[permaculture] Economists don't get it

David david at h4c.org
Thu Mar 4 11:57:33 EST 2010


Toby,

On 3/4/2010 8:15 AM, Toby Hemenway wrote:
> I was just sent this excerpt from an interview with Nobel-prize winning economist Milton Friedman in which he says incredibly stupid things.
>    

It seems to me that he is both wearing blinders and acknowledging that 
such is the case. What is passing strange is that he does not appear to 
understand the implication.

He's saying that in terms of economics (he believes) that price is an 
absolute signal of abundance or scarcity. Since the price goes up and 
down, the resource (oil) /cannot/ be scarce, at least not economically. 
This infers-- and I believe this is part of some schools of economic 
theory-- that "the market knows". Everybody knows what's what, and so 
everybody does what makes sense, and so whatever we see in the market is 
therefore sufficient evidence of what actually is the case, because, 
after all, the market knows. (Of course, this has been demonstrated 
repeatedly not to be true, or there would never be bubbles and bursts...)

He defines "capital" strictly in economic terms-- not physical terms, as 
the interviewer does-- and so again he appears to be applying the same 
circular logic. How can we be living on our capital if the price goes up 
and down? Reality be damned: it had just better not get in the way of 
all the lovely theories:

    "You have to separate the economic from the physical point of view."


> **/Ravaioli/****/:/**/ But there are many other environmental problems .../
>
> **Nobel Laureate Friedman:** Of course. Take oil, for example. Everyone
> says it's a limited resource: physically it may be, but economically we
> don't know. Economically there is more oil today than there was a
> hundred years ago. When it was still under the ground and no one knew it
> was there, it wasn't economically available. When resources are really
> limited prices go up, but the price of oil has gone down and down.
> Suppose oil became scarce: the price would go up, and people would start
> using other energy sources. In a proper price system the market can take
> care of the problem.
>
> **/Ravaioli/****/:/**/ But we know that it takes millions of years to
> create an oil well, and we can't reproduce it. Relying on oil means
> living on our capital and not on the interest, which would be the
> sensible course. Don't you agree?/
>
> **Nobel Laureate Friedman:** If we were living on the capital, the
> market price would go up. The price of truly limited resources will rise
> over time. The price of oil has not been rising, so we're not living on
> the capital. When that is no longer true, the price system will give a
> signal and the price of oil will go up. As always happens with a truly
> limited resource.
>
> **/Ravaioli/****/:/**/ Of course the discovery of new oil wells has
> given the illusion of unlimited oil .../
>
> **Nobel Laureate Friedman:** Why an illusion?
>
> **/Ravaioli/****/:/**/ Because we know it's a limited resource./
>
> **Nobel Laureate Friedman:** Excuse me, it's not limited from an
> economic point of view. You have to separate the economic from the
> physical point of view. Many of the mistakes people make come from this.
> Like the stupid projections of the Club of Rome: they used a purely
> physical approach, without taking prices into account. There are many
> different sources of energy, some of which are too expensive to be
> exploited now. But if oil becomes scarce they will be exploited. But the
> market, which is fortunately capable of registering and using widely
> scattered knowledge and information from people all over the world, will
> take account of those changes.
>    


d.
-- 
David William House
"The Complete Biogas Handbook" |www.completebiogas.com|
/Vahid Biogas/, an alternative energy consultancy |www.vahidbiogas.com

|
"Make no search for water.       But find thirst,
And water from the very ground will burst."
(Rumi, a Persian mystic poet, quoted in /Delight of Hearts/, p. 77)

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