Scarcity without Prices

11 August 2006 at 1:35 pm Dick Langlois Leave a comment

| Richard Langlois |

Yesterday’s New York Times carried an op-ed by Stephen L. Sass, a professor of materials science at Cornell. Writing in the context of high oil prices, Sass makes the point that scarcity of materials has long driven humans to find and make use of alternative materials. He argues that a scarcity of tin led denizens of the Bronze Age to figure out how to smelt iron, just as a scarcity of charcoal impelled the British to figure out how to use coal to make steel. I read the piece eagerly, thinking I might use it in my upcoming introductory economics course — until I got to the last paragraph. Here Sass draws the implication that we need a Manhattan Project to develop alternatives to oil.

Needless to say, this is wrong on so many different levels. Economists who teach introductory courses will notice immediately that, apart from the initial reference to high oil prices, the article treats scarcity as an absolute rather than a relative concept, and fails to see that prices are the measure of scarcity and the means by which information about scarcity gets transmitted. (You can see that I’m warming up for my lectures in the fall.) But the conclusion is just as wrong from the more sophisticated perspectives of economic historians and of students of innovation policy. Gavin Wright at Stanford, along with a graduate student called Jesse Czelusta, has argued that resource abundance is entirely a matter of prices and not at all a matter of absolute resource endowments. Resource-based industries have always been driven by relative prices, not by “scarcity” in a purely technological sense. (Czelusta even has a paper called “The Historical Non-Existence of Resource Endowments.”) And what of the Manhattan Project? Students of innovation policy like Dick Nelson point out that a government-funded project to create something the govenment itself will use and knows something about (like a bomb) — and which has to meet no tests of profitability — is quite a different matter from a project to develop something the government thinks the economy will want . The track record for projects of the latter kind is of course dismal. To think about scarcity without prices, and to call for a Manhattan Project, probably both reflect what Hayek called “the engineering frame of mind.”

On the other hand, I’m not sure I would have disagreed with a call for a Mankiw-style oil tax. Even believers in the market think that national defense might be an appropriate role for government. And there is arguably a foreign-policy externality to shipping boatloads of oil revenues to places like Iran, Venezuela, and Nigeria.