You may find this of interest, from the Book Unlimited Wealth, Paul Zane Pizler 1991: (Buy the book, it's worth every penny)
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SUPPLY-SIDE ALCHEMY: W=PTn
In which we define the First Law of Alchemy, which explains how technology determines the nature of physical resources; the Second Law of Alchemy, which explains how technology determines the supply of physical resources; and most important of all, the Third Law of Alchemy, which explains what controls the advance of technology--and hence contains the key to wealth.
In the early 1970s, pessimism was the order of the day. The world, it was said, was running out of everything. Unless radical action was taken immediately--action that included massive conservation efforts and a wholesale lowering of Western standards of living--humankind was doomed.
At bottom, this apocalyptically gloomy view of things was probably nothing more than an understandable reaction to the optimism of the previous decade. Nonetheless, it did have a specific genesis: the publication early in 1972 of The Limits to Growth, an enormously influential--and utterly downbeat--study issued by the Club of Rome, a collection of distinguished industrialists, scientists, economists, sociologists, and government officials from twenty-five countries.[1]
The Club of Rome had commissioned the study three years earlier, recruiting a team of seventeen experts--ranging from an Iranian population analyst to a Norwegian pollution specialist--to peer down the road a bit and report back on humankind's economic and environmental prospects. Working first under the direction of futurist Jay Forrester of the Massachusetts Institute of Technology, and then under Forrester's colleague, MIT business professor Dennis Meadows, the experts used some of the most sophisticated computer modeling techniques then available to produce a 197-page report that came to a genuinely shocking conclusion.
What their computer models told them was that with the world's population growing at a rate of about 2 percent a year and industrial output rising by 7 percent annually, the world's physical resources would be exhausted sometime in the next few decades--a calamity, they said, that could wind up wiping out most of humanity before the year 2100.
The study's impact was phenomenal. For as long as anyone could remember, economic growth had been regarded as the solution to all of humankind's woes; now, suddenly, it seemed to be the problem. Thinking big was deemed archaic, if not downright anti-social. The party was over; it was time for people everywhere to pull up their socks and lower their expectations. You might not like it, but what could you do? The Club of Rome wasn't a bunch of anti-social hippies, but an organization of some of the most highly regarded businesspeople, researchers and intellectuals of the day. And their conclusions seemed so scientific. As Time magazine noted: "Meadows is no latter-day Malthus prophesying doom on the basis of intuition: instead he has produced the first vision of the apocalypse ever prepared by a computer."
To be sure, not everyone was persuaded by The Limits to Growth that the sky was falling. There were more than a few skeptics who scoffed at the Club of Rome's cheerless projections as misleading and short-sighted. But most such doubts were washed away the following year when Arab oil producers responded to the 1973 Yom Kippur war in the Middle East first by unilaterally raising prices and then by cutting off deliveries to the West. Though the actual embargo didn't last very long, the price hikes stuck--in the process, establishing the Organization of Petroleum Exporting Countries (OPEC) as a force to be reckoned with. They also marked what at the time seemed to be the end of the era of cheap and abundant energy--an era that most people took to be synonymous with prosperity and growth.
What followed over the next few years seemed to prove the doomsayers right. Between 1973 and 1981, soaring energy prices pitched the United States headlong into its worst recession in four decades. Economic growth sputtered to a halt, unemployment mounted, and inflation soared, seemingly out of control. Long lines became commonplace at gas stations, with frustrated motorists often coming to blows. Electrical brown-outs became a regular feature of urban summers, and with heating oil deliveries uncertain nervous New England homeowners turned down their thermostats in winter.
The future looked grim indeed. Americans, we were told, would have to tighten their belts, garage their cars, turn off their appliances, and generally adjust to lower standards of living. The government even printed up millions of gasoline ration cards. As David Rockefeller observed in 1975, there seemed no getting around the fact that there were now "constraints on the rate of economic growth, constraints that were not apparent in the preceding twenty years."
In short, it looked as if the world we had known--the world of expansion and prosperity, of thinking big and rising expectations--was coming to an end. In its place, a new image came to dominate our thinking: that of the earth as a fragile spaceship with a rapidly declining store of supplies and fuel. And the consensus was that we had better get used to it. "The idea of sitting still until this thing blows over is just a bunch of nonsense," declared the president of Booz, Allen & Hamilton, Inc., one of the nation's largest management-consulting firms, in 1975. "It ain't gonna blow over. You can bet that for the next generation we're going to have to live with the conditions we've seen over the last decade."
