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Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
in the
Manville Public Policy Lecture Series
Rockford College
Rockford, Illinois
April 7, 1982

Remarks by
Henry C. Wallich
Member, Board of Governors of the Federal Reserve System
in the
Manville Public Policy Lecture Series
Rockford College
Rockford, Illinois
April 7, 1982

Ten years have gone by since the great debate that was unleashed,
in March 1972, by a small book of less than 200 pages, under the title

The Limits to Growth«
very dire predictions.

The book, which caused a tremendous stir, made some
The world was in danger of running out of resources.

Unless course was changed drastically within the decade of the 1970's, the
world would be launched on a path that could only end in collapse, some
time during the second half of the 21st century if not earlier.

At existing

growth rates of population and resource use, catastrophe threatened through
exhaustion of raw materials, and if not of raw materials, then of food, and
if not of food, then of the entire environment through pollution.
have gone by.


Ten years

How do these doomsday predictions look today?

Donella H. Meadows, Dennis L. Meadows, Jurgen Randers, and William W.
Behrens III, issued under the auspices of an organization that called
itself the "Club of Rome."

A lot has happened during these ten years.
raised the price of oil more than tenfold.
have driven up the price of food.

Two oil shocks have

Bad crops and food shortages

Inflation has accelerated worldwide.

Are events like these an indication that the thesis of "Limits" is correct
and that indeed the world is on the road to catastrophe?

Given the importance

of the topic, second in gravity only to the threat of nuclear war, the question
is well worth pondering.
The question comes in two parts.

The first is whether economic

growth must come to an end or whether it can go on indefinitely.

The second

is whether, if growth must come to an end, it must do so through collapse
instead of asymptotically, with a soft landing.

Must Growth Come to an End?
Economists, of course, have expressed views on both questions for
many years.

In 1798 the Reverend Malthus broadly took the side of "Limits."

Population would outrun food, growth would be limited by starvation.

At a

theoretical level, economists have always expressed great interest in a
condition known as the "stationary state," in which nothing changes and there
is no growth.

However, it is not easy to visualize a condition of zero growth.

Even if population stopped growing, saving and investment need not stop and per
capita output would grow faster than before because all of the investment
could be concentrated on the existing labor force.

Conceivably, net

saving might come to an end if the government were to absorb all saving
for current expenditures.

But so long as technological

-3progress occurred, the turnover of a constant capital stock would permit
incorporation of new techniques that would sustain a slow rate of growth.
All these sources would have to come to an end before growth could end.
Moreover, in this scenario there is nothing to indicate that growth must
end in collapse.

It might simply end in what today we might call stagnation.

As to when, if ever, this condition would be reached, economics had no
plausible prediction.
It is true, on the other hand, that any limits to growth that might
be discerned were rather spectacularly flouted by the growth models that
became fashionable among economic theorists during the 1960's.

Those models

translated the "stationary state" into a stably and indefinitely growing state.
Only labor and manmade capital played a role in this process.

If the authors

were of the opinion that food and natural resources could indefinitely be
multiplied or substituted with the help of capital and technology, they might
at least have noted the limits imposed by land or the prospect that the rent
of this one limited factor would have to rise indefinitely.

That, in any

event, had been the opinion of the Reverend Malthus' contemporary David Ricardo,
who viewed resources as unlimited but rising in price.

Must the End be Collapse?
On the second question, whether growth, if it must end, must do so
by collapse, orthodox economics does have a fairly firm message.

There are

adjustment mechanisms built into the economy that, if they function properly,
will make for a soft landing at a stable standard of living instead of

These mechanisms all, in one way or another, are based

on the response of economic agents to prices.

Scarcity of any

-4particular resource will lead to conservation and Increased production.
The development of adverse conditions such as pollution or overcrowding
will lead to corrective action.

The growth of population will be slowed

or stopped by the diminishing return and rising cost of rearing a large

There can be disagreement, of course, about how effectively these

mechanisms function and whether they are adequate to their jobs.

The last

ten years, with their various shocks to the world economy, have taught us
something about the functioning and adequacy of some of these adjustment

That is what I now proceed to examine.

Events in the energy area undoubtedly provide the most enlightening
commentary on the thesis of the "Limit."
a negative sense.

