Let us first deal with depletion. No economist should ever forget that in a free market reduction in time preference, i.e., a switch from current consumption to future consumption, will lower interest rates and thus raise the value of the land. This creates the obvious incentive to conserve resources and maximise their present value, which is the discounted sum of their anticipated rents.

In other words it is always in the interest of entrepreneurs to maximise the present value of their land and capital assets. (Actually, it is their internal rate of return that they will try to maximise). Excessive depletion of their resources would have the effect of reducing the market value of their assets. As already stated, the present value of an owner’s assets is the sum of their discounted future rents. The market tendency will be for these rents to become equal to the rate of interest. This leads to the fact that capitalisation becomes an argument for the privatisation of state owned lands.

So not only do market prices act directly to conserve natural resources through the process of capitalisation; they also expand the supply of resources by discovering and exploiting new reserves and by substituting new materials for old resources. The higher demand for the final products (consumer goods) increases the value of the resources that go into their production. These higher prices stimulate conservation and investment in exploration, new technologies and substitutes. In short, increasing scarcity reflected in higher prices increases supply. But not according to our Mr Colebatch

However, where any resource is treated as a free good (zero priced) it will be excessively used. Nevertheless, we cannot fully exhaust any natural resource because its price would rise to the point where it would become uneconomical to exploit. It can be argued that a resource can be completely exhausted if the cost of exploiting it in relation to its value is extremely is low, but I know of no such case. Anyway, the point is that overutilisation only occurs where the market process has been excluded or suppressed.

But let’s try some facts, shall we: In 1974 the London-based Commodities Research Unit estimated that the top mile of the earth’s crust holds a million times more than the estimated reserves of most metals at then current prices. Since then reserves have continued to expand, unlike Mr Colebatch’s knowledge of economics.

There is nothing new in Colebatch’s disgraceful scaremongering. Lefty journalists have been at it for decades. However, even the most scrupulous scientists have been led astray on this subject, much to their own mortification. The widely known 1946 Paley report, sponsored by the US government also predicted rapid depletion of the earth’s natural resources. The supply of US minerals would, according to the report, quickly dwindle and swiftly increase the country’s demand for imported supplies, raising their prices and thus turning the terms of trade against the industrialised world.

What confounded the Paley report’s findings was exactly the same thing that confounded the predictions of the likes of the loathsome Dr Ehrlich and his fellow doomsters and that was market processes. The vital role that prices play in the market place are not understood by the market’s critics, including the likes of Colebatch, who tend to show a disdain for market and seem to make a virtue out of economic illiteracy. (This probably explains his adulation for the late J. K. Galbraith whose contribution to economics was one fat zero).

They do not understand that market prices are why we cannot fully exhaust any natural resource because its price, as I have already stated, would simply rise to a point where it would become uneconomic to exploit. But the process is more subtle than this suggests. The criticism that the market cannot strike the necessary balance between present and future consumption because of ‘excessive’ depletion of both non-renewable and renewable resources (a distinction that is rarely made, particularly by journalists) is rendered absurd by the process of capitalisation and the dreadful experiences of the socialist states.

What the likes of Gittins and Colebatch cannot grasp is that economic growth is a resource-generating process. Up to the present day history is replete with examples of the market process finding new resources and substitutes when they have been most needed from the substitution of coal for charcoal in 18th century England, of kerosene for whale oil and gas for kerosene, of steam for wind, animal and waterpower, of electricity for steam and gas, of aluminium for cast iron pots and pans, of transistors for valves and of optic fibres for copper cables of nuclear power for coal and hydropower. The list is never-ending and growing exponentially.

In fairness to Gittins and Colebatch, I should point out that many supporters of the free market have also overlooked this salient fact. Oddly enough, many of the classical economists were more realistic on this point. This is what Mill had to say about economic development:

We have now been led to recognise that this ultimate goal [of the stationary state] is at all times near enough to be fully in view; that we are always on the verge of it, and that if we have not reached it long ago, it is because the goal itself flies before us. The richest and most prosperous countries would very soon attain the stationary state, if no further improvements were made in the productive arts, and if there were a suspension of the overflow of capital from those countries into the uncultivated or illcultivated regions of the earth. (Principles of Political Economy, 1848, Book IV, Chapter 6).

Mill was making the somewhat doleful, unfortunately, observation that economic progress was a continuous and unstoppable force. I believe this statement was made in the belief that markets would always be allowed to work their miracles.

As for Colebatch’s views on intergenerational equity, this absurd concept is precisely the kind of lousy logic I would expect from this statist hack. According to this quackery resources are allegedly reserved for succeeding generations. But one does not need a Ph.D. in logic to realise that so-called ‘intergenerational equity’ means no resource would ever be used. Any generation’s claim to resources — including the claims of the present generation — are just as worthy of consideration as those of any future generation.

Furthermore, resources are not just used up, they are transformed into higher valued goods; the consequence of using resources today instead of leaving them idle in the ground is to make future generations richer. How does Colebatch and his greenie mates think they would be living today (if at all) if our ancestors had not exploited ‘non-renewable’ resources that this short-sighted bunch now want left undeveloped?

They seem incapable of understanding — including a great many economists — that economic growth means the expansion of a highly complex capital structure consisting of stages of production made up of heterogeneous capital goods. As the structure expands it raises the marginal productivity of labour and hence real wages.

This is what really raises living standards, not totalitarian controls over population natural resources. Because capital embodies technical knowledge it actually creates additional resources while continuing to expand existing reserves of natural resources, making many of them obsolete in the process. In other words, growth generates resources as well as conserving them.

So-called conservation laws are not needed in a free market. Where such laws are implemented they have a number of undesirable effects. The laws restrict the use of depletable resources, i.e.., they force a greater inventory in the stock of depletable resources and also force owners to excessively invest in replaceable resources.

If, for example, the government imposed a ‘conservation tax’ on oil, the effect would be to slow down — depending on the size of the tax — oil consumption and direct investment into finding a substitute, probably shale oil. But this would be a waste of resources, a malinvestment. Extending investment to the conservation of any natural resource to the point where the return is lower than the opportunity cost of the investment is truly wasteful.

These laws can also extend the conservation of resources beyond the point where they become obsolete, a possibility with an oil ‘conservation tax.’ In fact, Industrial development would have been greatly retarded if past warnings of the imminent exhaustion of natural resources had been heeded.

The only argument advanced in support of conservation laws is that the market will use up resources too quickly and deprive future generations of their use. The critics forget or ignore the fact that future generations are provided for through present savings and investment, the cost of which is forgone consumption. Unless, of course, statist policies destroy the capital structure. As for his dopy statement that we are running out of oil, this overlooks the fact that America, for example, still has huge masses of oil reserves and natural gas that have not even been touched ..— thanks to the corrupt Democrats and their fanatical green allies.

I must finish with Colebatch’s allusion to the Gregory thesis that an increase in the demand for Australian resources will raise the dollar exchange rates and virtually wipe-out Australian manufacturing, a view that Industry Minister Ian Macfarlane seems to share. I should point out that I have even less respect for Macfarlane’s grasp of economics as I do for Colebatch’s.

In a free market exchange rates are ultimately determined by purchasing power parity. That is why we would not have an exchange rate problem if we were on a gold standard. Not that Macfarlane or Colebatch would have the wit to understand any of this.

Gerard Jackson is Brookes’ economics editor

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