Ch. 1 Visions of the Future

Introduction n The Self Extinction Premise –Do societies germinate the seeds of their own destruction? Examples: »Rome »Texas Rangers baseball –Gloom & Doom: Malthus (1798) believed population grows geometrically, but food supply only grows arithmetically. –Some Historic Examples: »Mayans of Central America: collapsed in 8 th and 9 th centuries A.D. »Easter Island: 2,000 miles west of Chile; impressive statues; society collapsed

Introduction (cont.) –Malthus was wrong but others argue that his prediction may yet come true –Many potential problems exist: deforestation, plant and animal extinction, ozone depletion. –But are some of these claims exaggerated? –Will mankind adapt? »Is necessity the mother of invention?

Future Environmental Challenges –Climate Change »Committee on the Science of Climate Change (2001) says that surface temperature has risen 1 degree Fahrenheit in past century & most warming over last 50 yrs. is due to humans »Potential impacts??? –Water Accessibility »United Nations says about 40% of world faces moderate to high water stress. »examples: Colorado River in Southwestern U.S., Rio Grande in Texas, Yellow River in China

Meeting the Challenges –Global problems will require global solutions »Formerly, nations could solve their own environmental problems. »Now international cooperation is needed for a host of problems. »International agreements are difficult to achieve n E.g. fishing, farming

How will Societies Respond? –Feedback loops »Positive - secondary effects reinforce basic trend n Examples: methane gas may warm atmosphere, which warms permafrost which releases more methane gas; subprime credit market in August 2007 »Negative – self limiting n Examples: Gaia (Greek for Mother Earth) hypothesis:

The Role of Economics and The Use of Models n Models: simplified abstractions of reality. It is impossible to describe every detail. n Parsimony: select the most impt. features; omit the relatively unimportant features. n Everyone uses models: engineers, repairers, dressmakers, architects, mapmakers. n Purposes of a model: –1) Explain 2) Predict n Two possible competing models of future: –1) Basic pessimist 2) Basic optimist

Is This a Good Model of the U.S.?

n It does not show how to find: –McDonald’s –libraries –bowling alleys –baseball stadiums n It does show basic physical relation of each state to each other n Conclusion: Different models are needed for different purposes. Models are never “real.”

The Basic Pessimist Model n Limits to Growth, D.H. Meadows et al. (1972); Beyond The Limits (1992) –argued that humanity would soon exhaust natural resources & die in misery of polluted environment –large computer model based on feedback loops n Conclusions of model: –1) in <100 years society will run out of resources; precipitous collapse of economic system; massive unemployment, decreased food production, death rate increases, population decreases

The Basic Pessimist Model (cont.) n Conclusions of model: –no smooth transition; overshoot and collapse –2) Partial solutions will not work; even if resource base is doubled, collapse will still occur due to pollution –3) overshoot and collapse can be avoided only if we limit population and pollution and stop economic growth.

Dangers of Prognostication n Many “experts” have made bad predictions n U.S. Geological Survey in 1920 reported that only 7 billion barrels of petroleum remained to be recovered and would be exhausted by But by 1934, an additional 12 billion barrels were discovered. n Paul Ehrlich (“Population Bomb”) bet Julian Simon (economist) in 1980 that five resource prices (total value of $1,000)would increase by 1990, but value fell to <$500!!! (See Example 9.2, “The Bet”)

The Nature of the Basic Pessimistic Model n dominant characteristic: exponential growth with fixed limits on resources n Suppose current reserves of a resource are 100 times current annual use –if consumption is not growing, resource will last 100 years –if consumption is growing at 2% per year, reserves will be exhausted in 55 years –if consumption is growing at 10% per year, reserves will be exhausted in only 24 years

Exponential Growth n A + A(1+g) 1 + A(1+g) A(1+g) n = 100A n A[(1-(1+g) n+1 )/(1-(1+g))]= 100A ( see proof on next page) n (1-(1+g) n+1 ) = -100g n (1+g) n+1 = g n (n+1)ln(1+g) = ln ( g) n n = ln ( g)/ ln(1+g) - 1 n e.g. let g = 2%, then # of yrs until exhaustion : n n = ln (1 +2)/ln(1.02) -1 = years n e.g. if g = 10%, n = 24 years

Exponential Growth n (1)Y = A + Ac 1 + Ac Ac n n multiply first equation by c n (2) cY = Ac + Ac 2 + Ac Ac n+1 n subtract (2) from (1) n Y - cY = A - Ac n+1 n Y(1-c) = A(1 - c n+1 ) n Y = A(1 - c n+1 )/(1-c) n now let c = 1+g in the earlier problem n Y = A(1-(1+g) n+1 )/(1-(1+g))=A(1-(1+g) n+1 )/-g)

The Basic Optimist Model n Herman Kahn et al. (1976): The Next 200 Years: A Scenario for America and the World n Basic conclusion: 200 years from now humans will be more numerous, rich, and in control of the forces of nature. n Tampering with the growth process will consign the poorest countries to life of poverty. n Nature of the Model: “Necessity is the mother of invention” –new technologies will make resources more available –food and energy will become more abundant

The Basic Optimist Model n Julian Simon, the late well known population economist, The Ultimate Resource (1981) –As the population has increased, standards of living have increased. –As incomes have increased, the environment has become cleaner. –A modified version of this hypothesis is known as the Environmental Kuznets Curve. As per capita income increases, pollution first increases, reaches a maximum, than declines. It has an inverted U-shape. We will discuss this more later.

Ecological Economics vs. Environmental Economics n Some similarities, some differences n Environmental economics: based on standard paradigm of neoclassical economics which emphasizes maximizing human welfare and using economic incentives to modify destructive human behavior n Ecological economics: uses a variety of methods, including neoclassical economics

The Road Ahead n natural sciences relegate humans to trivial role n economic models recognize that humans react to changes in the costs and benefits of using natural resources n direct solutions often exacerbate the problem –simple solutions of the government often fail for predictable reasons –e.g. rent controls reduce the supply of housing –e.g. natural gas price controls reduce supply –Bottom line: CORRECT government solutions are needed

The Issues n 1) Are resources finite? Is growth exponential? If limits do exist, have they been measured correctly? If limits do exist, have they been measured correctly? n 2) How does the economic system respond to scarcities? Does it involve mainly positive feedback loops? Would it intensify or ameliorate any initial scarcities? n 3) What is role of political system? Is gov’t intervention benign or exacerbating?

The Issues (cont.) n 4) Can the economic and political situations respond to uncertainty in reasonable ways? n 5) How do we alleviate current poverty without harming future generations? Is sustainable development possible? Can short-term and long-term goals be harmonized?

The End