The Development of the Extractive Industries

The Development of the Extractive IndustriesAuthor(s): Anthony ScottSource: The Canadian Journal of Economics and Political Science / Revue canadienned'Economique et de Science politique, Vol. 28, No. 1 (Feb., 1962), pp. 70-87Published by: Wiley on behalf of Canadian Economics AssociationStable URL: http://www.jstor.org/stable/139264 .

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THE DEVELOPMENT OF THE EXTRACTIVE INDUSTRIES*

ANTHONY SCOTT University of British Columbia

I wish to consider how industries exploiting natural resources may be expected to develop. It is not my purpose to consider their entire relation with the economy of which they form a part. Rather, I wish to examine the logic of their own changes in technology and technique in response to stimuli from the rest of the economy. In tracing this development, I shall stress the changing technology itself; the adjustment of property and tenure concepts; some aspects of location and transportation; and the impact of all these changes on industrial and market organization.

As an analytical technique for tracing these changes, I shall make use of a "stages of development" approach. It will be shown that most industries working natural resources may be said to be in one of three, roughly consecutive stages. The precise dating of the transitions between the stages is highly arbitrary, but this defect is unimportant since the chief function of the stages approach in its present context is to bring out the successive impacts on resource exploitation of two outside forces. The first of these is a mechanical, capital-using technology. The second is tlhe application of science to "control" the resource, biological or mineral, in the same sense that agricultural and manufacturing industries have control over their processes.

In the model, stress is laid on the industries that today are still extracting raw materials from nature: fishing, hunting, logging, oil and gas, metals, and water. Agricultural activity also properly belongs with these industries. However, since agriculture has already passed well into the third stage, it is referred to chiefly for purposes of example and comparison. The farmer no longer "hunts" his cattle, nor "collects" wild rice or fruit. Technically speaking, he is in command, in that he is technically able to grow what he likes where and when he likes. The fact that he does not choose to put hothouses at the North Pole or establish dairy farms in city lots reflects economic unprofitability, not technical inability. He may prefer to run more or less known climatic risks to incurring large costs to protect himself against drought or flood. When he is free to make such choices, nature can be said to be "under control." The other extractive industries, it will be argued herein, have not yet "controlled" nature. They can only hunt and collect what nature chooses to produce.

II

This is not the place to attempt to prove that the resource industries have economic characteristics unlike those of the rest of the economy. In many respects they are also unlike one another, but it is maintained here that charac-

*This paper was presented at the annual meeting of the Canadian Political Science Association at Montreal, June 8, 1961. An earlier version of parts of it was presented to the economics seminar of the Department of Political Economy, University of Edinburgh, in January, 1960. Subsequently, I have discussed aspects of it with a departmental seminar

70

Vol. XXVIII, no. 1, Feb., 1962



The Development of the Extractive Industries 71

teristic patterns in their development are common to all the primary industries. These patterns are best seen when each industry's development is arranged into stages. No "historicist" determinism, inevitable sequence, or absence of choice is claimed here, but merely a useful classification of processes and their consequences.l These are set out in Table I.

What is it that impels an industry through the stages? A sufficient cause is the growth of demand in the face of limited known resources. Demand, of course, can grow for a wide variety of reasons: change in tastes, population, income, market area, or teclmology might be involved. It is also true that autonomous changes may originate within the industry itself: there may be accidental discoveries of new raw materials or new recovery methods. (I shall argue later that such internal improvements are usually induced by the pressure of demand.) For simplicity, however, it is assumed that raw material requirements are growing in other parts of the economy, or throughout the world market.

What names should be given to the three stages? A senior American economist is said recently to have responded to questions about his opinion of J. K. Galbraitlh's fame and influence: "We said many of the same things in the thirties, but we couldn't find suclh catchy phrases." My problem here is not only to find catchy titles, but to avoid misleading ones. For the development of the resource industries is not to be identified by successive forms of one characteristic so much as the succeeding domination of different characteristics. Indeed, as I shall show, the third stage may be radically different from the first two, and may even depend upon a different resource! In choosing names, therefore, I have decided to be vaguely evocative rather than precisely indicative.2

The first or primitive stage is one in which man exploits a resource by taking what nature offers with the use of little capital or energy beside manpower. Weapons and hand tools would, of course, be necessary. But man's role is to collect minerals and vegetables; to hunt animals and fish.

The second or capital-intensive stage is one in which man has set up specialized industries, using great amounts of capital and energy, to collect or to hunt natural products. In most respects the technology is merely a more sophisticated, roundabout version of that used in the first stage.

In the third or controlled stage, man no longer merely collects or hunts. Having mastered nature, he is largely in control of his natural environment. He uses a technology to suit what nature has provided. He applies the cheapest technology to some abundant resource in order to obtain a particular consumer good or service.

In the discussion of each of these stages, I shall begin with the leading

at the University of British Columbia, with members of the Department of Applied Eco- nomics, Cambridge, and with Messrs. Peter Bauer and G. F. McGuigan. I have received substantial comments from Messrs. Basil Yamey and J. D. Pattison.

'See Walter Eucken, The Foundations of Economics (London, 19500), 64-102; Karl Popper, "The Poverty of Historicism," Economica, XII, 1945, 70; and F. A. Hayek, "Scientism and the Study of Society," a series of articles in Economica, 1941-5, for some criticisms of more general application of the "stages" approach.

2See the paper by Mr. J. H. Adler on the stages of economic development presented to the SSRC-RFF Conference on Natural Resources and Economic Growth, April, 1960, published as Natural Resoturces and Economic Growth (1961).



