Natural Resource Constraints and World Economic Growth

Introduction

For most of the time since economics was first studied as a discipline, the idea of resource constraints was essentially irrelevant. The world was simply not viewed as a finite place. The concept of resource constraints was limited, more or less, to the consideration of constraints within an individual economy. Adam Smith recognized that all economies would face resource constraints of one kind or another. As Snowdon (2003) points out, "to Smith, it was obvious that all economies were faced with resource constraints and that free trade was a policy that would allow any nation to achieve the most efficient allocation of its scarce resources." This notion was built into Ricardian trade theory and classical economics more broadly.

It has not been until recent times, however, that the concept of worldwide scarcity has become truly relevant. The idea of peak oil and a world with seven billion people — or more — has economists searching for responses to the possibility that economic growth is not sustainable indefinitely, and that finite resources will force economies to rethink the nature of growth and sustainability itself. This paper seeks to answer whether diminishing supplies of natural resources will limit world economic growth, drawing on the theories of Keynes, Smith, and modern economists alike.

Adam Smith and Scarcity

Prior to Smith, the prevailing economic view was that the world operates as a zero-sum game. This implied resource scarcity and led to public policy that emphasized acquiring as many resources as possible in order to maximize national wealth — knowing that doing so came at the expense of others. Smith argued that trade offered a better solution. His vision held that scarcity could be better addressed through trade because trade enabled maximum efficiency in the use of resources (Snowdon, 2003).

Flowing from this argument is Ricardo's theory of comparative advantage, which also emphasizes efficiency as a central objective of trade. Although Smith and Ricardo viewed individual economies as operating under scarce resources, they gave little consideration to a world where finite limits on critical resources constituted a legitimate global concern. Smith would have traded his way out of scarcity. The modern trading system, built on Ricardo and Smith's arguments in favor of free trade, emphasizes the role that efficiency plays in facilitating economic growth. Improved efficiency has, to this point, allowed the world to enjoy economic growth even as a rapidly rising global population consumes resources at an accelerating pace.

Keynes and Resource Constraints

Holt (2010) argues that Keynes' view of the economy did not adequately account for resource constraints. Keynes, like other economists of his time, did not view the environment as a binding constraint on economic growth. This meant that environmental externalities such as pollution and resource depletion were not incorporated into his framework. The Keynesian accounting identity for GDP, for instance, factors in only government, business, and consumer spending, along with the trade balance — no resource constraints of any kind are built into the model.

The Keynesian model did account for constraints on capital and labor, but with the underlying assumption that these could be summoned if necessary. Capital in particular could be mobilized through government borrowing when business and consumer spending were insufficient, and increased capital could draw surplus labor back into the market. Implicit in this view is the idea that any other resource could be purchased at the right price.

A significant critique of Keynes is that he failed to appreciate the importance of resource constraints. He went so far as to argue that resource constraints were not an antecedent or contributing factor in war. Yet he presided over the development of the post-war economy with full knowledge that one of the primary reasons the Axis powers lost the war was their inability to capture sufficient oil and metal to sustain their war machine — particularly after the Battle of Stalingrad. Resource constraints were very real in Keynes' world, but like earlier economists he doubtless viewed them as a national problem rather than a global one.

Conclusion

The challenge for economists is that most traditional economic models — upon which modern theories are based — tended to ignore the issue of resource constraints. While scarcity has always been a recognized phenomenon, it was long assumed that a nation facing conditions of scarcity could trade its way out of the problem. What the world faces today is not an immediate exhaustion of key resources, but a situation in which such an outcome is genuinely conceivable. The most prudent response is to ensure that, should scarcity materialize, it will not bring economic growth to a halt.

Diminishing supplies of natural resources will limit growth if the right decisions are not made. Some goods, such as fossil fuels, are non-renewable, meaning any continued use is inherently unsustainable in the long run. To maintain economic growth, substitutes will need to be developed — whether through new technologies or changes in lifestyle. Trading with another planet for additional resources is not an option. Economists must therefore consider how best to sustain growth in the face of these constraints. The most logical answer is to reduce dependence on non-renewable resources for which no perfect substitute currently exists, since reliance on such goods implies a contraction in growth should they become unavailable.

Making smart choices today can enable a smooth lifestyle transition — a gradual shift over years or even decades. Making short-sighted choices today, by contrast, will produce severe shocks when key resource supplies either disappear or become unaffordable, with no credible substitute ready to take their place.

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