This is true both in a positive and

The first rise in the price of oil, from $3.50 in 1972 to

$13.50 in 1974 seemed to be timed almost too well as a confirmation of "Limit's"

The second oil shock, lifting the price from $13.50 to $34.00,

seemed to make the point that the world had failed to respond adequately to
the first shock.

A closer look at the situation, however, requires one to

take a more balanced and, on the whole, more optimistic position.
First, it must be acknowledged that even the first oil shock sub­
stantially slowed, or substantially contributed to a slowing of, world
economic growth.

This was particularly the case in industrial countries,

but also in developing countries although they in good part compensated for
higher oil prices by borrowing abroad.

However, the oil shock did not have

-5its effect through serious shortages.

Rather it worked by reducing

purchasing power in the oil-importing countries and raising rates of
inflation which, in turn, required restraining policies.
The principal questions to be asked are whether the response to
higher oil prices came mostly through government action or through the market,
and whether it came on the supply side or on the demand side.

There was a

good deal of talk on the side of governments, including on international
action, but with very modest results.

A program for energy independence

in the United States remained mostly rhetoric.

In the market, the supply

responses to the first and even the second oil shock were either modest or
very slow in materializing.

Oil and gas did not spurt out of the ground as

prices were deregulated, although there was some improvement.


sources like shale, tar-sands, syn-fuels, and solar energy, proved uneconomic
or excessively anti-environmental, even at very high energy prices.


power became a disaster, at least in the United States.
Demand, on the other hand, showed itself surprisingly price elastic.
Industry quickly responded to higher energy prices, and consumers, particularly
after the second oil shock, also reacted strongly.
of GNP has declined by 22 percent since 1976.

Energy consumption per unit

Oil consumption in the United

States has fallen over 15 percent in the last three years.

In fact, world

demand has fallen so rapidly that oil prices have dropped more than 10 percent
since mid-1981.
In the United States, there was, of course, more room for energy
conservation than in most other countries.

The price of energy had been low

and nonincreasing in real terms for many years.

Moreover, price controls or



relatively low taxation kept the price of oil and natural gas in the
United States far below comparable prices in most industrial countries
even after the oil shocks.
In the light of this relatively good performance of the private
sector, it probably would not be fair to fault government for not contributing
more to adjustment to higher energy prices.

Reliance on the effectiveness

of the price mechanism in the private sector turned out to be justified.
Even better results no doubt could have been achieved by total removal of
price controls accompanied by more severe taxation of energy.
The question remains how far a supply shock produced by a cartel
can be taken as a proper test of the functioning of the price mechanism.
To encourage a smooth adjustment, the price of oil should have been rising
for years before the shock, instead of remaining flat or declining in real
terms during most of the 1960's.

The market may be exonerated on the grounds

that it could not reasonably have been expected to anticipate the circumstances
that made OPEC effective.

However, it has since become plausible that, even

in the absence of a cartel, supply limitations would have been encountered
during the 1970's and would have caused oil prices to rise.

This evidently the

market, which in any event was not a competitive one, did not adequately foresee.
The correct pricing of a resource such as Middle-Eastern oil is
extremely difficult.

Based on cost of production, the price prevailing during

the 1960's was more than adequate.

Based on a correct projection of future

demand and supply, the price was much too low.

A price more in line with

future market balance, however, would have yielded enormous profits to the


The U.S. government, in confronting the same issue in the

regulation of natural gas prices, took the view that price should be based
on cost, not on future supply and demand.

In retrospect, the policy of

maintaining a low natural gas price has been revealed as wasteful and

The same incidentally must be said of the government's policy

of limiting the importation of abundant Middle-Eastern oil since 1954 and
so encouraging the using up of U.S. domestic oil resources.

Thus, if the

market did not do a very good pricing job, the government did even worse.
The conclusion might be drawn that in this instance the price mechanism
has worked less precisely and promptly than one might wish, but that over
a period of years it did work quite adequately.

The first oil shock coincided with a food price shock, seeming
to lend further support to the "Limits" thesis.
Soviet Russia had bad crops.

Both the United States and

Running out of food has been the classical fear

of people concerned about limits to growth since Malthus.
there has been starvation in the world.
fraction of humanity has gone hungry.

