Conservation and Capital Theory: RejoinderAuthor(s): Anthony ScottSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 22, No. 1 (Feb., 1956), pp. 99-101Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/138273 .

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Notes and Memoranda Notes and Memoranda

asset holdings and cannot do so through the capital market. The desire of farmers in western Canada to have more machinery or more immediate con- sumption may, for example, have resulted in a tendency to exhaust the fertility of the soil because of the difficulty of obtaining unlimited credit at the going rate of interest. It is difficult to see how this type of imperfection of the capital market can be overcome in the case of the small owner.2 It may, however, be argued that capital rationing does not afflict the large enter- prise, so that where over-exploitation does occur for the above reason, large companies will appear which will profit by the difficulties of small ones and redress the balance of resource use.3 This eventuality need not, however, occur, and for two reasons. First of all, it may be that the resource can only be administered efficiently on a small scale. And, secondly, the fact that some are

over-exploiting resources may force the price of the products of these resources down below the level at which normal profits can be earned on the current

operations of an enterprise practising suitable policies of conservation. Such an enterprise will, of course, be able to make a profit in the future by selling its resources at an augmented price. But it may, in practice, be difficult to obtain capital for a project which involves the exchange of continuous losses in the present for an uncertain gain, no matter how great, in the future.4

2Professor Scott has indeed admitted the possibility that imperfections of the capital market might provide an opportunity for useful government action. But he restricts himself to imperfections which show themselves in higher interest rates rather than capital rationing, and is led to conclude that government action should be restricted to increasing the perfection of the capital market. It appears, on the other hand, that capital rationing is a necessary rather than an artificial characteristic of the market for the provision of capital to small entrepreneurs, and the amelioration of its effects presumably requires more direct action.

3External diseconomies of local depletion of resources may reinforce the necessity that conservation be undertaken on a large scale if at all.

4These cases are not exhaustive. There remain other areas in which collective action is the only alternative to no action at all. It is important to notice, too, that Professor Scott's argument implicitly assumes (as does my own) that resources are indifferent between uses, and that changes in the distribution of income between living members of society are irrelevant. Those who reject these assumptions will find his conclusion un- palatable.

CONSERVATION AND CAPITAL THEORY: REJOINDER

ANTHONY SCOTT Ottawa

I feel that the labours of my two generous critics might have been reduced if I had enlarged on matters which I dismissed, perhaps rather summarily, with a sentence of recognition, or assumed away without discussion. My paper had, I agree, a rather negative emphasis, and I am glad that Mr. Wolfe and Mr.

Goundrey have sprung to the defence of the conservationist. In particular, it is important to recognize that, where there are extra social costs in the use of natural resources, where there is inappropriate tenure, or where the govern- ment of a region believes that the survival of that region depends upon re-

placing a particular resource, there is nothing in economic theory which would

asset holdings and cannot do so through the capital market. The desire of farmers in western Canada to have more machinery or more immediate con- sumption may, for example, have resulted in a tendency to exhaust the fertility of the soil because of the difficulty of obtaining unlimited credit at the going rate of interest. It is difficult to see how this type of imperfection of the capital market can be overcome in the case of the small owner.2 It may, however, be argued that capital rationing does not afflict the large enter- prise, so that where over-exploitation does occur for the above reason, large companies will appear which will profit by the difficulties of small ones and redress the balance of resource use.3 This eventuality need not, however, occur, and for two reasons. First of all, it may be that the resource can only be administered efficiently on a small scale. And, secondly, the fact that some are

over-exploiting resources may force the price of the products of these resources down below the level at which normal profits can be earned on the current

operations of an enterprise practising suitable policies of conservation. Such an enterprise will, of course, be able to make a profit in the future by selling its resources at an augmented price. But it may, in practice, be difficult to obtain capital for a project which involves the exchange of continuous losses in the present for an uncertain gain, no matter how great, in the future.4

2Professor Scott has indeed admitted the possibility that imperfections of the capital market might provide an opportunity for useful government action. But he restricts himself to imperfections which show themselves in higher interest rates rather than capital rationing, and is led to conclude that government action should be restricted to increasing the perfection of the capital market. It appears, on the other hand, that capital rationing is a necessary rather than an artificial characteristic of the market for the provision of capital to small entrepreneurs, and the amelioration of its effects presumably requires more direct action.

3External diseconomies of local depletion of resources may reinforce the necessity that conservation be undertaken on a large scale if at all.

4These cases are not exhaustive. There remain other areas in which collective action is the only alternative to no action at all. It is important to notice, too, that Professor Scott's argument implicitly assumes (as does my own) that resources are indifferent between uses, and that changes in the distribution of income between living members of society are irrelevant. Those who reject these assumptions will find his conclusion un- palatable.

CONSERVATION AND CAPITAL THEORY: REJOINDER

ANTHONY SCOTT Ottawa

I feel that the labours of my two generous critics might have been reduced if I had enlarged on matters which I dismissed, perhaps rather summarily, with a sentence of recognition, or assumed away without discussion. My paper had, I agree, a rather negative emphasis, and I am glad that Mr. Wolfe and Mr.

