Book 1: Capitalism at Work: Business, Government, and Energy
Chapter 8 Internet Appendix
8.1 Zimmermann—A Forgotten Economist
8.2 Zimmermann and Institutionalism
8.3 Zimmermann’s Methodological Isolation
8.4 Zimmermann and Petroleum Conservation
8.5 The Rise of Conservation Economics
Bibliography: Chapter 8 Appendices
8.1 Zimmermann—A Forgotten Economist
The aphorism that “everything of importance has been said before by somebody who did not discover it” (Blaug: 283) can be applied to Erich Zimmermann (McDonald, 1995: 159–60). Carl Menger‘s distinction between “things” and “goods” (1871: 52–53) was analogous to Zimmermann’s “neutral stuff” and “resources.” The institutionalists’ emphasis on technological change was present before Zimmermann (e.g., Veblen: 15–18). Zimmermann polished his functional theory with the help of Wesley Mitchell (Zimmermann, 1951: 9–10) who opined, “Incomparably greatest among human resources is knowledge. It is the greatest because it is the mother of other resources” (Mitchell, 1941: 1). Still, Zimmermann put together the pieces in a highly original, compelling way. The profundity of his functional theory of resources is a major, underappreciated contribution in the history of economic thought.
A book review in the Journal of Political Economy in 1934 described Zimmermann’s “refreshingly dynamic” World Resources and Industries as “the most important work in its field, both from the standpoint of factual content and from that of method of approach” (McCarty: 706). Zimmermann, the review continued, succeeded in “impart[ing] the breath of economic life to the institutions he describes” (ibid.). Such accolades went only so far, and, as mentioned above, by the book’s second edition in 1951, Zimmermann—and what little there was of mineral-resource theory—were not in the vanguard relative to where economics was going.
Zimmermann goes unmentioned in the three-volume, 1,357-page Handbook of Natural Resource and Energy Economics, edited by Allen Kneese of RFF and James Sweeney of Stanford University (New York: Elsevier, 1993). There is no entry in the Palgrave history of economic thought for either Zimmermann or the functional theory of resources. Zimmermann’s name is even misspelled in some of the few books where it appears (Armentano, 1982; Barnett and Morse, 1963; Beckerman, 1974; Larson, 1948; Simon, 1981: 403; 1996: 690; Smith and Krutilla, 1982). Julian Simon, whose study of empirical data led him to a theoretical framework that Zimmermann first developed, never acknowledged him in a significant way. In fact, Simon’s “ultimate resource” of “skilled, spirited, and hopeful people” (1981: 348), was put forward by Zimmermann decades before (Bradley, 2007: 80).
Simon in his autobiography does not cite Zimmermann but mentions several books, including “the great 1963 book Scarcity and Growth by Harold Barnett and Chandler Morse, which showed that natural resources were becoming more available rather than more scarce” (2002: 242).
Mineral-resource economics as a general field began to be of interest to mainstream (neoclassical) economics only in the 1950s (Brooks: xxvii). Orris Herfindahl, one of the first modern resource economists, cited Harold Hotelling, not Zimmermann, in essays published in 1955, 1959, and 1967 (Herfindahl in Brooks, ed.: 35, 130, and 65). Until the 1970s, however, Hotelling was better known within the economics profession for his essays, all very technical, on duopoly and welfare maximization (Arrow: 670–71). Zimmermann, only occasionally mentioned in the mineral resource literature in the 1950s and 1960s, was totally forgotten thereafter.
8.2 Zimmermann and Institutionalism
Zimmermann was part of an economic tradition, institutionalism, which was outside of mainstream neoclassical economic theory. Institutional economics is interested in the free-market price system but more generally in “the organizational structure of the larger economy which effectively allocates resources” (Samuels, vol. 2: 865). The “broader or deeper set of explanatory variables” (ibid.) includes property rights, government policy, culture, and social power. As with Zimmermann, institutional economists “object to the equilibrium and presumptive optimality modes of analysis of neoclassical economics. The search for the deterministic technical conditions of stable equilibrium, it is felt, obscures the fundamental power and choice aspects of the economy” (ibid).