But then a strange thing happened. The world didn't come to an end.
* * *
As we approach the final years of the twentieth century, we are coming to grips with an astonishing--and heartening--realization. The Club of Rome scientists and the other environmental pessimists of the 1970s were wrong. The world's supply of physical resources is not decreasing. On the contrary, our effective supply of resources is increasing.
Consider the example of one of our world's most essential and problematic resources--crude oil.
On the eve of the 1973 oil crisis, global oil reserves were figured to be something on the order of 700 billion barrels--enough to last about forty years at then current rates of consumption. If the pessimists were right, over the next fifteen years those reserves should have dwindled to about 500 billion barrels. Well, the pessimists were wrong. In 1987, worldwide oil reserves were estimated at close to 900 billion barrels--nearly 30 percent more than they'd been fifteen years earlier. And that 900 billion barrel figure included only proven reserves; it didn't count the nearly 2,000 billion additional barrels of oil still waiting to be discovered or produced by enhanced recovery methods.
The same is true of most other commodities. In 1970, worldwide natural gas reserves were estimated to total some 1,500 trillion cubic feet. By 1987, that estimate had been revised upward to nearly 4,000 trillion cubic feet. Similarly, global reserves of copper more than doubled (from 279 million to 570 million tons) between 1970 and 1987. Over the same period, silver reserves climbed more than 60 percent (from 6.7 billion to 10.8 billion troy ounces), gold reserves rose by 50 percent (from 1 billion to 1.52 billion troy ounces), and bauxite reserves were up more than 35 percent (from 17 billion to 23 billion metric tons). The list goes on.
As supplies have increased, prices have tumbled. Between 1980 and 1985 alone, prices in the International Monetary Fund's thirty-product commodity index dropped fully 74 percent. Throughout the 1980s, the cost of such raw materials as bauxite, coal, cocoa beans, coffee, copper, cotton, hides, iron ore, lead, manganese, nickel, oil, potash, rice, rubber, silver, soybeans, sugar, tin, and wheat collapsed--many falling to their lowest level in half a century. And the outlook for the foreseeable future is for more of the same. Indeed, the downward trend has been so dramatic that the U.S. Office of Technology Assessment was led to conclude in a 1988 study that America's "future has probably never been less constrained by the cost of natural resources."
Conventional economics has a simple explanation for this kind of situation. Increasing supplies and falling prices are traditionally regarded as classic symptoms of faltering demand and economic contraction--in other words, of recession and depression. Yet, economically speaking, the decade of the 1980s was anything but that. Indeed, as we have noted, in the United States and most of the rest of the industrialized world, the 1980s saw one of the biggest peacetime economic booms ever. Industrial output, real wages, standards of living--all rose steadily, in some case sharply, and are continuing to rise. (Although, as we shall later on, not everyone is sharing equally in this rising prosperity.)
To put it simply, we are richer than we've ever been before. This may seem hard to believe in an era in which we seem to be overrun with poverty and crime, in which we often feel that we have to work harder than ever simply to make ends meet. But it's true. Though it may sometimes seem as if we're trapped in the Red Queen's race--having to run faster and faster merely to stay in the same place--the fact is that we have to work significantly less than we used to get the things we want. In 1970, for example. Americans had to work more than three times as many hours to earn enough to buy a TV set as they did in the late 1980s. Similarly, they had to work twice as long in 1970 to afford new clothing and 25 percent longer to earn a new car. What's more, our homes are larger today (the median size of new privately owned single-family homes in the United States was 1,785 square feet in 1985, versus 1,595 square feet in 1980, and just 1,385 square feet in 1968), our entertainment options are wider, and our life expectancy is longer.
So what is going on? How is it that we seem to have more resources at lower prices than ever before?
The answer, in a word, is Alchemy.
* * *
As we noted in Chapter 1, traditional economic theory views the world as containing a fixed--and hence essentially scarce--supply of physical resources. There is only so much coal, oil, iron, gold, water, arable land, and so forth to go around. According to this way of looking at things, the only way to increase your real wealth--whether "you" are an individual or a society--is at someone else's expense.
The Theory of Alchemy, in contrast, recognizes that physical resources are neither scarce nor even finite--not in an era in which we possess the know-how to "make computers from dirt," as the mathematician Mitchell Feigenbaum recently put it. What counts today is not the particular minerals we find buried in our backyard, but our growing ability to make more and better use of whatever does happen to be there.
