natural resources and economic theory

Martin Wolf questions whether it makes sense for theorists to merge natural resources with manufactured capital. This has been the norm ever since neo-classical economics triumphed over classical economics, about a century ago.

In moving from classical to neo-classical economics — the dominant academic school today — economists expunged land — or natural resources [incorporating them into capital]. ….

Yet it would seem to me that this way of thinking by economists is no longer sensible, if it ever was. Land must again be treated as separate from labour and capital.

First, resource scarcity is an increasingly pressing issue. It shows up in concerns over pollution (including global warming), in the discussion of “peak oil” and so forth. The idea that diminishing returns will become a more significant factor in the next century than in the past two seems to me to be compelling, now that modern economic growth has spread across the globe. So we need to return to economic models that incorporate resources, as a matter of course.

Second, in a globalised economy, taxing labour and capital will become increasingly difficult. That leaves land. The Australian government is right to want to extract the full rental value of its mineral resources for the benefit of the Australian people. Similarly, the people of the UK should wish to extract the rental value of London for their own use. The benefits of infrastructure investments that make London more productive would automatically be recouped if land rents were heavily taxed. Meanwhile, the taxation of capital and land [labour!] could be reduced.

Martin Wolf, “Why were resources expunged from neo-classical economics?”, Martin Wolf’s Exchange, 12 July 2010.

Despite the unfortunate typo (“land” instead of “labour”), Martin provides a splendid introduction to an important topic. (The extract above is only a small part of this introduction.)

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