72 Canadian Journal of Economics and Political Science

technological characteristic. Then I shall suggest other characteristics that have changed and developed at the same time, suggesting that these too can be grouped into the three stages. Among these characteristics are industrial organization, quality control, and legal control. Table I, which is indicative of the matters to be dealt with, may also be useful as a sort of table of contents.

TABLE I

CHARACTERISTICS OF THE THREE STAGES OF EXTRACTIVE INDUSTRY DEVELOPMENT (Roman numerals refer to sections of the text)

First Stage Second Stage Third Stage Characteristic "Primitive" (III) "Capital-intensive" "Controlled"

(IV) (VIII)

Technique: Hand tools (III) Mechanical, powered All technologies, Large uinits powered Labour and power chief Smaller units (IX)

inputs (V) Diverse inputs (X)

Location: Accideiital (III) Intense search, high Under control exploration costs, Mineral: planned folloved by depletion location near markets (V) Biological: growth near

markets (XI)

Inidustrial Small and local Vertically integrated Vertically integrated organization: (III) backward from forward from "land-

market lord" Some oligopoly and com- Differential goods with

petition in staples (VI) monopolistic competition (XI I)

Quality of Haphazard (III) Tenidency to explore for Under control (XII) product: sources of staples with

desirable qualities (V)

Teniure and Law of capture or Exclusive tenure over life Tenure over "life" of property common property of capital goods (VII) resouLrce (XIII)

(IV)

III

In the first or primitive stage, man merely collects what nature provides. He adds himself to those natural forces of erosion that gradually destroy geological formations. He joins the animals in harvesting fruit and vegetables. He emulates the predators in capturing and killing animals and fish. He does not produce, but hunts. Adam Smith calls it "that early and rude state of society which precedes both the accumulation of stock and the appropriation of land," and uses it as a setting for his 'nation of hunters."3 Doubtless, man's earliest economic environment was something like Smith's description, in which he was followed by generations of armchair historians. No rent, no

3Wealth of Nations, ed. E. Cannan (New York, 1937), 47.




profit, no market, no money, no exchange, no division of labour, no accumulation: mankind and economic theory start easily enough.

In the more recent past, peoples have hunted and collected with tools, weapons, and implements of wood, stone, and metal. But even these improvements, important as they may be archaeologically, do not represent a substantially roundabout technique to modern eyes. Neitlher did they provide a means by which energy other than manpower might be put to use.

Men in this stage certainly had little control over their resources. Rough rules of thumb were developed for determining where and when certain plants, fish, and animals might be available. Men might also be able to predict, by surface showings, where minerals or water were to be found; but they did not know why their rules were valid, and they were not able to make products become available by their own actions.

Neither, in this stage, had they modern concepts of property, although there is every reason to believe they had some rules for sharing the catch or discovery. In a few instances, as in some modern fishing and hunting enterprises, anyone could participate. Possession through capture is then nine points of the law. In other instances, certain groups or persons appropriated whole areas for their own use. Such appropriation as existed, therefore, had mainly distributional significance; it did not have any necessary effect on the total yield of the resource.4

The resource may be exploited by specialists, or by the whole tribe; their position as traders is endangered by their inability to deal with qualitative changes in their "resource base." Miners, for example, are plagued by changes in grade of metal, stone, or fuel. Thus, in matters of both quality and quantity they are at the mercy of nature.

Because of the niggardliness of nature, we would expect to find monopolies, as when one man or tribe wins control of a source of water, mineral, food, or fibre. But this may be insecure and monopolies may survive only for the "smarket period." In any case, unless there is some kind of money, notions of cost and monopolistic profit are fairly empty.

But primitive resource industries can also exist within modem economic society. The trades in furs and jewels are good examples. In more recent years the world has seen the great placer gold rushes, in which non-capitalistic producers, highly specialized, have used techniques little different from those of five thousand years earlier. Even today the trapping of fur-bearing animals, the finding of diamonds, inshore and inland fishing, the gathering of berries, wild rubber, cascara, and animals for zoos and laboratories, are fairly common- place, common-property, non-capitalized, hunting or collecting activities, which we may place in our primitive stage.

4This statement requires some modification. If there is no property, then people must attempt to forestall rivals in collecting or hunting. Even at this stage, therefore, property ';rights" allow men to allot their hours and days between activities in a convenient (and efficient) manner. Hence there is an economic advantage in property even when there is no investment and no knowledge of the factors affecting the yield of the resource (i.e., no attempts are made to conserve or manage the resource). There are many examples of first- stage property rights: mining claims, hunters' territories, exclusive fishing rights, and rights to wood in common forests.




IV

In this section I shall discuss the transition to the second stage. Once trade, money, implements, organization, and ideas about property exist, the simple collection of raw materials by hand methods is unlikely to endure for long. With an increase in demand, the way is clear for the adoption of substantially roundabout, fixed-capital methods.

Among the many reasons for any possible delay of the advent of the second stage is the purely economic one that the optimum technology may be labour- intensive. If the material is abundant and easy to extract, and if demand is small, hand methods may be rationally used. On the other hand, if the material is becoming depleted, low-grade, or remote, incentives may exist to hasten the adoption of fixed plant and equipment. There are obviously many possible degrees of capital intensity, and particular industries may build up to their full equipment, inventories, and auxiliary transportation services very slowly.

Once demand has increased beyond the capacity of primitive methods, capital and energy-using techniques may most easily be introduced by intro- ducing inventions from other parts of the economy. The power-saw in logging is a good recent example. Alternatively, an invention may be "induced," as the steam engine was invented for mine drainage, or the net for fishing. Finally, there may be "autonomous" inventions, but it is difficult to vouch for examples in the resource industries. Most new techniques whose history is known were urgently desired and sought for. Hence the main stimulus was demand or price. Price may rise not only because demand increases but also because known supplies peter out. In either case the resource suppliers are impelled to change their ways of operation; the resource industry becomes highly capitalized and moves into the second stage.