This is the heart of the Theory of Alchemy: wealth is the product not just of physical resources but of physical resources and technology. And of the two, technology is by far the more important.
Mathematically, this profound truth can be expressed as a simple formula:
W=PTn
In this expression, W stands for Wealth, P for physical resources (that is, the traditional measures of wealth such as land, labor, minerals, water, and so on), T for technology, and n for the exponential effect of technological advances on themselves. (As we shall see, technology has a multiplier effect on itself as each new technological advance becomes the foundation for another
advance.)
This simple formula has enormous implications--not just in terms of improving our understanding of the economic basis of our society, but as the key to developing more effective strategies for our individual lives as consumers, businesspeople, and citizens. At bottom, what it tells us is that we no longer have to play the zero-sum game. Instead of finding better ways to slice up the same small pie, in the alchemic world we can find a way to bake a new and bigger pie.
* * *
For most of the past five or six thousand years, ever since the earliest days of organized society, people have thought of wealth as being an abundant supply of the physical necessities of life--namely, food, shelter, and clothing. In the earliest societies, the sources of these necessities were obvious: land, livestock, and building materials (which, depending on where you lived, could be anything from timber to mud to blocks of ice). The more of these physical resources you possessed, the wealthier you were considered to be.
Even in the most primitive societies, however, mere possession of physical resources was not in and of itself enough to guarantee anyone survival, much less comfort or luxury. You could own all the land and livestock in the world and still starve to death if you didn't know how to hunt and dress game, or sow and reap crops, or slaughter and butcher cattle. In order for your physical resources to do you any good, in other words, you needed to know how to make use of them; you needed some smattering of what today we might call basic technology.
It was this technology--this knowledge of how to make productive use of the raw materials of nature--that made resources like land, livestock, and building materials worth having in the first place. It was the discovery of fire--or at least the discovery of how to start and control fires--that made wood worth collecting. It was the invention of bread--which is to say, the development of milling and baking--that made grains like wheat and rye worth cultivating. It was the development of smelting that made ores like iron and tin worth mining.
In short, from the very beginnings of civilization technology was at least as important a component of wealth as physical resources. Indeed, of the two, technology has always been by far the more important, for without the appropriate technology physical resources are useless. To put it another way, it is technology that separates the wheat from the chaff.
Thus we arrive at what we might call the First Law of Alchemy:
By enabling us to make productive use of particular raw materials, technology determines what constitutes a physical resource. Although this fact may seem obvious today, it was not evident throughout most of history. The reason is that until recently technology advanced quite slowly. Untold generations were born and died in the centuries it took for the Stone Age to give way to the Iron Age, for the Iron Age to give way to the Bronze Age. Modes of transportation, farming methods, medical practices, building techniques--for millennia, these and other technologies rarely changed noticeably within a single individual's lifetime. As a result, technology's impact on society was taken for granted to such an extent that it was as if it didn't exist. (Or, for those who did notice it, technology was treated for decision-making purposes as a constant over their lifetimes).
To a South Sea islander in the late nineteenth century, for example, the fact that palm fronds could be woven in a certain way to make a roof for his hut seemed to be an integral part of the nature of palm fronds. Living as he did in a society in which hut roofs had been woven out of palm fronds for as long as anyone could remember, it would not occur to him that what made palm fronds a precious physical resource was a particular body of knowledge--namely, the
technology of frond weaving. As far he and his fellow South Sea islanders were concerned, palms fronds were by definition a building material--useful and hence valuable. Weaving them into roofs was as basic and natural a part of his life as, say, spear-fishing.
To argue that palm fronds somehow did not constitute a valuable physical resource in their own right would make no more sense to our South Sea islander than to argue that fish were somehow not inherently valuable, either. How could they not be? Like palm fronds, fish always had been necessities of life, and always would be. It was obvious: the more you possessed, whether fish or palm fronds, the wealthier you were.
The fact is, of course, that just like palm fronds, fish don't constitute an inherently valuable resource. They represent food only to the society that possesses the technology of fishing. Without that technology, fish are nothing more than shadowy shapes that you might occasionally glimpse darting beneath the waves.
The crucial importance of technology becomes evident to us only when we see it shift massively in a relatively short time. For our South Sea islander, the arrival of a missionary with a supply of galvanized tin roofs would have likely done the trick. Faced with a different--and presumably better--way of building his hut, he might well have found himself reconsidering his view of palm fronds (along with the technology of frond weaving) and what they represented. Certainly, the palm fronds would have no longer represented wealth the way they used to. In this new situation, the wealthy man might be the one with the best relationship with the missionary.
