Saturday, June 15, 2013

The Entrepreneurial Cycle: From Scarcity to Abundance

We have been told over and over again that the world is running out of natural resources due to our short-sighted greed and overuse. This idea is nothing new; it has been preached not only in our own lives but for decades and even centuries on. Yet with every generation, the capitalist entrepreneurial cycle has proved these scares wrong.  Whether it is food, clothing, shelter, minerals, energy, clean air, medicine, beer or university faculty parking spaces, the same pattern emerges under the free market:
·        Scarcity leads to
·        Rising market prices, which signal
·        Entrepreneurial opportunity; there’s money to be made (‘there’s gold in them thar hills!’).
·        Investors and speculators advance their own savings to fund research and development to invent new ways to extract and produce more, to drill deeper under the ocean floor using only one tower where five had been required before, to design new industrial processes, to genetically engineer seeds that multiply crop yields, to discover new and better drugs etc.
·        Many entrepreneurs fail, at their own expense (not yours and mine; not bailed out by the taxpayers)
·        …but others succeed, and the result is profits for them and
·        Abundant products and services at lower cost than ever for us; even cheaper and more plentiful than before the initial ‘crisis’[1].

In the final analysis, physical assets like minerals, oil, gas, water, food and a host of others are only as good, as useful and as available as the PEOPLE who design the processes to mine, extract, cultivate, harvest, refine, market and distribute them. It is human ingenuity that takes icky gunk that oozes out of the ground and sickens your cows, and transforms it into energy – black gold. It is the entrepreneurial drive operating in a free market that responds to every shortage of anything by producing more than ever, at the lowest real prices ever. In the short run, physical resources are of course finite; but in the long term, they are virtually unlimited, only constrained by human imagination, ingenuity, freedom and hard work. That is the difference between economics and physics.
That is why right now we have approximately 13 years known reserves of oil, whereas 13 years ago we had…13 years of known reserves then, and 13 years before that the known reserves were good for …about 13 years. The line keeps being pushed back by advancing knowledge, technological innovation and the entrepreneurial response to price signals in the market.
The fact is, it costs money to know how much oil (or any other resource) is available in reserve, because prospecting, locating and mapping  deposits costs money. Its not worth it to anyone to know more than about 13 years, but if the period drops to 12 or 11, it starts to pay to know, and the companies that are in the business of knowing will renew their exploration efforts.
The concept of ‘known reserves’ cannot be divorced from market prices. At $50 a barrel, there may be X trillion barrels of known reserves. But at $150 per barrel, the known reserves, that is, the quantity of the resource known to be profitably extractable at that price may be 3X trillion or even 30X trillion. Moreover, after the investment is made to extract the more difficult-to-reach deposits, the tendency is for costs and ultimate consumer prices to fall once again. The market always finds a way to find more. Natural resources get cheaper and more abundant with every generation.
The only force capable of stopping this virtuous cycle is… force.  Controlling who may or may not engage in certain businesses or activities; interfering with the functioning of the market; controlling wages and/or prices so that signals and information about the true relative abundance and scarcity do not get transmitted accurately; denying permits to explore for and/or extract available natural resources; awarding contracts and employment positions based on political favoritism, nepotism or ethnicity rather than objective competence and qualifications; forcing taxpayers to prop up firms that have failed; expropriating profits lawfully gained by firms that succeeded; failing to enforce the rule of law consistently and fairly – these are the actions and reactions that can impede entrepreneurial capitalism from solving the universal problem of scarcity. Unfortunately, those actions are most often committed by the agency that should be defending individual liberty: government.
The world is full of wretchedly poor nations sitting on top of abundant natural resources. Russia, Venezuela and Mexico are examples of countries whose economic policies have stifled liberty, private property and the rule of law, and thus have kept their people poor in spite of huge reserves of oil and other commodities. Meanwhile, countries with few or no natural resources at all – think Switzerland, Japan, Hong Kong, Singapore – crush the economic competition.
Capitalism, properly understood as a framework of individual liberty and responsibility, free markets, free trade and free people with neither privilege nor prejudice, is the economic system that has provided and will provide the greatest material abundance and prosperity to the greatest number of people of all nations and classes, whether measured relatively or absolutely. Capitalism is the solution.

[1] This entrepreneurial capitalist cycle is described in detail by Julian Simon in his classic book The Ultimate Resource 2.