The University of Texas school of institutionalism, of which Zimmermann was part, was led by Clarence Ayres (1891–1972), who focused on technology “as a dynamic, cumulative, open-ended and most importantly accelerating problem-solving process” (Tom DeGregori to author, September 23, 2003). Ayres saw the largely beneficial force of technology as “continually at war with outworn, inhibitive institutions” (Samuels, vol. 1: 165). Thus “mankind’s task was to develop new institutional forms and revise old ones in order to keep pace with evolving technology” (ibid). Zimmermann was also very influenced by Wesley Mitchell, as mentioned, whose view of knowledge as the mother of resources was quoted by Zimmermann (1951: 9–10).
The institutional approach to economics is real-world oriented unlike the core of neoclassical economics, which abstracts from complexity in order to collapse (really obliterate) entrepreneurship into mathematical equations and an equilibrium box. This is why Zimmermann comprehended the essence of mineral resource theory, and mainstream economics—following Harold Hotelling—did not. Zimmermann would have smiled at the comment of Robert Heilbroner that “the neo-classical [equilibrium] model has rigor, but, alas, also mortis” (124).
8.3 Zimmermann’s Methodological Isolation
Zimmermann’s failure to expand his beachhead into a paradigm of expansionism reflected two problems. One was his inability to fully differentiate the functional theory of resources from depletionism, discussed in the next section on petroleum conservation. The second shortcoming was not placing his demotion of the “objective” view of resources in favor of “the appraising mind” in wider context: the subjectivist methodology of economics.
As mentioned in chapter 8, Zimmermann should have placed his contribution in the general methodological framework of mind-centered subjectivism, at least by his 1951 edition, to differentiate his approach from that of Harold Hotelling. If Zimmermann had criticized Hotelling on methodological grounds instead of dismissing his derivation as “a jumble of numbers,” the gulf between Zimmermann’s realism and Hotelling’s special case could have been clarified. Perhaps the misplaced alarmism that emerged in the 1970s, partly from Hotelling’s framework, could have been moderated. But perhaps not; economists were very much driven by a need to do original work, even if it was at the expense of realism, and such intellectual fashion became mutually reinforcing within departments and across educational institutions. There was also the methodological fashion that economics as a social science should imitate the methods of the hard sciences. But there was a price to pay for such production and consumption by economics in terms of real-world understanding and public policy.
The Austrian School of Economics never explicitly developed its own subjectivist theory of mineral resources to question the very distinction between depletable and nondepletable resources (Bradley: 2007). Such a theory could have given Zimmermann a base from which to attract greater interest in his approach—as well as provide a foundation for the empirical work of the Paley Commission and RFF that might have allowed their analyses to better withstand the reactionary forces of the 1970s.
Chapter 3 stressed the importance of comprehending and acting on objective realities as a philosophical precept for business success. Philosophicalobjectivism was championed over philosophical subjectivism as a business and academic ideal. Yet in economics, “objectivism” (also called formalism) focuses on the empirical residue of human action to the preclusion of the all-importantmotivation that produced the observed behavior. Focusing on data rather than motivation (intention) is a recipe for intellectual error. Such has been the depletionists’ fixation on minerals as fixed, finite, and knowable.
Subjective value is both a truth for economics and given for economists. Carl Menger, who along with W. S. Jevons (and Leon Walras) is credited with fathering modern economics, wrote in 1871:
| The measure of value is entirely subjective in nature, and for this reason a good can have great value to one economizing individual, little value to another, and no value at all to a third…. Not only the nature but also the measure of value is subjective. Goods always have value to certain economizing individuals and this value is also determined only by these individuals (146). |
Objectivism is the methodology of the natural sciences, which deals with causality between inanimate objects that possess no discernible “purpose.” Resources to the hard scientist are quantities rather than a process of action whereby the “appraising mind” is causal.
8.4 Zimmermann and Petroleum Conservation
Zimmermann stated his unease with mineral extraction under laissez-faire: “The profit motive cannot be relied upon to assure conservation, and social control must be resorted to” (1933a: 800). Zimmermann’s last book, Conservation in the Production of Petroleum (1957), was a full length treatment of what he earlier called the “warped appraisal” (1933a: 23) of rapid present-period production.