It's only recently that technology has begun advancing quickly enough to catch our attention in this way. Again, consider oil, one of the staple resources of the modern era. Little more than a century or so ago petroleum was regarded as nothing more than a sticky black substance--"an odd, mysterious grease," it was called--that one occasionally came across seeping up through the rocks in out of the way places. Even after Col. Edwin L. Drake drilled the world's first producing oil well in Titusville, Pennsylvania, in 1859, oil wasn't considered good for much beyond serving as a lubricant, a patent medicine, and a rather smokey and vile-smelling fuel for oil lamps. It wasn't until 1885, when Gottlieb Daimler and Carl Benz developed the first light-weight internal combustion engines that could burn a petroleum by-product known as gasoline--a by-product that up until then had been regarded as useless waste--that oil came to be considered a valuable resource.
By the early 1970s, of course, the petrochemical industry had grown into one of the world's largest, and oil--as both a fuel and a chemical feedstock--had become a linchpin of the global economy. What's more, as a direct result of the importance of oil, the barren desert kingdoms of the Persian Gulf, which happened to be located on top of one of the biggest petroleum deposits on earth, had gone from being among the world's poorest and least consequential countries
to among its richest and most influential.
Indeed, in our lifetimes technology has exploded as never before. As Ralph Gomery, the longtime chief scientist of International Business Machines Corporation, recently noted: "When my father was young, he used to take a horse-drawn carriage to the railroad station. There were no automobiles, no telephones, no atomic bomb, no man on the moon. But by the time he died, he had flown in a jet and had seen all those other things happen. No generation had ever been through a transformation like that."
We have seen, in other words, technology transform chaff into wheat and wheat into chaff before our very eyes. In recent years, we have watched technology make important resources of commodities as mundane and ubiquitous as sand (the raw material from which we make silicon chips) and sea water (from which a variety of minerals ranging from gold to magnesium can be extracted). At the same time, we have seen it diminish--if not actually erase--the importance of such once key resources as natural rubber (replaced by synthetic rubber), tin (increasingly superseded by aluminum and plastics), aluminum (itself being supplanted by newly developed ceramics and carbon fiber composites), copper (demand for which is slowing as result of recent advances in fiber-optics and superconductivity), and sheet steel (which is beginning to see competition from light, corrosion-resistant superpolymers).
* * *
The technology considered by the First Law of Alchemy--the technology that enables us to make use of particular raw materials and, in so doing, defines what constitutes a valuable physical resource--can be called definitional technonlgy. Clearly, definitional technology plays an enormously important role--probably the most important role--in determining a society's wealth. But it is hardly the only kind of technology to affect us in this way. There is a second category of technology that we must consider--the technology that controls how much we have of an already defined physical resource.
Although we live in a constantly changing world--indeed, in a world in which the rate of change is constantly accelerating--not everything in our world changes every day. There is at any given moment an existing level of definitional technology--which is to say, an existing base of currently defined physical resources--that for all practical purposes we can and do consider to be the measure of what is available to us. In the 1980s, for example, our resource base consisted of such relatively familiar commodities such as bauxite, copper, coal, iron, gold, natural gas, petroleum, silicon, timber, tin, uranium, and so forth.
A hundred years ago that list would have looked very different (bauxite, silicon, and uranium would have been absent, for example, while ivory and whale oil might have been present). A decade from now it will be different again, no doubt in ways that we cannot today imagine. Nonetheless, one must work with the tools and resources one has at the time. In the 1980s, therefore, as at virtually every other moment in history, it made sense to ask the question: how can we increase our supply of what we currently regard as valuable physical resources?
Reading history, one might quite understandably come to the conclusion that the best way--indeed, the only way--to increase one's supply of physical resources is to take them from someone else. After all, not only have conventional economists regarded the struggle for prosperity as a zero-sum game, but most historians have also viewed the world in that light. Indeed, the notion that the resource pie was fixed and that a larger slice for you inevitably
meant a smaller slice for me has always struck the vast majority of humanity as a matter of basic common sense. This notion, just like the Aristotelian notion that the sun revolves around the earth, seemed to accord with the evidence of our senses. What could be more obvious? If someone else had something, you could get it by taking it away from him.
