The economics of spaceship Earth Rob Hart c Draft date October 26, 2016 [email protected] Contents Chapter 1. Introduction 1 1.1. Economic growth on spaceship Earth 1 1.2. Questions regarding economic growth on spaceship Earth 5 1.3. Economic methodology 6 1.4. Thisbook 7 Part 1. The driving forces of economic growth 11 Chapter 2. Growth fundamentals 13 2.1. Production, GDP, and growth 13 2.2. Whatdrivesgrowth?Reasoningfromfirstprinciples 14 2.3. Growth drivers in the real economy 16 Chapter 3. Labour, capital, and neoclassical growth: The SolowandRamseymodels 17 3.1. The Solow model with constant technology 17 3.2. Solowwithexogenoustechnologicalprogress 21 3.3. The Ramsey model 21 Chapter 4. Endogenous growth theory 23 4.1. Ideas and long-run growth 23 4.2. A simple model of endogenousgrowth 23 4.3. Theeffect of endogenizing growth 27 Part 2. Natural resources and neoclassical growth 29 Chapter 5. Neoclassical growth and nonrenewable resources 31 5.1. Land 31 5.2. An abundant resource, costly to extract 32 5.3. A limited resource, costless to extract (Hotelling/DHSS) 33 Chapter 6. Pre-industrial human development 41 6.1. Population dynamics 41 6.2. A simple model of Malthusian growth 42 Chapter 7. Resource stocks 45 7.1. The elephant in Hotelling’s room 45 7.2. Anextractionmodelwithinhomogeneousstocks 48 7.3. Concluding discussion on resource stocks in the very longrun 56 Chapter 8. Renewable natural resources and pollution as inputs 57 8.1. Renewables 57 8.2. Pollution 59 Part 3. Demand for natural resources and energy 61 Chapter 9. Directed technological change and resource efficiency 63 9.1. Resource efficiencyintheproductionfunction 63 9.2. Asimplemodelofdirectedtechnologicalchange 65 9.3. Evidence regarding the DTC model 69 9.4. Links between knowledge stocks 71 Chapter 10. Structural change and energy demand 73 10.1. Introduction to structural change 73 10.2. Preliminary analysis 75 iii 10.3. Structural change without income effects 78 10.4. Amodelofendogenouslyexpandingvariety 84 10.5. Evidence for income effectsinenergydemand 88 Part 4. Substitution between resource inputs, and pollution 91 Chapter 11. Substitution between alternative resource inputs 93 11.1. Asimplemodelwithalternativeresourceinputs 93 11.2. Technological change 96 11.3. An alternative to lock-in: The Fundamentalist economy 98 Chapter 12. The EKC and substitution between alternative inputs 101 12.1. Introduction 101 12.2. Themodel 104 12.3. The elements of the model 107 12.4. Case studies of pollution reduction 112 12.5. Conclusions 115 Chapter 13. Production, pollution and land 117 Part 5. Policy for sustainable development 119 Chapter 14. Is unsustainability sustainable? 121 14.1. Lessons from historical adaptation 121 14.2. Financial and other crises 121 14.3. Uncertainty and future crises 121 Chapter 15. Growth and environment 123 15.1. Taxation contra Command and Control 123 15.2. Precaution 123 15.3. Lessonsfromobservationsofstructuralchange 123 Chapter 16. The no-growth paradigm 125 16.1. Consumerism 125 16.2. ‘Green’ consumerism 125 16.3. Conspicuousconsumption,labour,andleisure 125 Chapter 17. Mathematical appendix 129 17.1. Growth rates 129 17.2. Continuous and discrete time 130 17.3. A continuumof firms 131 Bibliography 133 CHAPTER 1 Introduction 1.1. Economic growth on spaceship Earth The metaphorof Earth as a spaceship—made famousby Kenneth Boulding (1966)—helps to bring home the obvious truth that we live together on a planet with finite resources. Furthermore, inputs from beyond the Earth—such as the flow of energy from the sun—are limited, and there are enormous obstacles to resource extraction from other planets, let alone their colonization. The necessity of living together on the finite surface of the Earth suggests the need for cooperation and fairness, as emphasized by Orwell in ‘The road to Wigan Pier’.1 On the other hand, Boulding focuses on the necessity of the careful use of the finite natural resources available to us, and the avoidance of fouling our own nest with pollution. In this book we follow Boulding by focusing on resource use and pollution rather than cooperation and fairness. Boulding describes the transition in the human imagination from the idea of the frontier economy in which scarcity is only ever local, to the idea of global limits. We aim to understand both the ‘frontier’ and ‘spaceship’ phases of developmentas part of a single long-runprocess; even when we have the mindset of the frontier, we are already on the spaceship. This book thus concerns the development of the global—spaceship—economy in the very long run. How can we make sense of the changes in the human economy that we have seen of the last couple of centuries, and even the last 20000 years? In the