Abstract
Outside of economics (and even within), Julian Simon is mostly remembered for his famous bet on resource prices against biologist Paul Ehrlich. The bet is frequently used to illustrate how some environmental scares are exaggerated. In the rare instances when more details are added, the emphasis is always on how the role of innovation in promoting socio-economic progress which, directly or indirectly, solves environmental problems. However, Simon had a rich and complex view of the role of institutions in modulating the pace of socio-economic progress (broadly defined) and the extent of environmental problems. In this paper, I highlight the unappreciated institutional conditions that Simon placed in his work. Institutions that foiled or distorted the market process had, in Simon’s view, the dual effect of reducing living standards and amplifying environmental problems. I show, using the case of climate change, that Simon’s forgotten nuances can help explain modern environmental problems such as climate change. Most notably, it allows a subtle shift from claiming that climate change is anthropogenic (i.e. man-made) to claiming that climate change is “statogenic” (i.e. government-made). This emphasis on government-made pollution can be extended to numerous environmental problems.
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Notes
Simon offered a rematch which Ehrlich declined.
Ehrlich himself cited papers that revisited the bet’s outcome when he stated that “the scientific community has repeatedly warned humanity in the past of its peril and the earlier warnings about the risks of population expansion and the ‘limits to growth’ have increasingly been shown to be on the right track” (Ehrlich and Ehrlich 2013, p. 4).
In the Ultimate Resource, Simon is clear about the adequacy of increasing returns to scale when he stated that he emphasized “the long-run benefits, on balance, of more people” (1996, p. 579). He elaborates on the same when the points to how William Petty had, in 1682, made the same point as Simon Kuznets that more people meant more ideas (1996, p. 372).
Public goods with a zero marginal cost will be cheaper to supply per person in a large market than a small one. However, because of non-rivalry in consumption, the benefits increase linearly with population (see Barzel 1971 for a closely connected argument).
Interestingly, Simon (1989b) made the same argument on a smaller scale in his work on immigration. More immigrants meant that the size of the market in the host country increased. That increase in market size meant greater specialization and increases in marginal productivity. As such, there would be net benefits to natives from immigration.
To highlight the popularity of this view, Simon pointed to how institutions such as the World Bank and the National Academy of Sciences had issued arguments stating that population growth was an obstacle to economic development (arguments which were later recanted) (Simon, 1996, pp. 433 and 579).
A brief digression – this is a valuable insight of Simon that few have taken up. I will note that I have attempted work in this direction in both works of economic history (Arsenault Morin et al. 2015) and environmental history (Desrochers et al. 2021a, b). However, far more exhaustive theoretical and empirical work has been produced by Davis (2008) and Desrochers (see footnote 12). Nevertheless, such works have unfortunately are still ignored by many.
It is worth, however, pointing out that Simon also highlighted ways in which population growth would also improve institutions (Simon 1989) in a way which is consistent with his view of increasing returns to scale (see footnote 3).
An important nuance that Simon made which is also rarely appreciated but better left as a separate paper is that some environmental problems are more important than others at different points in time. That importance is a function of how humans experience the environment. For example, at a low level of income, people rely on burning firewood which generates large particulate matter that lead to lung problems. As incomes increase, pollution from another source (e.g. coal emissions from industrial chimneys) increase as well. However, that new pollution is of limited importance to people who prefer to use the extra income they earn to reduce a costlier (to them) form of pollution (i.e. indoor air pollution). As such, the extra income may serve to buy gas stoves or acquire a connection to electrical utilities in order to phase out the costlier form of population.
Geographer Pierre Desrochers (2009a) documented several historical cases where, in the presence of well-defined property rights, firms had strong incentives to find the least cost solutions to deal with externalities. For example, in Victorian Britain, residues from iron and coal gas production constituted a form of polluting waste. Numerous legal actions were taken against polluters. To internalize the externality produced by the waste, firms developed important by-products from the waste produced from iron and coal gas. Elsewhere, Desrochers provides numerous other examples that follow the same logic (2000; 2004; 2007; 2009b; 2010; Desrochers and Leppälä 2010).
This latter point is known today as dematerialization. As McAfee (2018) points out, in America, the total consumption of metals such as aluminum, nickel, copper, steel and gold has stagnated since the 1970s even though total real GDP increased three-fold. This is evidence of a decoupling. It can also be observed in agricultural production. Even though the quantity of land farmed has globally stagnated since 1961, cereal yields and cereal production have more than kept pace with global population growth (World Development Indicators Database, 2021).