V

Resource industries that are in the second stage are capital-intensive. Im- pelled by the pressure of demand to multiply their rates of extraction, they respond by applying new techniques, bulk transportation methods, mass exploration devices, and, above all, large amounts of fixed capital.5

If we search for a single explanation for this dependence on fixed capital, we find it in the response to demand by a mechanical technology. I use the

5Capital-output ratios, derived from national wealth estimates, usually show tlat the "resource industries" (metals, petroleum, coal, forestry, and water power) have ratios higher than other sectors, although, admittedly, estimation of these ratios is at best a ten- dentious business.

We may also consult the work of Leontief and his associates on American incremental capital-output ratios. Elsewhere I have calculated from Grosse's 1939 estimates that the ratio for the resource industries' sector was 2.1, exceeded only by the 2.6 requirement of the transport, storage, and communications sector. That other writers have noted this high ratio is shown by its use in their comments on Leontief's scarce-factor paradox. See: Raymond Goldsmith and Christopher Saunders, eds., Income and Wealth, Series VIII (London, 1960), passim; Wim. C. Hood and Anthony Scott, Output, Labour and Capital in the Canadian Economy (Ottawa, 1957), 289-96, based on R. N. Grosse, Appendix I in WV. Leontief, ed., Studies in the Structure of the American Economy (New York, 1953); and Daniel Creamer, Sergei P. Dobrovolsky, and Israel Borenstein, Capital in Manufacturing and Mining: Its Formation and Financing (Princeton, 1961).



The Development of the Extractive industries 75

word mechanical advisedly, in the sense stressed by Usher in his History of Mechanical Inventions. "At the lower levels, mechanical invention involves little more than some improvement in the skills required for the making of simple tools, and as long as invention is essentially empirical, even the development of relatively complex mechanisms does not seem to involve abstract thought or organized scientific knowledge."6 If we take into account the transporting and weight-reduction aspects of the resource industries, the technology does seem quite complex (fish canning, for example, or electro- lytic reduction). But the actual technology of exploitation is unashamedly mechanical, as indeed are often the transport and reduction phases too. Man, having found it impossible to supply a large demand by hand operations, has made machines that work analogously to hand methods. There is little scientific difference between hydraulic mining, dredging, open-cast mining, even drilling, and the primitive techniques which they have supplanted. The same is true of logging and fishing methods. What has changed is the scale. In order to get large amounts of raw materials it is necessary not only to exploit more natural-resource sites but also to work them at a higher rate of extraction per year and at a lower level of natural richness. In modem mining, for example, immense tonnages of waste rock or dirt pass through the works, requiring a high ratio of capital to final output. The lower the grade of raw material, the higher the ratio. A similar statement applies to all the extractive industries. What is important is that the problems of increasing volume and diminishing accessibility have been met by the use of a mechanical technology. There has rarely, it seems to me, been a revolution in what the industries were trying to do. Let us take a few examples.

Newcomen and Watt worked out mechanical pumping methods for coal mines. We are told the steam engine was the basis of an industrial revolution, because those who used it could do new things. But in the mines, the steam- powered pumps merely improved and extended the old workings. Manpower, waterpower, and horsepower had already been applied, and the actual technology of coal extraction was merely altered in scale.7 A really revolutionary technique in the mining of coal would be its underground gasification; this would not merely improve the primitive "break it off and drag it out" approach, but would be a non-mechanical technology. It does not require an engineer to point out that fishing today is merely a mechanical extension of primitive methods. The trawl, the long-line, and the seine net, made of fine new materials and exploited in the deep sea from speedy large vessels, are still the old techniques. Only recently has man begun to wonder whether there is not a more efficient way of getting food from the sea than hunting for fish. The same general statements apply to logging, water supply, and oil drilling (though this is a relatively new industry, and an 'ancient" technology scarcely existed).

In the second stage resource industries remain collectors or hunters, as they

6A. P. Usher, A History of Mechanical Inventions (revised ed., Harvard, 1954), 5-6. See also Charles Singer et al., A History of Technology (London, 1958), II, chapters on primary industries.

7See J. U. Nef, The Rise of the British Coal Industry (London, 1932), I, 350-80.




were in the first stage, but the increase in scale has replaced man with a machine. It has also replaced his strength with outside sources of power. For the most part, power has been required at all stages: the transportation aspects of actual extraction, lifting, and the subsequent carrying of large volumes over long distances. Waterpower, steam, gasoline, and electricity-especially the first two-have been essential in this role, and their invention has been intimately associated with the resource industries and with mining in particular. Extraction per se has also required power for drills, saws, nets and lines. And of course bulk-reduction has required immense amounts of mechanical heat and mechanical energy.

Another implication of the second stage is that the resource margin is extended by discovery. While the technology of extraction remains mechanical, the technology of discovery has made use of all the main branches of the natural sciences. In the nineteenth century man started out to look at the surface of the whole world for traces of valuable minerals. Private prospectors and public geological surveys share the task today. The traces were originally surface showings of the underground deposit itself. But today physical, electric, magnetic, and chemical techniques, coupled with an expanding geophysical knowledge, are tending to enable men to predict where minerals may be found. In the search for wood, such power of prediction is obviously less difficult to come by. Apart from vastly improved inventory techniques and some botanical and genetic knowledge useful for the growing of trees, the chief "discoveries" have been in the processing of previously neglected sizes and species of trees and plants and other sources of cellulose. (This tendency may herald a movement into the third stage.) The application of the sciences to the search for fish is chiefly a post-war development. An extraordinary number of ideas from oceanography, meteorology, psychology, and zoology have been combined with older methods of sounding the depths and have apparently vastly increased our knowledge of the seas.

