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No. 566:
Economics of Environment

Today, we talk about profit, loss, and the environment. The University of Houston's College of Engineering presents this series about the machines that make our civilization run, and the people whose ingenuity created them.

Here's a chilling thought. Suppose a whaling company had gone out and harvested every blue whale in the ocean in 1960. Their profits would've been huge. Today that company would make more from interest on the profit than they'd make if they were still whaling.

In other words, they could have exterminated the species and increased their profits as well. That leaves us with a very uncomfortable feeling about that kind of arithmetic.

Economist Howard Hotelling first did that arithmetic 50 years ago. He said, let's think about a mine owner. He can take all the ore out of the mine at once. If he does, he'll depress the price. He might well make the ore worthless.

Or he can draw ore slowly. If he does, then he delays income and loses interest. If that isn't complicated enough, remember that the mine will eventually run out. Figuring out how fast to mine the ore can be very complicated.

Turn that arithmetic loose on the world around us, and we get into real trouble. During the '50s, Hotelling's ideas underwent refinement. People harvesting natural resources came up with the idea of a maximum sustainable yield. Here's how it works.

We ask, for example, how rapidly we should fish for anchovies to sustain a maximum profit. Once we know, we harvest that many. But what about the other fish and birds who live by eating anchovies?

That happened in Peru during the 1970s. First, Peruvians fished anchovies to the limit. Then seagulls, who eat anchovies, began starving. Peru didn't need the gulls, but she did need their droppings. Now Peru hasn't just lost her anchovy industry. She's lost her guano industry as well.

Today, fishermen systematically apply Hotelling's arithmetic to the Pacific halibut. They treat them like ore in a mine. They maximize their profit against the day halibut become extinct.

Hotelling's arithmetic, like so much arithmetic of human commerce, is too simple. There's too much to take into account. The living species on this planet are too subtly interwoven. If we maximize profit from one species, we pay a higher cost somewhere else. In the end, the species that'll starve, as we continue feasting, is our own. We shall die from overfeeding ourselves.

I'm John Lienhard, at the University of Houston, where we're interested in the way inventive minds work.

(Theme music)

Clark, C.W., Clear-Cut Economies. The Sciences, January/February 1991, 1989, pp.16-19.