the basic land, not its fruit, needs no reproduction, it is excluded from the capital

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good category.

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The fact that the natural resources cannot be reproduced means that they earn a net rent,

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and that their rent is not absorbed by land and labor factors that go into their production.

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Of course, from the net rents, they earn the usual interest rate of the society for

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for their Owners, interest earnings being related to their capital value, increases in

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capital values of natural resources go ultimately to the resource owner himself and are not

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absorbed in gains by other land and labor factors.

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There is no problem in capitalizing a resource that is subject to depletion, since as we

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We have seen capitalization can take place for either a finite or an infinite series

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of future rental incomes.

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There is, however, one striking problem that pervades any analysis of the resource subject

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to depletion and that distinguishes it from all other types of goods.

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This is the fact that there can be no use for such a resource in an evenly rotating

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economy.

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For the basis of the ERE is that all economic quantities continue indefinitely in an endless

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round.

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But this cannot happen in the case of a resource that is subject to depletion, for whenever

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it is used, the total stock of that good in the economy decreases.

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The situation at the next moment, then, cannot be the same as before.

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This is but one example of the insuperable difficulties encountered whenever the ERE

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is used not as an auxiliary construction in analysis, but as some sort of ideal that the

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free economy must be forced to emulate.

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There can be a reserve demand for a depletable resource, just as there is speculative reserve

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demand for any other stock of goods on the market.

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This speculation is not simple wickedness, however, it has a definite function, namely

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that of allocating the scarce depletable resource to those uses at those times when consumer

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demand for them will be greatest.

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The speculator, waiting to use the resources until a future date, benefits consumers by

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shifting their use to a time when they will be more in demand than at present.

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As in the case of ground land, the permanent resource belongs to the first finder and first

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user, and often some of these initial capital gains are absorbed by interest on the capital

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originally invested in the business of resource finding.

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The absorption can take place only insofar as the finding of new resources is a regular

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Continuing Business, but this business, which by definition could not exist in the ERE,

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can never be completely regularized.

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Minerals such as coal and oil are clearly prime examples of depletable resources.

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What about such natural resources as forests?

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A forest, although growing by natural processes, can be produced by man if measures are taken

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One of the frequent attacks on the behavior of the free market is based on the Georgist

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bugbear of natural resources held off the market for speculative purposes.

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We have dealt with this alleged problem earlier.

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Another and diametrically opposite attack is the common one that the free market wastes

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resources, especially depletable resources.

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Future generations are allegedly robbed by the greed of the present.

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Such reasoning would lead to the paradoxical conclusion that none of the resource be consumed

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at all, for whenever at any time a man consumes a depletable resource.

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Here we use consumes in a broader sense to include uses up in production.

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He is leaving less of a stock for himself or his descendants to draw upon.

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It is a fact of life that whenever any amount of a depletable resource is used up, less

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is left for the future, and therefore any such consumption could just as well be called

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Robbery of the Future, if one chooses to define robbery in such unusual terms.

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Unusual terms because robbery has been distinctively defined as seizure of someone else's property

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without his consent, not the use of one's own property.

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Once we grant any amount of use to the depletable resource, we have to discard the robbery of

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of the Future argument and accept the individual preferences of the market.

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There is then no more reason to assume that the market will use the resources too fast

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than to assume the opposite.

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The market will tend to use resources at precisely the rate that the consumers desire.

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Having developed in Volume 1 our basic analysis of the economics of the isolated individual,

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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.