Transcript Economics 1100

Ch. 1 Visions of the Future
Introduction

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 8th and
9th 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
 E.g. fishing, farming
How will Societies Respond?
– Feedback loops
» Positive - secondary effects reinforce basic trend
 Examples: methane gas may warm
atmosphere, which warms permafrost which
releases more methane gas; subprime credit
market in August 2007
» Negative – self limiting
 Examples: Gaia (Greek for Mother Earth)
hypothesis:
The Role of Economics and The Use
of Models
Models: simplified abstractions of reality.
It is impossible to describe every detail.
 Parsimony: select the most impt. features;
omit the relatively unimportant features.
 Everyone uses models: engineers, repairers,
dressmakers, architects, mapmakers.
 Purposes of a model:

– 1) Explain

2) Predict
Two possible competing models of future:
– 1) Basic pessimist 2) Basic optimist
Is This a Good Model of the U.S.?
Is This a Good Model of the U.S.?
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It does not show how to find:
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–
–
–
McDonald’s
libraries
bowling alleys
baseball stadiums
It does show basic physical relation of each
state to each other
 Conclusion: Different models are needed for
different purposes. Models are never “real.”

The Basic Pessimist Model
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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
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.)
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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
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Many “experts” have made bad predictions
U.S. Geological Survey in 1920 reported that only 7
billion barrels of petroleum remained to be recovered
and would be exhausted by 1934. But by 1934, an
additional 12 billion barrels were discovered.
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
dominant characteristic: exponential growth
with fixed limits on resources
 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
A + A(1+g)1 + A(1+g)2 +...+ A(1+g)n = 100A
 A[(1-(1+g)n+1)/(1-(1+g))]= 100A (see proof on

next page)
(1-(1+g)n+1) = -100g
 (1+g)n+1 = 1 + 100g
 (n+1)ln(1+g) = ln (1 + 100g)
 n = ln (1 + 100g)/ ln(1+g) - 1
 e.g. let g = 2%, then # of yrs until exhaustion :
 n = ln (1 +2)/ln(1.02) -1 = 54.48 years
 e.g. if g = 10%, n = 24 years
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Exponential Growth
(1)
Y = A + Ac1 + Ac2 +...+ Acn
 multiply first equation by c
 (2)
cY = Ac + Ac2 + Ac3 +...+ Acn+1
 subtract (2) from (1)
 Y - cY = A - Acn+1
 Y(1-c) = A(1 - cn+1)
 Y = A(1 - cn+1)/(1-c)
 now let c = 1+g in the earlier problem
 Y = A(1-(1+g)n+1)/(1-(1+g))=A(1-(1+g)n+1)/-g)
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The Basic Optimist Model
Herman Kahn et al. (1976): The Next 200 Years:
A Scenario for America and the World
 Basic conclusion: 200 years from now humans
will be more numerous, rich, and in control of
the forces of nature.
 Tampering with the growth process will consign
the poorest countries to life of poverty.
 Nature of the Model: “Necessity is the mother of
invention”
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– new technologies will make resources more available
– food and energy will become more abundant
The Basic Optimist Model
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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
Some similarities, some differences
 Environmental economics: based on standard
paradigm of neoclassical economics which
emphasizes maximizing human welfare and
using economic incentives to modify
destructive human behavior
 Ecological economics: uses a variety of
methods, including neoclassical economics
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The Road Ahead
natural sciences relegate humans to trivial role
 economic models recognize that humans react
to changes in the costs and benefits of using
natural resources
 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
1) Are resources finite? Is growth exponential?
If limits do exist, have they been measured
correctly?
 2) How does the economic system respond to
scarcities? Does it involve mainly positive
feedback loops? Would it intensify or
ameliorate any initial scarcities?
 3) What is role of political system? Is gov’t
intervention benign or exacerbating?

The Issues
(cont.)
4) Can the economic and political situations
respond to uncertainty in reasonable ways?
 5) How do we alleviate current poverty without
harming future generations? Is sustainable
development possible? Can short-term and
long-term goals be harmonized?
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The End