Zimmermann’s complaint was echoed by Wesley Mitchell:
| The appalling wastes of natural resource that are going on seem due largely to the policy of handing over the nation’s heritage to individuals to be exploited as they see fit. It appears that business planning takes, and must take, a relatively short period of time into account—a period that is but as a day in the life of the nation. What is rational on the basis of this short-run private view may be exceedingly unwise on the basis of long-run public interest (89). |
Under the rule of capture, ownership of migrant minerals like oil and natural gas required physical possession by any one of the reservoir co-owners; by contrast, hard minerals were owned in place. Thus the incentive was to produce oil and gas as quickly as possible and hold inventory above ground rather than in-place in the reservoir. Zimmermann concluded, in the case of migrant minerals at least, that “free automatic forces cannot even halfway solve the problems, and resort to police power is inevitable if they are to be solved satisfactorily” (1957: 110).
I have elsewhere reconsidered the market-failure interpretation under the rule of capture to answer Zimmermann’s challenge (Bradley, 1996: 59–221). Three general lines of argument compose a revisionist view:
| • | Another private-property-rights assignment based on the homestead principle (first-finder rights to the entire contiguous reservoir) could have addressed the multiple-owner, high “transaction cost,” problem under the rule of capture. | |
| • | A variety of government interventions ranging from antitrust law to corporate (double) taxation discouraged greater coordination between reservoir owners to drill fewer wells and practice delayed production. | |
| • | The “solution” of conservation regulation (which in turn led to oil import regulation to prop up the oil-state cartel) introduced its own problems, making government failure (defined in Capitalism at Work: chapter 5, 132) comparable to market failure. |
Of historical note, the “intolerable anarchy” (1957: 269) that Zimmermann feared sans state regulation of oil extraction under the rule of capture actually would have been part of the market’s solution to overproduction and waste. When overproduction reached its zenith in the great East Texas field in the spring of 1933, mass unrest developed. Oil prices dipped as low as a dime per barrel, and mom-and-pop producers with debts to pay faced financial ruin.
But rather than ensure that property rights were respected in the industry restructuring, the federal government declared martial law, sent in the National Guard, and closed the field to production. The same action was taken in the Oklahoma City field by that state’s governor. Such actions were not only a massive violation of civil and economic liberty, they prevented a price-induced rationalization of production that could have put the industry on a market-driven—rather than politicized—basis. The leading industry trade publication, Oil and Gas Journal, in fact, editorialized for a market solution: “It would be better to open up all the fields, go through the comparatively brief period of 15-cent oil, and then start the recovery with politicians eliminated from the picture” (issue of March 16, 1933: 7).
Zimmermann’s own theory of natural resources posed problems for his depletionist view. How could it be known that global oil reserves, not only domestic U.S. supply, were depleting too quickly and that resource substitution would not be effective when the global supply of a particular mineral became scarce? A resource optimist could argue that oil producers in the 1930s, if not later, were producing from an underground ocean of oil (and other forms of energy) that might be no more valuable in the future than today.
The predictable result of Zimmermann’s bifurcated theory was its attraction to the U.S. “oil lobby” (Jameson: 192). Tax incentives and other special inducements found justification from his theory emphasizing the creative nature of resource development and concern over rapid production. The depletion allowance, wellhead prorationing, and import restrictions each found support from Zimmermann’s view. This development put Zimmermann at odds with many petroleum economists who were critical of such government intervention.
8.5 The Rise of Conservation Economics
A conservation ethos was first applied to minerals such as oil and gas on public lands between 1890 and 1920 (Barnett and Morse: 44–48). It began as “a creed, a dogma” (249), Anthony Scott noticed. “The subject of Conservation is rather abstruse,’ former president Howard Taft commented in 1910, “but there are a great many people in favour of Conservation no matter what it means” (quoted in Scott: 249).
One of the earliest definitions of conservation was provided by President Theodore Roosevelt for a report released by the National Conservation Commission in 1909. He spoke of “dealing intelligently with what we have” in order to promote “the permanent welfare of our people” (1–2). “National efficiency” also meant “liv[ing] within our means,” given that “in wasting our resources we are wronging our descendents” (ibid., 2, 4). “The underlying principle of conservation has been described as the application of common sense to common problems for the common good,” he added (ibid., 3).