But there are still immense risks involved in discovery, and modern methods are heavily capital-using. It may be theoretically analogous to investment in new manufacturing capacity, but the inability to predict is still so serious that development might almost be described as a random process. Consequently, while there is some capacity to cope with nature's caprice in the quality and quantity of resources, man is still, in the second stage, at the mercy of nature. Only by employing huge amounts of capital and energy in both discovery and extraction can the supply of raw materials be sustained. The hunting and collecting technology of the second-stage resource industries has an average productivity of capital much lower than elsewhere, especially when the risk of failure (of which resource-exploiting firms so often complain) is taken into account.

VI

If the second stage is one that requires capital, energy, and a mechanical technology, xvhat are the implications for its e-conomic structure? One important implication, I believe, is vertical integration backtvard from user to source.




The product is still a "staple": a transportable, more or less standardized, raw material with a fairly high value in relation to its bulk. Consequently, it may be sold on world markets under more or less competitive conditions. Some metals, pulp, lumber, coal, and some fish are sold on open markets to many buyers. Where this is the case, feast-or-famine is the rule for the sellers. Steadily growing demand and depletion of old sources create an incentive to find new sources of supply. Such is the scarcity of sources and the indivisi- bility of investments, however, that a single new discovery may have a pronounced effect on world prices. And b3cause the final market for raw materials is concentrated in the durable goods industries, which usually display an unstable demand, the market is unsettled for this reason as well.

This instability of the open markets for raw materials, which I hope to investigate elsewhere, is often concealed or removed by vertical integration. The using industries have a variety of reasons for acting. First, they may wish to avoid instability of price and uncertainty of supplies, even if the market is fairly competitive. Second, there may be so few using firms that vertical integration to supplies becomes part of the oligopolistic battle. Third, there may be so few supplying firms that vertical integration becomes a rational protection against monopolistic pricing. Fourth, difficulties about the quality of the raw material may be most cheaply dealt with by assuming control over a particular source; this would be particularly true if the market were narrow. Fifth, the using firms may find the supplying industry insufficiently enterpris- ing, or lacking capital for development, or both. Sixth, tax treatment of industry may be biased in favour of the primary link in the chain of production.

For all these reasons, we find that in the highly capitalized extractive industries integration has usually been backward from the user or processor to the primary producer.8 It is true that the final integrated enterprise has the same characteristics whether the impetus to merge came from the front or the rear. Nevertheless, most of the advantages of promoting a merger listed above are advantages for a using firm; it is obvious that an actual or assumed "shortage" of raw materials provides the main motive. When the primary industry is in the secondary, or capitalistic stage, it is still at the mercy of nature. It cannot guarantee supplies into the future to the whole group of users. Consequently, the using industry faces not only unstable prices, but also the risk of either losing available supplies to its competitors or paying scarcity rents to its suppliers. Why not earn the rents itself? With the security of guaranteed supplies, it can safely invest in capital-intensive processing plants, advertising campaigns, product differentiation. and the like. The extra costs (the inefficiencies) of having to take its supplies from its own sources regard- less of opportunities elsewhere, are usually thought to be well worth the advantages of the security they buy. We find, therefore, that petroleum, natural gas, electricity supply, metals, chemicals, wood, and fish all tend to be organized from user back to resource. (It will be noted that some of these

SThere is, of course, a large literature on this whole subject. Some useful recent works are Orris C. Herfindahl, Copper Costs and Prices: 1870-1957 (Baltimore, 1959), esp. chap. 8; 0. WV. Main, Canadian Nickel Industry (Toronto, 1955); J. G. McLean and R. WV. Haigh, Growth of Integrated Oil Companies (New York, 1954).



X8 Canadian Journal of Economics and Political Science

industries are among the so-called natural monopolies-usually public utilities- or oligopolies. They then have all the more incentive to integrate backwards.) Only a very large, purely competitive industry might be free of the motives sketched above. Under pure competition it is never worth while to take steps to prevent a shortage of raw materials. Thus a small contracting firm is not justified in obtaining its own supplies of wood and lumber; and a job printing firm does not make its own paper. But a large newspaper may make its own newsprint.

It follows that in the second stage the large amounts of capital required are frequently invested by the users. The region or the country where the resources are found is merely the host. If it is an underdeveloped country, the resource industry may be an "enclave" of the mature countries where the raw materials are used.9 So fur-trading Canada was an outpost of Europe; Indonesia an enclave of the Texas oil economy; and many forest-products and mining industries are financed, manned, and managed by users from abroad.

VII

In the primitive stage, property rights may be minimal or non-existent. In the second stage of resource development, however, tenure and property concepts must be very strong. The very capital-intensity sketched in the preceding sections is impossible without secure rights in raw materials. A firm will not install a railway, mine, access road, mill, dam, power house, smelter, or pipeline unless it is sure that supplies will be forthcoming over the economic life of the asset. Consequently, with one exception to be discussed below, in the second stage tenure in resources must be guaranteed for at least the life of the capital goods installed to exploit them. Note that the length of tenure is set by the life of the invested assets, not by some "reproduction period" of the resource itself.

