ROBINSON CRUSOE WAS NOT MAINLY A RESOURCE ALLOCATOR Julian L. Simon Economists' contemporary definition of their field is that of Robbins: The study of the allocation of scarce resources among competing uses. And this definition certainly fits some situations. A classic example is the decision-making process of an oil refinery that decides on the basis of daily or hourly prices how much of each barrel of oil will be made into airplane gasoline, automobile gasoline, lubricating oil, and a variety of other products. The allocational algorithm of linear programming perfectly fits the conceptual needs of the situation. The study-of-allocation definition fits perhaps most short- run situations. It also fits some long-run situations, an example of which is the social decision about whether tax moneys should be spent upon a dam, or on a welfare program, or left with the tax-payers. But for other important long-run analyses allocation is not the heart of the matter. And attempting to view all situations through the lens of allocation economics distorts or prevents understanding of the situation. The field of resource economics demonstrates the point, as I hope to show in this brief essay. And resource economics is not a minor exception in the broad field of economics, but rather has a central place. North argues that "the basic tension that has been and remains the center of economic history [is the tension] between population and resources" (1981, p. 13). So if a foucs on allocation economics serves badly in resource economics, there may be strong reason to inquire whether its place in economic analysis should be modified. In a presidential address to the Association of Environmental and Resource Economists, Geoffrey M. Heal defined the field in standard fashion: "It is obvious that our thinking about these issues in the last decade or so has represented a pioneer- ing effort within economics, largely because econo- mists found themselves very short of appropriate models when these concerns emerged. But _i_f_ _e_c_o_n_o_m_i_c_s _r_e_a_l_l_y_ _i_s_ _t_h_e_ _s_t_u_d_y_ _o_f_ _t_h_e_ _a_l_l_o_c_a_t_i_o_n_ _o_f_ _s_c_a_r_c_e_ _r_e- _s_o_u_r_c_e_s_ _a_m_o_n_g_s_t_ _c_o_m_p_e_t_i_n_g_ _u_s_e_s, this paucity is dif- ficult to explain." (l983, p. l, italics added). In the longest run technology production is all-important in the supply of natural resources. But this view of economics badly constrains the study of the production of technology in general, and obscures the process and history of resource creation in particular. And this definition may thereby cause resource economists' assessment of future resource supplies to be overly pessimistic. Robinson Crusoe is the economist's choice example of the resource-allocation process. Crusoe certainly had an economic problem in the sense that the production of goods and services-- mainly from natural resources found in a natural state--was of extreme importance to him. But contrary to the portrayal in elementary economic texts, Crusoe did not primarily occupy himself with allocating scarce resources among various competing means to his ends. To be sure, he did make some important allocation decisions. But most of his thought went into the creation and adaptation of technology. One might agree, yet still say: Yes, but the interests of _e_c_o_n_o-_m_i_s_t_s in Crusoe's activities are with that part of his thought which involves allocation decisions, and the rest of his activities lie in the domain of engineering and natural science. To conclude so, however, is to confirm modern economics in a straitjacket which confines it, to its (and the economy's) great loss. Crusoe set out on his binge of discovery and technical change because he lacked the means of ordinary survival, and because he brought with him a variety of knowledge and of tools; both of these conditions are economic. To understand the connections between these economic conditions and his economic development is a vital area of inquiry, and it is closest to the domain of economics; surely no other discipline studies it. One could probably cram Crusoe's creative thinking into the framework of resource allocation. But if one examines the amount of time he spent deciding whether to devote resources to this or that use, compared to the amount of time he spent pondering _h_o_w he might do something, it will be clear that allocation was a minor activity for him. And the amount of time spent seems to me the appropriate test here of the importance of allocational and other thinking. In comparison, business people spend a large proportion of their time deciding whether employees should work on this or that activity, whether funds in the checking account ls and go to repay a loan or to buy more inventory, and so on; it is therefore reasonable to think of them as primarily allocators. Indeed, a referee for this journal responded to the above paragraph in this fashion : [T]he case of Robinson Crusoe the author indicates that proportionately greater amounts of time were devoted to production than to decision of allocation of scare resources. Similarly, the example of the businessman spending great amounts of time in decision of allocation of scarce resources distorts and ignores accompanying elements. In the