light of our explanation of the past, what future scenarios are possible, or indeed likely, regarding long-run global production of goods and services, given the finite nature of the Earth, its natural resources, and the inflow of energy from the sun? Furthermore, what policies are called for in order to achieve desirable long-run outcomes with regard to (sustainable) long-run production and the quality of the living environment? Over the last 100 years and more the world has witnessed economic growth which is not only uniquely rapid, but also astonishingly steady, by which I mean that the increase in production of goods and services per capita in the richest countries has occurred at a remarkably constant rate. Can this increase be maintained, and if it is maintained, will that be at the expense of the quality of the Earth’s environment or other species? To get some perspective on these questions we need data, observations. We begin by pre- senting data regarding long-run growth in GDP per capita, and also growth in population. We do this for two periods: pre-industrial (up to 1700) and industrial (after 1800). Regarding the pre-industrial period, Figure 1.1 shows that production per capita was remarkably constant from prehistoric times through to around 1700.2 Global population, on the other hand, increased very slowly up to around 5000 BCE, from which point it grew at a rather constant exponential rate (note the logarithmic scale) up to 1700 CE. Because we have used a (natural) log scale, the slopes of the line tell us growth rates directly: thus we can read off that the growth rate of population between 5000 BC and 1700 was approximately 4.5/6700, i.e. less than 0.1 percent per year. (For more on the mathematics behind growth rates and the use of the logarithmic scale see the Mathe- matical appendix, Chapter 17.1.) The explanation of these two trends is straightforward and was first put forward by Thomas Malthus (1798); we return to it in Chapter 6. After 1800 things look very, very, different, as we see in Figure 1.2. During the 19th century both global product and population grow at around 0.5 percent per year, whereas in the 20th century they grow faster: almost 2 percent per year for average global product per capita, and 1.5 percent per year for population. Note that the growth rate in total global product is the sum of the growth rates in population and global product per capita, and was therefore slightly over 3 percent per year during the 20th century. 1‘The world is a raft sailing through space with, potentially, plenty of provisions for everybody; the idea that we must all co-operate and see to it that everyone does his fair share of the work and gets his fair share of the provisions seems so bla- tantly obvious that one would say that no one could possibly fail to accept it unless he had some corrupt motive for clinging to the present system.’ Orwell (1958), p.203. Available at https://archive.org/details/roadtowiganpie00orwe. 2Note however that the data on which the figure is based could be called into question. 1 2 1.1. Economic growth on spaceship Earth 5 4 3 2 Log scale, normalized 1 Global population 0 Average yearly production per capita −20000 −10000 0 1700 year Figure 1.1. Global product and population, historical (data from Brad DeLong). Both variables are normalized to start at zero. Population grows by a factor of approximately exp[5], i.e. about 150. Average yearly production per capita is close to 100 USD throughout. 2.5 2 Average global product per capita, normalized 1.5 Log scale 1 Global population, normalized 0.5 0 1800 1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 Figure 1.2. Global product and population, modern (data from Maddison (2010) and US Census Bureau). We now turn to resource consumption rates, and prices, as illustrated in Figure 1.3.3 In Figure 1.3(a) we show data for an aggregate of the 17 most important metals measured by factor expen- diture (not including uranium). The results are striking: over a period of more than 100 years, growth in global consumption of metals almost exactly tracks growth in global product, whereas the real price is almost exactly constant. The result is that the share of metals in global product is also constant, since expenditures (the product of price and quantity) track global product. In Figure 1.3(b) we see the same result for global primary energy supply through combustion. Again, quantity tracks global product while the weighted energy price is almost constant. After a slight 3Note: Global product data from Maddison (2010). Metals: Al, Cr, Cu, Au, Fe, Pb, Mg, Mn, Hg, Ni, Pt, Rare earths, Ag, Sn, W, Zn. All metals data from Kelly and Matos (2012). Energy: Coal, oil, natural gas, and biofuel.