The exception mentioned above is the group of industries exploiting fluid resources, such as the fishery or oil industry. Let us compare these with mining or logging. The sawmiller needs tenure so that he need fear no encroachment while removing the logs. He is not prepared to take his chances on a race or a battle in the woods between his loggers and others. Neither will a miner risk his capital in sinking a shaft to ore that may be removed by competing enterprises. But in the fishing and oil industries, the fluidity of the resource has long been thought to make it inherently impossible to guarantee anyone rights to a certain volume of raw material. Hence competing oil wells and fishing boats not only battle against the unpredictability and niggardliness of nature; they also battle against each other. Unless forms of tenure are found that are adapted to this situation where the resource is not "specific" to any user, the industry tends towards an inefficient equilibrium: too much capital; too rapid removal of the resource; and possible depletion of a resource that ought to be perpetual from a social point of view. This inefficiency of common property

9See Hla Myint, "An Interpretation of Economic Backwardness," Oxford Economic Papers, 1954, 153; and Benjamin Higgins, Economic Dcvelopment (New York, 1959), chap. xii, for a review of the literature.




resources, which has been thoroughly investigated elsewhere, is an exception to the rule of extractive industries in the second stage, namely, that tenure tends to be coextensive with the life of the physical assets.

VIII

When we think of today's "extractive industries," we think of those that are still in the second (or even the first) stage. Many primary industries, however, have already moved into the third, mature stage, where nature is controlled by man. Agriculture provides an instructive example. I shall spare the reader my inexpert gloss on the considerable literature in the history of agriculture. It is sufficient to note that from the outset the aim in agriculture was plant and animal husbandry. Man did ncft long confine himself to making machines that would cut more wild grain or kill more wild animals. Instead he brought the wild process under his own control. Increase in demand was met not only by taming resources at the extensive margin, but also by intensifying cultivation, by inventing new techniques, and by breeding new strains of plants and animals. Mechanical technology took man into the second stage of the extractive industries; technology and genetics took him into the third stage in agriculture.

The characteristics of agriculture flow from its mastery or control of nature. In this third stage, fixed capital for transportation, extraction, or bulk-breaking is required in smaller lumps. When natural processes are controlled, transport costs are reduced by placing primary production closer to the user. The costs of "extraction" are likewise reduced by breeding products that are cheap to harvest, and by increasing their grade or density per acre. Finally, bulk- reduction is made less capital-intensive by breeding plants or animals that have little waste matter, and that are as close as possible to the form finally required. In brief, while the extractive industry in its second stage is very capital-intensive, and is organized most efficiently in large, resource-oriented, indivisible establishments, the efficient farms of the third stage may be market- oriented and much smaller in scale.

It is particularly difficult to sum up this contrast in a single generalization, but something like the following seems to be broadly true: in the second stage, the efficient establishment is adjusted to the location and scale in which the resource occurs in nature, but in the third stage the natural resource itself can be made divisible and "mobile" by inventions and discoveries. Conse- quently, man may be able to devise least-cost combinations of "natural" resources, plant, and current inputs which have a wide range of possible sizes and certainly may be smaller than those dictated by the resource indivisibilities of the second stage.'0

The example of agriculture shows two changes that come about as an industry enters the third stage. First, obviously enough, science and technology

'0The opposite view about scale is held by Harrison Brown, The Challenge of Man's Future (New York, 1956), 218. See also Sir George Thomson, The Foreseeable Future (Cambridge, 1955), esp. chap. II. An earlier, useful discussion is F. G. Tryon, et al., "The Mineral Industries," in NV. F. Ogburn et al., Technological Trends and their Social Implica- tions (Washington, 1937), 145-76.




must master nature. Second, current inputs are substituted for fixed capital. I will examine these two changes in turn.

Ix

Whether the factor-saving bias of most inventions is induced (as Hicks was one of the first to suggest) is still a matter of dispute. It is surprising that economists have not made more use of the example of agricultural improvements to throw light on this question."1 This is not the place to develop the analogy fully. But it is clear that technical progress in agriculture has been inspired by a desire to economize on inputs which were clearly becoming dearer to the individual enterprise. Man set out to reduce the huge areas of land that were necessary to yield a certain volume of food or fibre; he set himself to produce crops in convenient locations instead of in remote or difficult places; he set himself to grow goods that were close in form to the ultimate requirements of the market.

The process may be obvious enough for agriculture, but is it typical of the third stage for all resource industries? Can fishing, mining, or waterpower be brought under the same control and their products yielded at will?

Take fishing first, since it presents the least difficulty. There is in principle no insuperable obstacle to domesticating the fishery. The sea is obviously more difficult to control than the land, both legally and technically. But the difficulties are a matter of degree. Certain nations have already set themselves this task. In some parts of the world, land is being converted to fish ponds, and lakes and bays to fish farms. Elsewhere, steps are being taken to bring fisheries under biological, legal, and economic management.'2 I see no reason why demand for food should not eventually push the fishing industry well into the third stage, to take its position beside agriculture.

The mineral industries, however, cannot develop in a parallel manner. The winning of minerals must be brought "under control" in different ways, at least until elements can be synthesized from even more elementary particles than atoms-until, that is, analogies to geological processes can be produced to order in less than geological time. I shall leave to scientific forecasters the discussion of this question, noting only that diamonds and other gems are already being commercially manufactured.

Instead of learning to produce scarce minerals, we now bypass the difficulty by turning to substitutes.'3 The substitutes to which we turn are those that are convenient and-usually-abundant. The synthesis of substitutes for certain chemicals provides good examples, as when saltpetre (for gunpowder) and potash (for fertilizer and ammonia) were largely displaced by the same elements obtained from other minerals or from the atmosphere.

But the market does not eagerly desire a specific element or compound for

"See, however, Joan Robinson, The Accumulation of Capital (London, 1958), VI. 12For example, see Sol Sinclair, Licence Limitation, British Columbia (Ottawa, 1960). laIn connection with the following paragraphs, consult the excellent papers by Earl P.

