Why we'll never run out of resources

February 04, 1997|By Julian L. Simon

CHEVY CHASE -- Why did the trading arm of the Japanese firm Sumitomo recently lose more than a billion dollars in its commodities trading operations? Because its copper trader believed that copper prices had to go up eventually.

Why did a recent article in the Wall Street Journal report that, ''Despite Risks, Colleges Dabble in Commodities''? Because the investment managers for Harvard and other universities do not understand that the prices of commodities fall over the long term. On average, they will also fall in the short run and simply cannot be compared with other stock prices.

Why do sophisticated traders, like those at Sumitomo and Harvard, believe that the prices of commodities will rise rather than fall? Because they believe that our economy must eventually use up the fixed stocks of commodities, making them more scarce on the market.

And why do they believe that commodities will grow more scarce? For many people, the idea that resources are finite is at the source of this belief. But the idea of finiteness is a prejudice and it is not supported by available facts.

Incredible as it may seem, the term ''finite'' is downright misleading when applied to natural resources. The mathematical definition of ''finite'' is quite different from a useful economic definition.

For instance, the quantity of services we obtain from copper should not be considered ''economically'' finite because there is no way of counting them appropriately. We should also consider the possibilities of using copper more efficiently, of creating copper or its economic equivalent from other materials, of recycling copper or even obtaining copper from sources beyond planet Earth.

Therefore, a working definition of the total services that we could obtain from copper now or in the future is impossible to construct.

Creating new materials

This is easier to see now than in the past. After centuries of slow progress using the familiar materials of stone, wood and iron, science is attaining an undreamed-of ability to create new materials.

The first auto-engine parts made of silicon and carbon (water-pump seal rings) are being installed in Volkswagens. Engines could soon be made of silicon carbide, cutting weight and emissions in addition to replacing metals.

Palladium instead of platinum can now be used in auto-exhaust emission systems. Ceramics engineering is exploding with new knowledge, putting an end to past generations' worries about running out of metals.

Organic plastics can now be blended with glass to yield a material as strong as concrete, but flexible and much lighter. And a feasible way to make heat-resistant plastics using gallium chloride has been found.

Plastics are now made only from fossil fuels or the oils from plants grown in fields. But researchers have recently found ways to convert agricultural products, like potatoes and corn, into direct sources of plastics by inserting plastic-producing genes into them.

In light of these developments, concern about running out of commodities seems ever less sensible. Just as the number of points in a one-inch line can never be counted, even in principle, the quantity of natural resources that might be available to us, and the quantity of services that they can give us, can never be known.

Julian L. Simon teaches business administration at the University of Maryland. He is the author of ''The Ultimate Resource 2'' (Princeton 1996).

Pub Date: 2/04/97

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