Goundrey have sprung to the defence of the conservationist. In particular, it is important to recognize that, where there are extra social costs in the use of natural resources, where there is inappropriate tenure, or where the govern- ment of a region believes that the survival of that region depends upon re-

placing a particular resource, there is nothing in economic theory which would

Vol. XXII, no. 1, Feb., 1956 Vol. XXII, no. 1, Feb., 1956

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The Canadian Journal of Economics and Political Science

disapprove the efforts of the community to make the best of the situation by "conserving" the resource. My purpose, as both my critics recognize, was to

go beyond these manifestations of common sense to what I believe is the core of conservationist sentiment: the economic rationality of preserving capital in a natural or original state for future users. I would like to discuss one or two points in greater detail.

1. I agree with Mr. Wolfe that unless a resource is "monopolized"-I think we should say that unless it is in "sole ownership," or following Marshall, "appropriated"-there will be wasteful use of that resource.1

2. I also agree with Mr. Wolfe's point that the effect on owners' decisions of the illiquidity of certain natural resources may be to destroy them or to cause them to be sold prematurely. The farm woodlot forms a good illustration of the point: it is often sold up for cash at a price far below its present value.2

Forestry specialists agree that imperfect "capital rationing" or unduly high interest rates may be an important cause of this waste, but they also suggest that owners' ignorance of opportunities in the lumber market may be just as

important. Owners do not realize that they have in their trees assets on which

they might borrow. Education of both lenders and borrowers would do a great deal to raise the productivity of farm forests.

3. I feel that Mr. Goundrey's distinction between the "government" and the "state" is interesting, but that it is misleading in the present context. When he writes that present generations "squander" resources, or that resources are "used up by other countries," he seems to forget he has already agreed that natural resources are a part-but not all-of the social capital. If, therefore, the natural part of the social capital is depleted, the man-made part may be increased. What he calls "squandering" might better be termed "trans- formation."

Further, I would argue that he is incorrect in asserting that the government, as trustee for all the generations that compose the state, should "act as a monopolist" by restricting output. The parallel with monopoly is wholly misleading. The economy, society, the state, the government-somebody must decide on the best form that the social capital must assume. Should it remain as natural resources, or be transformed partly or entirely into capital and con-

sumption goods? The analogy with monopoly simply does not cast light on this

problem of choice. The conservationist is free to accept or reject the price system's solution, which I sketched in my paper; or he may suggest a better one. But he cannot take refuge in merely hoarding capital in its original or natural form, refusing to make any choice. He must face up to the problem of what society wants to achieve. Mr. Goundrey in one place rather mysteriously

1See IH. Scott Gordon, "The Economic Theory of a Common-Property Resource: The Fishery," Journal of Political Economy, April, 1954; and a paper by J. W. Milliman on the economics of ground-water use, which will appear in the Southern Economic Journal. See also my own contributions: "The Fishery: The Objectives of Sole Ownership," Journal of Political Economy, April, 1955; and Natural Resources: The Economics of Conservation (Toronto, 1955).

2See Report of the Ontario Royal Commission on Forestry [Kennedy Report] (Toronto, 1947).

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Notes and Memoranda

suggests that society's end is "maximizing the returns to all generations." If this were so, would it best be done by leaving the natural endowment in its original, unusable, condition?

4. I agree with Mr. Goundrey that it is not unreasonable for the con- servationist to make the same assumption as the investor in a new asset: that

technology will not change so quickly as to make obsolete the product of the asset. But he cannot have it both ways; he then, paradoxically, mentions Shackle's observation that investors commonly hesitate to commit their funds to projects which are in danger of becoming obsolete. All this amounts to, surely, is that investors, working through the price system, are well aware of the danger of technical change to slow-returning investments, and do try to estimate the future uses of things. They perform a social service when they refuse to plunge on things which they feel may soon be outmoded, or could be, at a price. Can the conservationist, explicitly acting on behalf of society, do better than this? Only, I think, in circumstances where there are extra social benefits from investments, the provision of which is not profitable to private owners.

5. I welcome the speculation in Mr. Goundrey's last paragraph about whether or not a good deal of the national income actually arises from dis- investment in natural resources. I have myself argued, with him, that we ought to know as much about depletion as about depreciation. But I cannot see the direct relevance of this point to conservation.

Assume that it was found that 10 per cent of the net national product, as

presently calculated, was actually derived from drawing down our known stock of natural wealth. Would this be cause for alarm? Is there some figure above which we must not go? Depletion, known or unknown, is not repre- hensible in itself.

Further, whether or not new investments are constructed in order to expedite the exhaustion of resources is immaterial. Their owners clearly believe that the resource is more valuable for the output of natural products with the improve- ment than without it. The fact that net investment, as presently measured, mis- states the increment or decrement in aggregate capital, does not justify deploring the tendency to add to this capital machines and buildings which further contribute to the job of depleting natural resources. Nobody deplores adding a fuel pump to a car because it will lead to the using up of the

gasoline; neither should they be concerned that so much of Canadian invest- ment takes the form of mines, mills, and smelters.

6. Professor Hayek, in his Pure Theory of Capital3 and in articles,4 and Hla

Myint, in Theories of Welfare Economics,5 have, on a priori grounds, dealt with the Pigou argument about the irrationality of rational time preference by discussing whether one can conceive of choice between present absolute

utility of a future good and its future "true" utility.

3London, 1941, 216 ff. and 416 ff., esp. 418. 4See especially "Utility Analysis and Interest," Economic Journal, March, 1936, 48. 5London, 1948.

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