Stevenson, Frederick T. Moore, and John A. S. Adams in Henry Jarrett, ed., Science and Resources (Baltimore, 1959). See also Thomas B. Nolan, in The Nation Looks at its Resources, Report of the Mid-Century Conference on Resources for the Future (Washington, DC, 1953), 315.




long. Demand for minerals is derived from demand for certain final goods and services. Therefore, certain properties must be obtainable from the raw materials from which such services and types of final goods are produced. Man's hunt for minerals must properly be viewed as a hunt for economical sources of these properties (strength, colour, porosity, conductivity, mag- netism, texture, size, durability, elasticity, flavour, and so on). For example, there is no demand for "tin," but for something to make copper harder or iron corrosion-free. No one substitute for tin has been found, but each of the functions performed by tin can now be performed in other ways. Tin's harden- ing of copper (as in bronze) has been supplanted by the use of other metals. Food need no longer be packed in tin cans. Hence the immense capital investment that society might have been forced to undertake to satisfy its former needs for tin from the minute, low-grade quantities to be found in many parts of the world have been replaced by simpler investments in obtaining other materials. Chief of the replacements for tin is glass, made from apparently unlimited quantities of sand and with little more energy than is needed to bring metallic tin to the user. Lead and mercury are being bypassed in similar fashion; zinc and copper may be next.14

Logging is like mining in the second stage. In the third stage, foresters expect, it will become like agriculture.15 The industry will begin to do what it once did in the eighteenth century-grow trees for the market. For some European forestry was once in the third, controlled stage. Generations of foresters devoted themselves to the science and economics of sylviculture. But the combined influence of the long period of production of timber, the discovery of new trees in the east and west, and the urgent short-run requirements for wood during the Napoleonic wars, led to the mining of cultured forests, and to the steady frustration of trained foresters ever since. As a world-wide industry, forestry has relapsed to logging, an extractive occupation.

It is too easy to say that in the future wood production will return to culti- vated forestry. This may be tlhe outcome -in some favoured areas. But one would expect technology to bypass this expensive way of producing cellulose, just as it has' bypassed the shortage of tin. The pulp and paper industry is already well aware of the potentialities of producing suitable substances from grass, cane, and other plants. In the third stage, logging may scarcely exist.

14This sketch of the manner in which the mineral industries might be brought under control is quite consistent with the viewv taken by Harrison Brown and others. These latter- day Malthusians have examined the ability of natural resources to sustain the expected population of the coming centuries. They too have emphasized the functions performed by minerals rather than the minerals themselves (for example, in their discussion of the possibility of a shortage of "hard" minerals, or of fuels). They have also taken some care to extrapolate technology into the future (instead of, as frequently happens, assuming that only population will increase). It is interesting that, as engineers and scientists, they expect that although the reaction of the mineral industries to increased demand will be something like the "third stage" of my scheme, this reaction will be in vain: it will not succeed in supplying enough energy and raw material for the population increase. It certainly is not inconsistent with the "stages of development" approach to argue thus. Bringing nature under control is no auarantee that she will be infinitely bountiful. Personally, I am more optimistic than these writers, but I have no special competence to defend this attitude (see Harrison Brown, Challenge of Man's Futtire, chap. vi).

'5See, for example, Egon Glesinger, The Coming Age of Wood (New York, 1950).



82 Canadian Joturnal of Economics and Political Science

x

The second aspect of a movement into the third stage is the substitution of other inputs for fixed capital. As an industry settles down to produce from abundant materials in the earth the final products that are needed, trade with the resource industries will no longer be a "one-way street." In the second stage, these industries bought only capital goods and energy supplies from other industries. (On an input-output table, an extractive industry has very few entries in its columns. It is a buyer only of energy, lubricants, and transportation services. Of course, the larger complex of primary industries, from land to refinery or mill, is a large purchaser of supplies. But even this linkage is weaker than that of secondary manufacturing. It is, I believe, a corollary of the capital intensity of the second stage that the input of "other supplies" should be relatively minor.) In the third stage the resource industries make heavy demands on other industries. Even as agriculture needs feeds and fertilizers, so the third-stage extractive enterprises require not only energy and capital goods but also chemicals, solvents, containers, and other supplies drawn from the entire gamut of industrial production. Consequently we should expect that the national input-output table will fill out; the resource industries will have many linkages backward as well as forward in supplying the specific needs of consuming industries and so will acquire large indirect as well as direct labour and capital requirements.

In my opinion, the ratio of fixed capital to output of these industries will decline, partly because of the substitution of current inputs and partly because, with locations closer to the market, the transportation aspect of the transport-extraction-bulk-reduction task of these industries will be reduced (or so I argue in the next section). However, it must be recognized that abundant low-grade resources will present special problems. Among these are the necessity of dealing with huge amounts of waste to obtain concentrations of the desired final material, and the possibility of obtaining several final materials at the same time. These problems may well be most easily solved in particular instances by very capital-intensive installations near the site of the abundant resources. (The problems of winning oil from shale suggest the difficulties.) In such instances, the increased use of supplies from other industries may fail to reduce capital-output ratios much below their second stage level.

XI

The consequences of moving into the third stage depend, of course, upon the nature of the technological changes that have occurred. In general, the consequences that I will sketch below are analogous to the changes that have come about in agriculture and in the manufacturing industries. But there are differences as well.