case of Robinson Crusoe, time is, indeed, a finite resource. The mere fact that Crusoe devoted more time to production and technology is an allocative decision. It is present in our vernacular phrase of "let's get on with it!" Thus, to decide to "do" rather than "think" about it, is an allocative decision that precedes the action involved in creativity and production. It may be that Crusoe, or any other person, has the ability to evaluate situations quickly, size up conditions and constraints in almost blinding quickness and flash, and then move on to the heart of the problem that may be creativity and production. Such quickness of perception does not mean the individual has not gone through the allocative decision process; we often call such quickness as "intuition," "brilliance," "insight," etc. But it is a mental, allocative process that occurs prior to the individuals taking some action and unleashing creativity and productive capacity. In the case of the businessman making many, prolonged allocative decisions, which the author cites as the obverse of Crusoe, that investment of time may be, in reality, insignificant when compared with the total creative, productive effort it permits and unleashes. Thus, the decision-maker, spending all his time in allocative efforts, removes that effort from dozens or hundreds of others who can then devote full time and effort to production. It is perhaps unfair, therefore, to remove the businessman making formal, allocative decisions with respect to time and other resources that are finite and to consider his efforts as isolated and independent from the creative, productive efforts that flow from his effort. The example, therefore, distorts other realities. Perhaps another way of thinking about the matter will help make the point: If Crusoe were to have been able to have the benefit of another person's thought and knowledge for a day, would Crusoe have preferred that that day be devoted to helping him decide how to allocate his time, or to providing ideas and information about how to obtain materials and develop plans to build a ship? I think it is clear that the creative technical contribution would have been much more valuable to Crusoe than help in deciding how to spend his time. I do not suggest that allocation is not a crucial economic activity. It is indeed the most important activity within an economy or a decision-making situation whose time-horizon is sufficiently short so that technology may be considered to be fixed. But when we stretch out the horizon of interest to include major technological change--which certainly is fundamental in the study of natural resources--analyses within the context of optimization will mislead us. Economics encompasses studies of the conditions of invention and adoption of knowledge under the rubric of endogenous technical change. But even this body of work reveals the confining character of allocation thinking. The bulk of mainstream theorizing about endogenous technical change has concerned the allocation of inventive effort among various possible lines (e.g., Kennedy, l964; Samuelson, l965; and Nordhaus, l969), following Hicks's (l932/l963) analysis of the allocation of effects of technical change between the saving of capital and of labor. Inquiry into the total amount of technology creation does not naturally fit together with allocation thinking because it does not naturally presuppose a fixed quantity of inputs which may be allocated in one fashion or another. There is no obvious quantity to be conserved, and therefore it is difficult to visualize how a price mechanism in the context of general equilibrium regulates the process. Rather, there seems to be some sort of a free lunch, at least as we customarily measure lunch and its constituent elements. Evidence of how resource economics has lost its way -- apparently because of the compelling attraction of allocational thinking -- may be found in the half-century history of Hotelling's Rule. In their fifty-year review of Hotelling's famous 1931 article, Devarajan and Fisher (1981) noted that the entire formal field of resource economics has flowed from that single origin, and continues to flow at an ever-increasing pace. Yet Hotelling's analysis leads to wrong conclusions for all known situations. Consider the situation to which Hotelling first applied his analysis: the owner of a single mine in "free competition", i. e. a mine owner whose sales are assumed to be too small to have an effect upon market price; this is the appropriate assumption in every conceivable case. If the market price is expected to fall or even to remain constant, the owner obviously would have no use for Hotelling's Rule or even for dynamic programming; s/he would sell as much output as possible just as soon as possible, subject only to the qualification of increasing production cost in the short run due to heavier use of facilities. Next, consider a mine owner who has sufficient monopoly power so that his/her sales affect the market price; Saudi Arabia as a whole might be such a case. If price is on a long-term decline which may be expected to continue in the future no matter what the owner's output decisions, then the optimizing decision is to set each year's output independently