In fact, however, the resource base has never been fixed--and not simply because the nature of its components are always changing as definitional technology advances. If the base were fixed, how could the worldwide reserves of oil, gas, copper, gold, silver, and the other commodities we cited earlier possibly have increased between the early 1970s and the late 1980s? The fact is, even in the
context of a given set of previously defined physical resources, the supply of resources is always expanding.
It's not that vast new amounts of oil or gas or copper are somehow spontaneously being created deep in the bowels of the earth. The amount of these commodities is pretty much the same as it's always been less, of course, what we've consumed over the millennia. But the amount of a resource is not the same as the supply of a resource. The amount of a resource is how much of it physically exists in the universe. The supply of a resource is how much is known to exist and is physically available for our use--a figure that is determined as much by how we use it as by the quantity we happen to have available.
This leads us to what we might call the Second Law of Alchemy:
Technology determines our supply of existing physical resources by determining both the efficiency with which we use resources and our ability to find, obtain, distribute, and store them.
What makes a physical resource a resource--as opposed, say, to just a pretty rock or an annoying black goo--is its usefulness. Take oil, for example. One of the things that makes oil such a valuable physical resource is that we can refine it into gasoline and use it to power our cars. In this context, the most sensible way of measuring how much oil we have is not in terms of how many barrels it can fill up (filling up barrels, after all, isn't really what we want to do with the stuff) but in how many miles of driving we can get out of it.
The actual amount of oil buried in the earth (the number of barrels or gallons) is irrelevant. What counts is how much good the oil we know we have will do us--in other words, the supply.
Clearly, a veritable ocean of oil won't do us any good if we don't know it's there. Nor will it do us any good if we can find it but can't get to it. Nor if we can obtain it but can't move it to where we want it. Nor, finally, if we can distribute it to where we want it but can't find a way to
store it there until we need it.
Beyond these constraints, there's the question of how we actually use it. If I've got a car that gets ten miles to the gallon and you've got a car that gets twenty miles to the gallon, the same amount of gasoline will get you twice as far as it will get me. In other words, even though we may both have the same number of gallons of gas, your effective supply is twice as big as mine.
From this it should be clear that there are basically two ways to increase the supply of a previously defined physical resource: (1) we can improve our ability to find, obtain, distribute, and store it; and (2) we can improve the efficiency with which we use it.
The first set of abilities constitutes what we might call supply technology. The second set can be labeled use technology. Together, they constitute the general category of technology considered by the Second Law of Alchemy--quantity technology, or technology that determines the available quantity of existing physical resources.
Of the two kinds of quantity technologies, the technology of supply has the more straightforward impact on our resource base. Consider its effect on the supply of oil and natural gas over the past two or three decades. To begin with, advances in geology (our ability to find oil and gas) led to the discovery in 1968 of the huge oil field beneath Prudhoe Bay on Alaska's North Slope--as a result of which estimates of total global oil reserves were revised upwards by nearly 10 billion barrels. On top of that, improvements in drilling techniques (our ability to obtain oil and gas) allowed gas producers who had previously never delved deeper than five or ten thousand feet to sink wells six miles or more into the earth's crust--thus giving them access to huge reservoirs they'd never before been able to tap. In addition, the evolution of the super-tanker and the advance of pipeline construction methods (our ability to distribute oil and gas) enabled new discoveries to be brought on-stream almost as quickly as they could be made. And finally, the development of relatively safe above- and below-ground storage tanks gave us the ability to store heating oil in our homes and put a gas station on virtually every street corner.
In general, the four aspects of the technology of supply--the ability to find, obtain, distribute, and store a resource--constitute a kind of conceptual pipeline through which all physical resources must flow for them to be of any value to us. Our ability to clear up bottlenecks at any of those four points thus effectively increases our supply of a given resource.
In the case of oil and gas, the worst bottleneck we face as we enter the 1990s involves distribution. Over the past decade or two, we have become very good at finding, obtaining, and storing oil and gas. But as was illustrated by the horrendous Exxon Valdez spill that disfigured Alaska's Prince William Sound in 1989, our ability to transport oil safely still leaves much to be desired. As a result, we have (possibly with unconscious wisdom) let potentially huge supplies of oil and gas--such as the large, highly promising federal tracts in Alaska, off the California coast, and in the Gulf of Mexico--go unexplored.
This is true of most currently defined physical resources in the alchemic world. The biggest constraint on supply is not the difficulty of finding, obtaining, or storing resources, but the inability to distribute them efficiently to where they will do us the most good. |