First, we should expect that extractive industries would no longer be the mainstay of less developed countries. Using industries consent to the high transportation costs of hauling fibres and minerals from remote economies only because they have no convenient substitutes closer to the market. But




if nature is to be brought under control, why should Europe, Japan, or North America bring their supplies from afar? Since it is the users who are doing the research today, we can be sure that the bias of induced inventions will be in the direction of saving on transportation costs, towards discoveries that will wring the substances users need from their own abundant rocks, soils or waters. Just as cement, bricks, and most other building materials are now usually locally produced, so it can be expected that the future values of many substances will be so low as to preclude shipment from a distance. Of course, whether a material is imported or made locally depends not only upon technology but also upon costs. Remote countries that have high-grade deposits may continue to earn a rent over their transportation cost to market; but low-grade deposits will tend to disappear below the margin.

This technological advance may therefore have two effects on underdeveloped countries. Their chance of breaking into world markets on the strength of some middle-grade resource is likely to be lessened. The world will no longer beat a path to any country that can find deposits of metals, fuels, or wood, once substitutes for these materials have been derived from more abundant, and closer, sources. But, on the other hand, underdeveloped countries may not have to depend upon expensive imported raw materials to supply their new industries. They may instead be able to produce from their own natural environment the products and services they wish. The first of these effects may work against the remote, sparsely populated countries. The second may favour the over-populated "resource-hungry" countries.

XII

Another consequence of entry into the third stage will be in the structure of the market. In the second stage, the shortage of raw materials, instability, and the rent to be earned on scarce sites, encouraged the "backward" vertical integration of industry. In the third stage, however, there would be no standardized raw material to integrate. Rather, all the sources of industrial materials would be vying to supply the substances specified by consuming industries. Consider textiles. In the nineteenth century there were a few staple fibres: silk, linen, cotton, and wool. Although there was competition between them, each had its own properties, and was bought for appropriate items of clothing, upholstery, and so forth. Today we have these four still, and a host of other "synthetics." Though there are a few standard types of rayon and nylon, the characteristics of these products may be changed at will. The consumer's purchases may be derived from sheep, cotton, trees, coal, oil, glass, milk, fish, or metal. He now buys by required properties, not by requiring "pure viscose," or "pure polyestyrene." The producer of each elemental raw material is now in competition with all other elemental raw materials as far as the textile market is concerned. The idea of a standardized staple as an article of commerce has disappeared. Paradoxically, the disappearance of a single standard product is leading to a more competitive, rather than a less competitive, market. As might be expected from Chamber- lin's large-group case, the disappearance of the standardized product (staple)




is producing a chain of technically differentiated substitutes. Each seller can now appeal to a wider group of buyers. In this sense, the market is becoming more rather than less competitive. Another example is provided by the in- credible number of sources from which the users of fats and oils may now draw. No longer is each manufacturer limited to a particular raw material (tung oil for paint; castor oil for lubricants; whale oil for lighting; coconut oil for soap; olive oil for cooking, etc.); nearly any animal or vegetable oil can be refined or processed for nearly any final specification.

As more of the resource industries enter the third stage, we may expect this easy substitution and slight differentiation to become the rule. The refinery, smelter, or mill will be faced with stiff competition from products from other sources. There will be little point then in collusive action among the refineries of a particular raw material, except in market battles with the raw material producers themselves.

As in the second stage, one would expect these battles to be resolved by vertical integration. Now, however, the shoe is on the other foot. In the second stage, the buyers feared a shortage of raw material. In the third stage, the owners of natural resources mostly fear monopsonistic exploitation by refiners and the instability of the demand for their products in the face of new substitutes which seem to be constantly appearing. It now appears to be logical to buy their way into firms closer to final consumption in order to assure their raw material a share of the market.

I can cite a few examples of this tendency, though they are not clear evidence of my explanation. However, if we assume that producers of materials now in surplus supply at existing prices are behaving in much the same way as they would if their product were permanently "under control," so that there is a permanent battle for markets, we may learn a great deal. The aluminum companies are now buying their way forward to the production of finished goods, whereas a few years ago steel companies bought their way backward to the iron ore mines (ore still being in short supply). Some new integrated oil companies are being formed by the oil producers, whereas the great integrated companies were formed earlier bv the marketing and transport firms. New pulp and paper mills and fine paper establishments are now frequently being built by the timber holders, whereas a few years ago most of the extensive vertical integration arose from the final users (in rayon, publishing, or chemicals) reaching back to the wood supply.

The factors I am stressing can also be illustrated by the shifting market structure in uranium and titanium mining. The sample is, of course, too small to prove either that most raw material vertical integration is now going forward, or that my reasons are correct. But trade discussions of recent mergers and purchasers are certainly consistent with these views.16

Another way of reducing insecurity in the final market is to invest in applied research. In the nineteenth century laboratories were the responsibility

161t is true that some of the examples in these industries are also consistent with a theory that primary producers have integrated forward to get access to markets which are oligo- polistically supplied. In any given situation, of course, more than one motive may be present. However, I believe these examples are at least free of another possible motive, that the primary producers were threatened with new backward integration by using industries.



The Development of the Extractive Inclusties 85

of the using industries: chemistry, steel, pharmacy, electrical manufacturing, photography, and so on. Part of their task was to find methods bv which the imperfectly suitable, standardized staples from the resource industries might be adapted to the demands of the using industry. Rarely did the raw material industry maintain elaborate research facilities. The shortage of raw materials meant that their users had to 'do the research homework. As industries enter into the third stage, however, the firms that must enlist science are in the raw materials camp. Knowing the products or specifications of the using industries, they must work not only to obtain a product which meets those specifications but also to suggest to old and new users how they might gain from making further use of their materials. Further, they must advise their own industry of specifications in final markets and of ways of exploiting those possibilities. Consequently, we expect to see in the third stage a relative increase in the proportion of applied research undertaken by primary industries, their trade associations, and their govemments. The world's coal industries are already good examples of this tendency, as are the wood-products and fish industries. But they are decades behind agriculture. The best-known work of agricultural laboratories is directed to more efficient farm production. But probably their most valuable work is now in the fields of market testing, packaging, preservation, and consumer research.

