Julian Simon and the Welfare State: Are Libertarians Social Malthusians?

The Libertarian/right are a fickle bunch, on the one hand they tell us that we need not worry about unlimited growth, that the Malthusian theories are incorrect and that we should all read Julian Simon to see why.  However, when it comes to social resources, they become distinctly Malthusian, things like universal healthcare they say, will lead to incredible scarcity, complete with terrifying tales of people dying while waiting in line, absurdly unequal doctor to patient ratios, a worse life for all of us.

But yet, when the countries that have implanted such systems are looked at, it becomes apparent that their tales of doom are not as accurate as they claim.  Perhaps my Libertarian friends need to re-read Julian Simon to see why.

When I first read Simon, I was admittedly quite skeptical, as are most people who do.  For those of you who are unfamiliar with his work, Julian Simon was a Chicago School economist best known for his book “The Ultimate Resource”.  Simon’s fascinating vision is bold, he believes that the Malthusian theories of ever-depleting resources and ever worsening material reality for humanity are wrong.  We will not run out of resources, even as the population increases he says, in fact the long term outlook for commodities should be bearish, that is, the price of things like oil and metals, finite resources, will be lower in the future than it is now.

Crazy, right?  That’s what I thought too, but as I explored his theory more, I realized that Simon may have a point.  The theory goes that as demand increases for a commodity, so will the price, however, rather than fizzle into oblivion, it will reach a point where the cost becomes so high that markets will seek innovations which lead to greater efficiency, or substitutes for the good.  As a result these innovations will decrease the scarcity of the good, and in fact the price will go down eventually.  Essentially the price outlook for all commodities should be one of a giant bell curve, the price rises, reaches a peak, and then innovation and substitution will kick in and the price decreases.  For example, over 100 years ago whales were the primary source of heating oil, they were famously hunted to the point that they were on the verge of extinction, anyone living 150 years ago could reasonably assume that whales would be gone from the earth eventually.  However, there came a point that the price of heating oil was high enough that demand increased for substitution, and eventually a man named Edwin Drake figured out a way to drill for a new kind of heating oil, called “rock oil”.  This proved to be a success, and soon kerosene replaced whale oil as the main source.  Furthermore, the drilling techniques were perfected and kerosene proved to be even cheaper than whale oil.  Soon the hunting of whales for oil ceased to be a viable industry, and today we have more whales than we did 100 years ago. 

Another example is in wood, for centuries wood was the dominant fuel source.  It was used for both household heating and cooking as well as industry like iron smelting.  Nearly all of the forests in North America were chopped down at some point in time, very few virgin forests remain in the northeast.  The amount of wood decreased, erosion caused damage, and it was becoming harder and harder to find cheap wood for fuel.  But in places like the hills of Pennsylvania and West Virginia a new fuel was being discovered: coal.  At first the mining of coal was ineffective as it was cheaper to find wood, but as forests became increasingly scarce, the opportunity cost changed.  Soon mining of coal became more widespread, innovations made it cheaper than wood, and processes such as coking proved it to be superior for industry, this helped to spur the steel industry.  Today we again find more forests than we did 150 years ago. 

The more you understand Simon’s theories the more convincing they become, at the center of it is a deep faith in the ingenuity of humanity.  If the human mind, which Simon called the “ultimate resource” was properly utilized, innovation and responses to increased demand can deal with threats of scarcity, and in fact our society will enjoy further and further abundance and prosperity. 

Libertarians often tout Simon when responding to criticisms of environmental strain and resource scarcity.  And to be fair, the criticisms have some validity, we should still seek to curb harmful activities and not go overboard.  But I agree with many of the Simon fans that a focus should be on innovation and proper use of human resource, rather than austerity.   However the economic liberals become staunch Malthusians when it comes to things like the welfare state or green technology.  In their mind something like universal healthcare will invariably lead to a Malthusian spiral in which we all die.  This kind of Jekyll and Hyde hypocrisy is common among the laissez faire crowd, on the one hand they will tell you that things like the bank bailouts aren’t needed because the market is strong enough to bounce back, yet at the same time they seem to attach an apocalyptic outlook for the slightest of things like Environmental regulations and Social Security.  Very strange indeed.

Libertarians need to stop being so Malthusian and listen to Julian Simon.  Something like Universal Healthcare, if done correctly would not lead to an epic collapse.  If everyone in the country could afford healthcare it would indeed spike demand, however, would it be the end of times?  Of course not, the increase in demand would cause a corresponding incentive for innovation, the obvious job opportunities would lead more people to med school, greater use of creative innovations like use of LPNs and better preventative and screening technologies would occur.  In other words, the healthcare market would expand so the supply meets the demand, and if human ingenuity is used correctly, we may even expect that these innovations would be cheaper than their predecessors, thus healthcare in the long run may actually become progressively cheaper.  This is classic Simonian analysis here.  And of course this is why universal healthcare has not caused doomsday scenarios in the countries that have it.  As long as we do not stomp on opportunity and the freedom for medical providers to innovate and expand, we shouldn’t expect it be bad in the long run at all. 

Once you reach this understanding the world opens up and becomes an exciting place.  Could we create an economy that combines the best of both capitalist and socialist features?  Could the demand boosting aspects of socialized programs be complimented by a capitalist supply side?  I cannot say for sure, but with each day I grow more and more convinced that if the “ultimate resource” of humanity is properly utilized, we should expect to see a better world.  The ingenuity of humanity should never be underestimated.

And a cheaper and universal healthcare system would be utilizing the ultimate resource, the decrease in medical fees would free up capital to be invested in other purposes to help people achieve their goals and dreams.  Things like social security for old age and disability decrease the burden on households to cover those immediate needs. Thus the children of a disabled or elderly person, instead of having higher time preference and having to work quick paying, low skilled jobs to cover immediate expenses for their family members, could be relieved of that burden by a welfare state and instead be able to make long term investments in themselves like education and training.  This would help them utilize their full potential.  Imagine how many potential Einsteins and DaVincis, Beethovens, Cricks and Curies have wasted their lives away working in a farm field or a factory because they were forced to meet immediate expenses to pay for their elderly parents or disabled spouse, or to simply cover basic costs like food and shelter.  Imagine if they had been able to instead afford the long term investments in themselves by becoming educated or pursuing their passions.  Imagine the benefit that would have brought humanity.  Imagine if we could have a world where human capital is not being wasted.  Imagine a world where the ultimate resource is used in the most efficient manner.

I am not a Malthusian, I believe that we can achieve a better world.  Free market capitalism only gets us halfway there, it still does not properly utilize human ingenuity, socialism is also only a halfway point, it does not utilize the innovating power of the market and the incentives of privatization.  We could see a better world.  I challenge all the free marketeers and socialists out there to open their minds, allow themselves to ask “what if?”  The safety net of the government compliments markets if done correctly.  We truly could have a better world.  Open your mind and stop being so Malthusian. 

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