of future output decisions, as a first approximation. Or as a second approximation, a dynamic program embodying the effects of current sales on future price would yield an optimum set of price decisions for future periods. But in neither case would Hotelling's Rule be appropriate. Now let us briefly review the evidence showing that the long term course of raw materials is indeed downwards. The classical source is Barnett and Morse (1963) together with the series prepared at Resources for the Future which they analysed, covering 1870-1957. Their data, together with my analysis of individual resource prices in the United States from 1800 to 1976 (the period covered by Historical Statistics of the United States) plus scraps of evidence covering various commodities such as copper back to 1800 B. C. show that over the entire span of recorded history, the prices of all exhaustible raw materials (excluding industrial diamonds, for which I have not found data, and also those resources such as gold which are used as stores of value) have been constant or have declined relative to consumer goods. A vivid demonstration of the disastrous outcome of following Hotelling's Rule is given by Anders, Gramm, Maurice, and Smithson (1980, Table 10.2), where they compare the actual prices of various "depletable resources" in 1975 to the prices that would have had to have prevailed if the resources had been bought in 1900 and the buyers had received a reasonable return on their investments (using a wide variety of rates of return). It is very clear that holding stocks of minerals starting in 1900 (or in 1800 or any other year) would have been an atrocious investment under any conceivable assumptions. There has recently been discussion of alternative measures of natural resource scarcity (e. g. Brown and Field, 1978) and Halvorsen and Smith (1984), but no measure proposed alters the basic conclusions concerning the trend in prices. From the standpoint of human welfare as well as economic development, the trend in resource prices relative to the price of the most important good -- human time -- is even more important than relative to consumer goods. And the downward trend in resource prices relative to wages is even more marked than relative to consumer prices, especially in the advanced countries but also in poorer countries, as the graphs show. Resource economists have attempted to make Hotelling's Rule useful by amending it in such fashion that it yields predictions exactly the opposite of its original form. But this ingenious twisting has no obvious benefits other than as contributions to the stock of elegant models, and hence can be left aside for present purposes. The point again is that allocational models are quite inappropriate for many situation where there are used nevertheless, to the great cost of all. Now let's consider an example (after Nef, l977, and Thomas, 1986) of how the process of resource creation takes place, and we to see how it is not illuminated by allocational thinking. England became alarmed, starting in the late l500's and the l600's and peaking in the 1700's, at the impending deforestation of the country for firewood. People feared a scarcity of fuel energy for heating and for the iron industry. This impending shortage led to the development of coal. Then in the mid-l800's Englishmen came to worry about an impending coal crisis. Jevons calculated that a shortgage of coal would bring England's industry to a standstill by l900; he carefully assessed that oil could never make a decisive difference. Triggered by the impending scarcity of coal (and of whale oil, whose story comes next) ingenious profit-minded people developed oil into a more desirable fuel than coal ever was. And now in l987 we find England exporting both coal and oil. Another element in the story: Because of increased demand due to population growth and increased income, the price of whale oil for lamps jumped in the l840's, and the Civil War pushed it even higher, leading to a whale oil "crisis." This provided incentive for enterprising people to discover and produce substitutes. First came oil from rapeseed, olives, linseed, and camphene oil from pine trees. Then inventors learned how to get coal oil from coal, which became a flourishing industry by l859. About then, other ingenious persons produced kerosene from the rock oil that seeped to the surface; the kerosene became a produce so desirable that its price then rose from $.75 a gallon to $2.00. This stimulated enterprises to increase the supply of petroleum, and finally Edwin L. Drake brought in his famous well in Titusville, Pennsylvania. Learning how to refine the oil took a while. But in a few years there were hundreds of small refiners in the U.S., and soon the bottom fell out of the whale oil market, the price falling from $2.50 or more at its peak around l866 to well below a dollar. If one insists on framing all economic activity within the structure of allocational thinking, one conceivably could imagine inventors of coal deciding whether to allocate the afternoon to thinking about the firewood or coal, or business or playing with the children. But that is patent foolishness, in my view. An extreme example of allocational thinking--but one which