Blair Fix takes us back to the roots of Value Theory by reminding us of this quote by Robert Solow (1974) (pdf)
If it is very easy to substitute other factors for natural resources, then there is in principleno “problem”. The world can, in effect, get along without natural resources.
Contrary to the proclamations of neoclassical economists (like Robert Solow), the world cannot get along without natural resources. That this fact needs stating is a testament to the shallowness of economic theory.
From its outset, the field of Political Economy was not designed, in any meaningful sense, to understand resource flows. Instead, it was designed to explain class relations. The goal of early political economists was to justify the income of different classes (workers, landowners and capitalists). They chose to do so by rooting this income in the ‘production of wealth’. What followed from this original sin was centuries of conflating income with ‘production’
This flawed thinking starts with a failure to understand property rights. Political economists largely understand property as a productive asset — a way of thinking that dates to the 17th-century work of John Locke (or perhaps earlier). Locke proclaimed that property rights stemmed from ‘natural law’. A man, Locke argued, has a natural right to own what he ‘produces’:
… every Man has a Property in his own Person. This no Body has any Right to but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property. It being by him removed from the common state Nature placed it in, hath by this labour something annexed to it, that excludes the common right of other Men. For this Labour being the unquestionable Property of the Labourer, no man but he can have a right to what that is once joyned to, at least where there is enough, and as good left in common for others.
Locke’s thinking became known as the ‘labor theory of property’. This theory (and its derivatives) is why political economists misunderstand the role of natural resources. If we accept Locke’s argument that you have a right to own what you produce, it follows that your wealth should stem from your output. Most political economists after Locke accepted this reasoning (at least in part). That meant that the debate was not about whether wealth was ‘produced’, but rather, about which ‘factors of production’ were ‘productive’
It’s not really a ‘theory’ in the scientific sense. It doesn’t explain why property rights exist. It explains why they ought to exist. Locke proclaimed that a man ought to own what he produces. That is his ‘natural right’.
This change from ‘is’ to ‘ought’ is important. It means that we’re not dealing with a scientific theory. We’re dealing with a system of morality. Locke’s ‘theory’ of property is not a ‘theory’ at all — it’s a morale treatise. According to Locke, we ought to own what we produce. But that doesn’t mean that we do.
To see the consequences of this mistake, we need an actual scientific theory of property rights — a theory that explains why property exists, not why it ‘ought’ to exist. The most convincing theory of private property, in my opinion, comes from the work of Jonathan Nitzan and Shimshon Bichler. To understand property, Nitzan and Bichler argue that we should turn Locke’s idea on its head. Property isn’t a ‘natural right’. It’s an act of power.
The most important feature of private ownership is not that it enables those who own, but that it disables those who do not. Technically, anyone can get into someone else’s car and drive away, or give an order to sell all of Warren Buffet’s shares in Berkshire Hathaway. The sole purpose of private ownership is to prevent us from doing so. In this sense, private ownership is wholly and only an institution of exclusion, and institutional exclusion is a matter of organized power.
Property is about the act of ownership — the institutional act of exclusion.
Economists see income and conclude that it indicates the productivity of the owner’s property. When the income flowing to natural resource owners declines, economists conclude (wrongly) that the resources themselves are becoming less important.
Most early political economists argued that there were three ‘factors of production’: land, labor and capital. But over time, land was slowly dropped, leaving only labor and capital. Here are William Nordhaus and James Tobin noting this shift.
The prevailing standard model of growth … is basically a two-factor model in which production depends only on labor and reproducible capital. Land and resources, the third member of the classical triad, have generally been dropped. … Presumably the tacit justification has been that reproducible capital is a near perfect substitute for land and other exhaustible resources.
Land was dropped as a ‘factor of production’ because it could be replaced by capital. In other words, capital had become so productive that there was no longer a need for land. Economists rid their theory of land because of the original sin in political economy: from declining income, economists inferred declining contribution to output
The wealthiest people are now almost exclusively the owners of capital. And these capitalists sometimes own nothing but ideas (intellectual property). Wealth, it seems, is dematerializing. The world can get along without natural resources!
This thinking is flawed. It’s the Lockean mistake in action. Economists assume (wrongly) that income reflects productivity. They then mistake income redistribution — from the landed aristocracy to industrial capitalists — as a decline in the importance of ‘land’. But it is no such thing. Land remains the basis of all human activity.
The conflation of income with productivity has led economists to misunderstand the role of natural resources in human societies.
In tying the concept of ‘output’ to income, neoclassical economists fool themselves. Their accounting system leads them to believe that natural resources are unimportant. When the price of a natural resource decreases, so does its apparent contribution to ‘output’. So as resources become cheaper, economists mistakenly think that societies are becoming less dependent on the Earth.
The price of a natural resource doesn’t indicate its importance to society. The role of natural resources is, in reality, invariant. Today — just as we have always been — we are utterly dependent on natural resource for our survival.
In an important sense, the price of a resource is inversely related to the resource’s importance. The cheaper a resource becomes, the more we tend to depend on it.
Without energy flows, our machinery would be useless. How do we understand the importance of energy to the economy? A popular approach among ecological economists is to reform neoclassical theory by adding energy to production functions. The idea is that, alongside labor and capital, energy is a ‘factor of production’.
It’s a mistake to even try to explain ‘economic output’. Organisms don’t have ‘outputs’ in any meaningful sense. They have throughputs. Organisms transform matter and energy into forms that are useful. There’s no need to relate economic inputs to economic outputs. Instead, there’s only the flow of energy. When framed this way, the study of ‘economic growth’ becomes the study of energy transformations. We needn’t get GDP involved. Instead: study the use of energy to harvest energy. Harvest the energy we need, and no more.
The physicist Arthur Eddington once remarked: “if your theory is found to be against the [laws] of thermodynamics I can give you no hope; there is nothing for it but to collapse in deepest humiliation.” Neoclassical economics profoundly contradicts these laws. Yet sadly, we’re still awaiting its humiliating collapse.
Neoclassical economics is founded on an embarrassing error. It assumes that income indicates contribution to production. For a century, this error has led economists to conclude that natural resources are unimportant. They see that the natural resource sector earns a tiny fraction of all income. And so they infer that we could get rid of this activity and still retain the vast majority of ‘economic output’.
Unfortunately, the real world doesn’t work like that. Income doesn’t tell us about the importance of resource flows. It never has and it never will. As long as we think that it does, we’re headed down a dangerous path. Let’s not let the delusions of neoclassical economics seal our fate. The planet deserves better.