The know-it-when-you-see-it wastage insinuated by Roosevelt included physical waste, such as flaring natural gas at the wellhead instead of channeling it into a pipeline for consumer use. The 1909 study reported that one-half of produced gas was openly discharged (ibid.: 16). An interdepartmental federal study released in 1939, Energy Resources and National Policy, assumed a conservation problem and recommended: “(1) promoting greater efficiency in the production of the fuel resources from the standpoint of recovery; (2) promoting greater economy in the use of fuels; and (3) placing a larger share of the energy burden on lower grade fuels and water power” (1939: 1).
Beyond objectively determinable physical waste—and absent a “rigorous” or quantitative definition of efficiency—economic “waste” was very subjective. Policy was set at the intersection of the fears of government depletionists (Barnett and Morse: 75–76) and wants of the involved business firms (Bradley, 1996: chapter 3).
Then economists started to weigh in. “The primary problem of conservation,” stated economist L. C. Gray in 1913 (515), “is the determination of the proper rate of discount on the future with respect to the utilization of our natural resources.” What might the discount rate be? Gray mentions “’the crutch of common sense’” (515) but leaves such for future economists to determine (519).
Other definitions by economists prior to 1925 were vague and inconsequential (Ise: 490–94). Economist John Ise, building on Gray, suggested employing a discount rate of between four and six percent (1921: 490). He also recommended (ibid., 494) setting a floor price for crude oil not less than the cost of producing substitutes, estimated at around $6 per barrel. This compared to crude oil then selling for $1 per barrel or less! Ise also recommended government ownership of subsoil minerals to slow production (ibid., 496–504). In The Economics of Welfare, A. C. Pigou sidestepped a definition of conservation only to state: “It is the clear duty of Government to watch over, and, if need be, by legislative enactment, to defend, the exhaustible natural resources of this country” (1920: 28).
Some resource economists defined conservation simply as postponed production/consumption. S. V. Ciriacy-Wantrup in 1952 defined conservation as a shift in a resource’s “inter-temporal use in the direction of the future” (quoted in McDonald, 1971: 72). Economist Anthony Scott in 1955 defined conservation as “a public policy which seeks to increase future usable supplies of a resource by present action” (quoted in ibid.).
Other economists defined conservation by comparing petroleum production under the rule of capture with what was seen as “optimal.” Edward Mason defined conservation or economic efficiency as “the avoidance of wastes associated with a faulty time distribution of the use of resources” (1958: 162). Stephen McDonald similarly defined conservation as “action designed to achieve or to maintain, from the point of view of society as a whole, the maximum present value of natural resources (or of a natural resource)” (1971: 71). Lovejoy and Homan summarized, “In recent years economists have built up a body of theory on conservation that centers on maximizing social benefits over time by proper distribution of resource use over time” (1967: 8–9).
In a 1961 essay, Orris Herfindahl exposed the varying and sometimes contradictory meanings of conservation. Conservation meant more developmentby some (through resource protection and better harvesting) and preservation(postponed use or nonuse) by others. Utilitarian definitions such as “the use of resources for the greatest good for the greatest number for the longest time” (48), indeed, could and did encompass different motivations and policy recommendations. Instead of enacting conservation “on the basis of slogans,” policy should be based on “all the associated benefits and costs and perhaps on the redistribution of real incomes involved” (57). Herfindahl apologized for “downgrading” the term conservation and warned that pubic policy should “not be undertaken simply because something is conserved” (ibid). This reconstruction, however, begs the question of how costs and benefits can be objectively measured given the subjectivity of preference (or immeasurability of different satisfactions/dissatisfactions across individuals) versus revealed preference as demonstrated by decisions in the market to buy or not buy.
Shortages of oil and natural gas in the United States during price-control periods, first during World War I, then World War II, and most recently the 1970s, brought forth a new genre of conservation: reduced consumption for society’s sake, orconservationism. Whereas wartime patriotism in World War I and II included reducing fuel usage to redirect supply to the war theater, 1970s end-use conservation was urged on Malthusian grounds.
Neoclassical economists desirous of Hotelling-like rigor in a definition of conservation have criticized the ecologists’ conservationism. As Talbot Page of Resources for the Future complained in 1977:
| In contrast to the economists, the conservationists do not spell out criteria in precise mathematical detail. It is not even clear what the definition of ‘conservation’ is. While the view of the economist is a little like a theology, the view of the conservationist is more like that of a religion (174). |
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