Limits to Growth?

In studying economics, I encountered the “Limits to Growth Theory” (LGT), which offers an alternative perspective to mainstream economic theories dealing with development, growth, and financial behaviour. The theory suggests there are limited resources available and, without recognizing this, serious environmental degradation will occur. Following this logic, at current growth rates, and under current economic models, the planet will face grave problems unless there are changes to the status quo.

LGT is concerning for obvious reasons, however, it has flaws that are easily overlooked. It suggests that human behaviour is static, for instance, as opposed to dynamic. In addition, it assumes that current models cannot account for negative externalities, not to mention a failure to recognize the advent of environmentally friendly technology.

New developments, such as the hybrid vehicle, are an excellent example of how technological development responds to, and fights against, environmental harm. To offset rising fuel costs, for example, firms introduced automobiles that achieve higher mile-per-gallon ratios. Indeed, much of the increase in their popularity is also attributable to the substitution effect, whereby consumers seeks substitutes that save them money and align with their preferences.

In addition, LGT suggests that societies will deplete natural resources if growth continues at current rates. The Club of Rome, who was integral in the development of LGT in the 1970s, argued that society was nearing the end of its oil reserves. Citing “peak oil,” they asserted that declining reserves validated LGT. However, decreases in the supply of oil, combined with a global increase in the demand of oil, gas, and petroleum products, spurred natural resource development in areas that were once uneconomical to develop, such as the Alberta Oil Sands (not to mention that technological innovation made the extraction process more efficient).

The Club of Rome addressed the discovery of new oil reserves in a recent report, stating that, despite flaws in their earlier assumptions, natural resources are ultimately finite. While it is true that resources are finite, there is no shortage of examples where markets responded efficiently. In fact, economists proposed similar theories about copper and iron-ore to no avail. Competition, coupled with property rights, will compel individuals and firms to maximize the use of natural resources. Technological innovation can also bolster this process. In cases where consumers are unwilling to pay higher prices, they will seek substitutes, reducing the demand for petroleum products and stabilizing the supply. Furthermore, the “environmental Kuznet’s curve” hypothesizes a relationship between economic growth and environmental sustainability reinforced through demands for cleaner technologies, institutions that internalize externalities, and consumer willingness to support higher prices in favor of safer environments. This phenomenon is identifiable in developed countries, where the demand for cleaner technology is visible.

Ultimately, LGT merits consideration–everyone wants a clean and liveable environment. Despite this, however, the theory does not seriously challenge current economic growth models. It is true that resource depletion is a real risk, yet, due to technological innovation and the way in which markets respond to scarcity, the economy will continue moving along.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

One thought on “Limits to Growth?

  1. Randy – Have you read The Ultimate Resource by Julian Simon?

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