This is going to be a bit of a long post, so let me get quickly to the heart of my thesis. The idea I want to put forward and test is the idea that, from a resource use and allocation standpoint, every natural resource price and therefore every derived commodity price is wildly inaccurate or wrong.

This idea is supported by three arguments. First, as Karl Polanyi points out, natural resources (land) as a factor of production can only be priced as if it were a commodity, when in fact it is not a commodity. Second, costs and values associated with resource extraction are based on the idea of opportunity cost, that is the cost for the next best single use for the resource. Finally, both upstream and downstream costs are externalized and not reflected in the resource price.

Since natural resources such as fossil fuels, metals, water, timber and food drive much of the pricing in the economy, if their prices are wrong, then all prices everywhere are wrong.

The consequence of this basic error, if it is true, explains a number of phenomena, such as Matt Simmons’s assertion that even at $100 a barrel, crude oil is massively underpriced. But I will save that for a later post.

My purpose here is to float an idea and hold it up to see how resilient it is. I will admit that it is only partially formed and not well researched at this point.

Legend has it that Margaret Thatcher, in her ascendancy to No. 10 Downing Street, held up a copy of Hayek’s Road to Serfdom and stated categorically, “this is what we believe.” She’s also quoted as having famously said, “there is no alternative.”This second quote is all Thatcher, and not supported by Hayek, at least in the Road to Serfdom. There he asserts that, due to incorrect, inadequate or untimely information, centralized planning is relatively less adept at allocating resources than the price mechanisms in theoretically open markets. Although imperfect, the price mechanism is the best we have at the time of writing (1947). This is not to say that there is no theoretically better alternative to the price mechanism; just that its the best we have in 1947.

Thirty or sixty years later, one could argue whether the information we have from sources other than price mechanisms have improved, or even surpassed the price mechanism. One could argue that the theoretically open markets, on which the assertion is based, never have existed and never will. One could also argue that while the argument may hold for pure commodities in flow in the system, it may not hold for limited, finite or multi-functional natural resources, especially those whose use threatens or destroys other resources.

Hayek is an important thinker in the history of ideas behind connectionism, that is the study of behavior of complex, even seeming “intelligent” networked systems. He was also careful to clearly state that he was not a conservative. I’ll leave that argument for another post as well. The problem is that a single thought in a complex line of reasoning has been generalized and elevated to the highest doxa, worldwide, without question. This is similar to those Christians who quote John 3:16 as definitive proof that Jesus was exclusionary and that Christians are therefore a special, chosen people.

Since he understood complex systems, it is likely that Hayek knew better than to think that natural resources could be priced in the same way as produced commodities. However, he does not solve the natural resource riddle, but leaves it as a given. Malthus, of course, argued that fixed and limited arable land would ultimately prove the limiting factor in production and in population. We might in a later post look a little closer at the idea of land as a conceptual convenience. From an ecological standpoint, there may be no such thing as land, and if there is, it is divided very differently from the way it is done in existing market systems.

Polanyi, in The Great Transformation, painstakingly reviews the political history of capitalism, starting with the forcing of labor from land into factory towns with the Enclosure laws in England. These laws were enabled by the new “rational” division of land using straightline surveying. Mollison anecdotally proclaims that straight lines in the landscape indicate disempowered people. The idea is supported and expanded by the work of Marxist geographer David Harvey in Spaces of Global Capital.

The separation of land into parcels is related to the idea that a natural resource has one best use and that the price ought to reflect the lowest best use price possible, rather than the combined use, or even synergistic use within a network of effects of which the resource is a player. This lowest best price is referred to as opportunity cost in classical economics. It means the value of a resource is measured in price as the price-value of the next best use of the resource. This pricing mechanism is wildly inaccurate for natural resources.

As an example, forest provides many, many services such as air and water filtration, soil creation, temperature moderation, down wind rain creation, habitat, windbreak and flood control. If these services were somehow factored into the price of wood, timber clearcut from steep slopes would surely make lumber one of the most expensive commodities in the economy. Sustainable harvest from such a forest would, on the other hand, be extremely price competitive. This fact alone clearly indicates that the price mechanism leads to destruction of resources in this case as opposed to efficient allocation of them.

Carrying this forward we can see that wherever “cheap” timber is used as a cost factor in the price of downstream commodities and products, these prices too are understated. Furthermore, upstream contributors such as sunlight, precipitation, genetic diversity (in the case of the forest) are not included in the price of commoditized natural resources, neither are the downstream externalized costs such as transportation, waste management, maintenance, flooding, health effects and so on. These are all handled by the price mechansim as simple issues of supply and demand, irrespective of the real systems in which they are generated, moved, transformed and recycled.

To sum up, these ideas are only partially thought out and I hope to have your help and constructive criticism in refining them.

This entry was posted on Friday, September 12th, 2008 at 5:05 pm and is filed under Sustainability, Economics, Systems Thinking, Permaculture. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.