has had a large impact on public policy as well as upon economic thought--is the notion that energy (as the master resource) is ultimately finite; this view is urged by Georgescu-Roegen (l97l) and Daly (l977), with the support of Samuelson. Those writers will accept that the limit to energy must be at least as large as the sun's 7 billion or so years of future life. But they will then insist on a cosmology of a fixed universe, and work backwards from that assumption to propositions about the allocation of energy and other resources among the next few generations of mankind. I do not here wish to argue about the "ultimate" finiteness of the universe, or about the permanent certainty of a body of relevant physics that has been in existence only a century or so, and that is in controversy even now (Frautschi, l982). The whole issue of energy's finiteness seems to me remarkably irrelevant to our considerations as resource economists. But the self-described "neo-Malthusians" will not agree on that irrelevance; to do so would be to forego the calculus of allocation (and the consequent propositions about conservation which they justify with reference to ultimate values and to God; Daly, l979, pp. 76-77; Georgescu-Roegen, l979, pp. l02-l03). Evaluation of the economic consequences of population growth is one of the topics onto which the interrelated notions of finiteness, conservation, and allocation of scarce means are brought to bear. And it was in grappling with this objection of the neo-Malthusians, specifically founded on the notion of finiteness, that I came most sharply into conflict with allocational thinking. Many welfare functions are possible in the analyses of population growth, which necessarily complicates any discussion of optimization. And throughout the sweep of thousands of years of history, the main long-run benefit of addi- tional people has been the development of resources through the creation of technology (as well as through the creation of non- technical knowledge), and hence allocational economics is particularly misplaced. Swearing off allocational economics need not imply giving up economic analysis in the study of natural resources. Concepts such as price, production cost, cost of R&D, market size, and profit opportunity are crucial in understanding the creation of technology, as Schmookler (l966) and many others have shown. Evolutionary analysis may offer a powerful avenue of research, as several writers have suggested recently. But one way or another, the study of resource economics ought to go beyond Robbins's sort of allocational economics, in order to improve our understanding of the place of resources in the long sweep of human civilization. 87-110 Crusoe 4/25/8 /page 1 /articles/crusoe/[date?] REFERENCES Gerhard Anders, W. Philip Gramm, S. Charles Maurice, and Charles W. Smithson, The Economics of Minteral Extraction (Boulder, Colo: Praeger, 1980). Harold Barnett and Chandler Morse, Scarcity and Growth (Baltimore: Johns Hopkins, 1963).James M. Buchanan, _W_h_a_t_ _S_h_o_u_l_d_ _E_c_o_n_o_m_i_s_t_s_ _D_o_? (Indianapolis: Liberty Press, l979). Herman Daly (ed.), _T_o_w_a_r_d_ _a_ _S_t_e_a_d_y_-_S_t_a_t_e_ _E_c_o_n_o_m_y (San Francisco: W. H. Freeman and Co., l973). Herman E. Daly, _S_t_e_a_d_y_-_S_t_a_t_e_ _E_c_o_n_o_m_i_c_s (San Francisco: Freeman, l977). Steven Frautschi, "Entropy in an Expanding Universe," _S_c_i_e_n_c_e, 2l7, August l3, l982, 593-598. Nicholas Georgescu-Roegen, _T_h_e_ _E_n_t_r_o_p_y_ _L_a_w_ _a_n_d_ _t_h_e_ _E_c_o_n_o_m_i_c_ _P_r_o_c_e_s_s (Harvard University Press, l97l). Nicholas Georgescu-Roegen, "Comments on the Papers by Daly and Stiglitz," in V. Kerry Smith (ed.), _S_c_a_r_c_i_t_y_ _a_n_d_ _G_r_o_w_t_h_ _R_e_v_i_s_i_t_e_d (Baltimore: Johns Hopkins, l979), pp. 95-l05. Geoffrey M. Heal, "President's Message," _A_E_R_E_ _N_e_w_s_l_e_t_t_e_r, Vol. 2, No. 2, July, l982, pp. l, l5. John R. Hicks, _T_h_e_ _T_h_e_o_r_y_ _o_f_ _W_a_g_e_s (London: Macmillan, lst ed. l932, 2nd ed. l963). Charles Kennedy, "Induced Bias in Innovation and the Theory of Distribution," _E_c_o_n_o_m_i_c_ _J_o_u_r_n_a_l, 74, September l964, 54l-547. John V. Nef, "An Early Energy Crisis and Its Consequences," _S_c_i_e_n_t_i_f_i_c _A_m_e_r_i_c_a_n, May, l977, l40-l5l. Douglass North, Structure and Change in Economic History (New York: Norton, 1981). Paul A. Samuelson, "A Theory of Induced Innovation along Kennedy, Weizsacker Lines," _R_e_v_i_e_w_ _o_f_ _E_c_o_n_o_m_i_c_s_ _a_n_d_ _S_t_a_t_i_s_t_i_c_s, 47, l965, 343-356. Jacob Schmookler, _I_n_t_e_r_v_e_n_t_i_o_n_ _a_n_d_ _E_c_o_n_o_m_i_c_ _G_r_o_w_t_h (Cambridge: Harvard UP, l966). Brinley Thomas, "Escaping from Constraints: The Industrial Revolution in a Malthusian Context," in Population and Economy, Roger S. Schofield and E. Anthony Wrigley (eds.), (New York" CUP, 1986). Hayek (somewhere), Buchanan (l979, Chapter 2), and others have already criticized Robbins's allocational definition of economics effectively. But their grounds were somewhat different than mine. Neither Hayek nor Buchanan are centrally interested in the long-run economic conditions of knowledge creation, which I consider to be a topic of fundamental importance for economic analysis. 87-110 Crusoe 4/15/8 article8D/l22A /page 2 /articles/crusoe/[date?]