The new direction of vertical integration and the new emphasis on primary- products research, therefore, both indicate that while in the second stage capital, marketing, and research might be provided by final users, in the next stage the owner of natural resources is on his own. This too is a disquieting matter for remote, underdeveloped countries. Many such countries are today restless under the influence of foreign, second-stage, resource-exploiting companies. "Foreign ownership," and "enclaves of foreign society" are becoming terms of abuse. But when these industries enter the third stage, the underdeveloped countries may be embarrassed by the absence of these enclaves. Unless they develop their own products, and assist in developing markets, they may find themselves left severely alone.17

One implication of the argument is the increasing need for active govemment exploration of its own territories. As the using firms withdraw from their avid exploration of remote territories, the primary industry must take on the task. In some countries there are no "landowners" except the government itself. Unless it is willing to acquiesce in the bypassing of its potential resources, it will have to assume the surveying and exploration role much more vigorously than it has in the past. It may also have to undertake some initial development. I have made this point elsewhere with particular reference to

I7One application is in the oil industry. Many writers have commented on the new surpluses of oil, and their effects on the willingness of the industry to take on the development of new fields wherever they are found. There are signs that the industry is becoming increasingly unhappy about oil discoveries that are far afield. Only oligopolistic jockeying for strengrth, it seems to me, keeps them seeking to maintain their relative shares of the world's reserves. But this inter-firm jealousy is dyin0, as the industry begins to realize that energy resources are widespread, and that the ability of geological science to spot likely deposits is increasing at least as rapidly as old fields are wasting. Indeed, the chief factor that keeps some companies exploring is the desire to satisfy local governments who are unwilling to allow these firms to market oil unless they also explore for it.




the Canadian provinces, which up to now depended on large American user- dominated firms for the development of their Crown lands.'3

XIV

In section VII the point was made that in the second stage the tenure of the resource site must be sufficient to cover the useful life of the invested capital asset. In the third stage, the industry has nature under control. By processes analogous to those of agriculture, we may expect the forestry and fishing industries to grow wood (or cellulose) and fish, rather than merely to collect them; and we may expect mineral industries to settle down to the synthesis of "substances with desirable properties" near the sites of abundant materials. It follows that the investment of a resource industry in the third stage will be embodied as much in the resource itself as in the capital goods used to work it.

It follows further that third-stage resource tenure must be similar to that in agriculture: at least as long as is required to amortize all improvements, including those which are embodied in fish, trees, or beds of minerals. In many cases we would expect that the present short-term timber or mineral leases would be far too short for this kind of operation. We should therefore expect the present tendency to give timber users longer-term tenure to be continued, and similar tendencies to appear in fishing and in mining.

Indeed, I cannot see that the present common-property resources (fisheries, oilfields, water) can enter the third stage unless their tenure is changed to bring their exploitation under single management. In some places this change might take the form of sole ownership; elsewhere, unitization, sale of permits, or even taxes might serve the purpose. This matter has been dealt with extensively in the fisheries-economics literature, and needs no summary here.'9

In the mineral industries, because of the shift from scarce, remote, capital- intensive exploitation to the processing of abundant raw materials there may be no new demands for property similar to those in the biological resource industries. If, for example, it became feasible and economic to process common granite or sea-water, their abundance may lead to less fuss about tenure and property than was the case in the second stage. In the biological resources, third-stage industry will have wealth tied up in the living population of plants or animals. But the ubiquity of gravel and sea-water may cause their pro- cessors to return to the casual attitudes of the days when rights in common land and riparian rights in water gave protection enough.

XV

Our "stages," though they may not be fully applicable to all resource industries nor distinct phases in any one industry, attempt to convey some

18I have discussed these applications of the problems of stage three in "Policy for Crude Oil," this JOURNAL, May, 1961, and in "Government Policy and the Public Lands," in R. M. Clark, ed., Canadian Issues: Essays in Honour of Henry Angus (Toronto, 1961), 166-8.

'9See the forthcoming Proceedings of the FAO Expert Mleeting on the Economic Effects of Fishery Regulation, Ottawa, 1961, where the management of six different types of fishery is discussed.




sense of development, of realization of potentialities, in modern primary industries. The following points are p'articularly worthy of emphasis:

1. The first stage comes first, but the second and third are not necessarily consecutive. It is quite possible to imagine the utilization of resources moving directly to the full control of the third stage. Similarly, it is possible to imagine society's losing control of a resource, and its slipping "back" into the second stage-a useful way of envisioning man's struggle to obtain adequate supplies of water.

2. Underdeveloped and remote regions have a stake in the perpetuation of the second stage. Otherwise, they are apt to slip into a small-scale, more or less self-sufficient, but inefficient third stage-just as their agriculture is in the third stage of development, but uses local manpower and capital in a backward way.

3. Property concepts fit well with the stages. In the first stage, property is economically necessary only for the efficient allocation of labour, and the distribution of the product. Frequently, it scarcely exists at all. In the second stage, property rights are necessary to justify and protect heavy fixed investment. In the third stage, they are necessary to protect investments embodied in the resource itself. (If the resource is abundant, property concepts may be less important than in the second stage.)

4. Vertical integration back to the resource, and the concept of the standardized staple, seem to belong chiefly to the second stage. Vertical integration forward towards the consumer, and the concept of specified substance, seem to belong to the third stage.



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The Development of the Extractive Industries