On Natural Resources, Use History as Guide

While petroleum gets the headline attention, prices for practically all metals, minerals, and agricultural and other natural resources have reached record levels in recent months. For the first time in perhaps decades, those holding investment portfolios of natural resources over the past five years have netted exorbitant profits.Over the past few months, economists are increasingly asking whether we have entered a new economy where natural resources are king, and industrial countries such as China and India will be slowed and enfeebled. Should the rational investor shift away from other investments and focus mostly on commodities?The simple answer is: “No.” To think otherwise is to ignore the history of the past several thousand years.For most of human experience, natural resources have dominated economic concepts. In biblical times, wealth was primarily noted by livestock numbers, the agricultural capacity of land, and other references to natural resources.As recently as the early 19th century, an investor in practically any country including America, given the choice between agricultural and natural resources or returns from trade and manufacturing, would have chosen the former.Most young people took up the practice of agriculture and other forms of resource extractions not for ancestral fealty so much as due to the absence of better alternatives.Those days have long vanished in America and in all but a few countries around the world. Although the economic prospects of becoming a farmer or a miner are better today than five years ago, only a few choose careers in natural resource extractions because that is all the youthful labor that those sectors can support.In 2007, the most recent data available, only 1.2% of America’s economy was from agriculture, forestry, and fishing. Another 2% was from mining, oil, and energy extraction. The combined 3.2% for natural resources is higher than the 1.9% in 2002, but still relatively small for a country that was primarily agricultural 150 years ago.The most resource-intensive states — Alaska and Wyoming — derive just 30% of their economic activity from natural resources. Even if the relative economic share of the natural resource industries were to double or triple — an unrealistic event — more than 90% of the American economy would remain elsewhere.With a few exceptions, such as Canada and Chile, countries that export huge quantities of natural resources have not necessarily become consistent economic successes. Higher prices today will benefit natural resource countries, but will not necessarily lead to economic growth tomorrow. More troubling for these economies, history does not show that the prices of natural resources consistently increase relative to other assets. Indeed, history shows the opposite.America is relatively blessed with natural resources, but its economic growth is only modestly related to natural resources. The country’s largest and most profitable industries over the past few decades have been far more concentrated in finance, services, and the development of intellectual property than in the harvesting of natural resources. Like any other country, America would welcome the discovery of vast new reserves of energy, or a new continent of timber or grains, but economic prosperity is not tied to these resources.The world’s fastest growing countries, such as China, India, and Korea, are even less endowed with natural resources. Higher natural resource prices may slow their growth, but it won’t stop them.Odds of natural resource prices increasing relative to other prices forever are nil. Higher prices will both encourage increased supply and discourage usage, both limiting further price increases. Technologically, progress responds to price changes, and that includes natural resources. American businesses constantly produce more with fewer resources, and will rely even less on those natural resources that become more expensive.This is not a newfound 21st-century economic principle, but one that has worked in all ages where businesses are free to make choices in response to unfettered movements in prices. It fails only where governments limit price movements or dictate the decisions of businesses and households. Eerily, those are precisely the devastating policies widely discussed in Washington today.A former FCC commissioner, Mr. Furchtgott-Roth is president of Furchtgott-Roth Economic Enterprises. He can be reached at hfr@furchtgott-roth.com.

On Natural Resources, Use History as Guide

On Natural Resources, Use History as Guide

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