In this regard, Simon has been vindicated. While oceanic fisheries harvest per capita have fallen since the 1960s, seafood consumption per capita has increases. This is because aquaculture went from less than a tenth of the global seafood supply to more than half as it became increasingly productive and cost competitive (Desrochers et al. 2021b, p. 813).
These grounds were, at the time of the writing of the Ultimate Resource, relatively minor in the conversation. Therefore, Simon only dedicated 6 of the 39 chapters of the book on these topics. Climate change received a scant 4 pages in the 734 pages of the Ultimate Resource.
In all his works on environmental issues, Simon rarely expanded on his conception of externalities. However, he did have numerous examples suggesting that he believed that externalities did not exist in a state of nature. Rather, he often hinted (such as in the case of environmental degradation in the Soviet bloc) that he believed that institutions determined the presence (and the magnitude) of externalities. This institutionally-contingent view of externalities in Simon’s work is best seen in topics that were not directly related to environmental issues. For example, in a 1975 paper in Demography, Simon argued that it was unclear whether childrearing had effects external to the family. However, he emphasized that there were “contexts” in which more children would generate positive externalities. At numerous points in the article, these contexts entail the involvement of institutional arrangements to internalize externalities. As this was an early work of Simon and that the literature on institutions and economic performance soared in the 1980 and 1990 s, the relationship between institutional context and externalities is not as well fleshed out as it could. However, it shows that Simon had a conception of externalities that differed from the rest of the literature then in that they depended on the institutional arrangements governing a community.
Simon argued that economists needed to carefully define the time period over which externalities would materialize (Simon 1996, p. 59). Negative externalities for one generation, he added, might be compensated by positive externalities for the next such that the net external effect centered at zero. From this reason, Simon argued that policy remedies to externalities now may generate larger adverse consequences in the long run. One example is provided by Calmette and Péchoux (2007) who point out that environmental policies to reduce air pollution in cities reduces the disutility of pollution to marginal actors which induces more migration to the cities. In this case, the long-run result may be increased pollution.
The most recent numbers provided by the OECD (2021) and Mahdavi et al. (2021) suggest that subsidies have either been stable or have increased slightly since 2009.
One could reasonably retort that many countries also tax consumption of gasoline thereby internalizing some of the externality. However, there are two empirical limitations and one theoretical reply to this retort. First, the countries that subsidize heavily are demographically heavy countries (e.g. China, India, Russia, Nigeria, Brazil) relative to countries that tax heavily (e.g. France, Germany, Sweden, Denmark, Britain, United States). Second, and in relation to the first point, Coady et al. (2019) calculated implicitly the effects of already existing taxes by looking at prices paid by consumers (inclusive of excise taxes) and what the optimal price would be. Then, they compared this figure with the amplitude of subsidies and found that subsidies are larger. In other words, there are net subsidies. The figures they find for the empirical importance of subsidies, 5.4–6.5% of global GDP, can be compared with the empirical importance of taxes to see the same thing. According to a recent OECD report (2021), taxes on energy in the richest countries (which are also the ones levying the most taxes) amount to less than 3% of income per capita. Some country-specific studies such as those that pertain to Canada (a major oil producer) suggest that subsidies are more important than taxes (Stefanski 2016). In other words, the subsidies are empirically greater than the taxes. Third, and most importantly, this retort does not alter my point. Even if there were more taxes than subsidies, one could still say that subsidies are creating more externalities. Phrased differently, this would imply that the needed “socially optimal” tax rate on fossil fuels would be lower without the subsidies than with the subsidies.
Larsen’s predicted level for emissions in 2010 without subsidy elimination was very close to the actual level observed for that year. Assuming that the level is reduced by his proposed reduction goes roughly a tenth of the way to achieve the ambitious 450 ppm scenario.
The policies also tend to be regressive in that it tends to help richer households to a greater extent that poorer ones (Del Granado et al. 2012).
Other studies, such as Fullerton and Kinnaman (1996), point in the same direction.
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Geloso, V. Statogenic climate change? Julian Simon and Institutions. Rev Austrian Econ 35, 343–358 (2022). https://doi.org/10.1007/s11138-022-00581-0
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DOI: https://doi.org/10.1007/s11138-022-00581-0
Keywords
- Julian Simon
- Institutions
- Economic growth
- Environmental Kuznets curve
- Population Growth
- Climate Change
- Statogenic climate change