From time to time,

At all times probably a considerable
In a world with reasonably good storage

and transportation, however, the two phenomena are far from identical.


people are hungry because they are poor, not because there is no food.


most of the time world hunger seems to coincide with manifestations of excess
food supply such as government accumulation of surpluses, output restrictions,
and price stabilization schemes.

It may be true that half or more of the

world's arable land is already being farmed, at least until some economic

-8method of desalinating sea water is developed.
farmed very badly.

But most of it is being

The fact that the United States is able to export

33 percent of its agricultural output while maintaining diverse restraints
on this output, and can do this by the work of four percent of its labor
force, shows what an efficient agriculture can do.
One of the facts that differentiates food from oil or coal or
other sources of energy is that there is no substitute for food.


can shift from oil to natural gas or coal or even to solar energy.
cannot shift away from food.


However, there are substitutions within the

food sector, and the United States has just gone through a major substitution.
As a result of price changes, the consumption of meat has dropped from 195
pounds in 1976 to 181 pounds in 1979 per capita.

As in the case of oil, the

price elasticity of demand for particular kinds of food has proved high.
If the price of animal products should continue to rise, no doubt man would
shift increasingly to direct consumption of vegetable products.
animals to feed people is a roundabout and expensive process*

If food

problems ever were to become serious for the United States, substantial
substitution would be possible.
This is not true, of course, for poor developing countries where
people eat relatively cheap food.

For the most part, however, developing

countries have been improving their food situation by improving their farming.
China, with approximately 22 percent of the world's population, is reasonably

India, with twice as much arable land per capita as China,
Pakistan and Indonesia are other

-9What may not be manageable is the situation of some African

Great backwardness combined with very high population growth

and in some cases an inhospitable environment seem to be the reason.


should not make a world food crisis out of the plight of these particular
countries, since other countries could with little sacrifice take care of
those needs were they so minded.

I shall revert to this question in

connection with population.

Primary Products In General
An exercise guaranteed to arouse public alarm is to demonstrate
that over some predictable period we shall be running out of some particular
raw material, particularly if its principal source is located in some
vulnerable or less than friendly country.
bauxite, and cobalt are among the examples.

Manganese, platinum, chrome,
For many years, a rise in the

price of these and many other primary products has been predicted, pointing
to a severe worsening of the terms of trade for the industrial countries.
In fact, however, such shifts of a general sort have not occurred.

On the

contrary, the problems affecting most commodities, as their producers keep
telling us, continue to be inadequate prices and unstable markets.
Within this group of primary products, substitution, of course, is
relatively easy.

It is hard to believe that the world's development would

have been very different had the world's crust not contained such substances
as cobalt, lead, or even copper.

Moreover, a Ricardian rather than Malthusian

view of the supply of such commodities suggests that there is no absolute
limit to supply, but an unlimited supply at ever rising costs.


-10substances, to be sure, could be priced out of the market.

But the fear

which arose after the first oil shock that some commodities, such as bauxite
and copper, might be successfully cartelized by their IDC producers seems to
be put at rest by the possibilities of substitution, aside from the apparent
inability of the producers to form an effective cartel.
Are the market mechanisms in place that should warn us of an
impending shortage if, contrary to expectations, some critical shortage
should be in the offing?

The pricing of nonrenewable natural resources is

a difficult matter, as I already have noted in connection with oil.


mining properties and the like are bought and sold among large producing
firms, one should think that the best available foresight is being brought
to bear on the valuation of such assets.

Anybody who believes that, over

the next ten or twenty years, some metal or mineral will do what oil, gold,
and silver have done, has an opportunity to become wealthy if he can back his
judgment with money.

Of course, there are risks.

They relate to political

events, affecting both the potential supply and the possibility of establishing
a dependable claim to such resources.

That, however, has nothing to do with

worldwide availability over time.

Land is needed not only for farming, but for people.

One of the

concomitants of economic growth, both per capita and aggregate, has been a
greater conglomeration of people in cities.

One of the concomitants of

conglomeration has been crowding, social tensions, violence and crime, and

Some of these conditions can become a serious threat to growth

in an orderly society.

-11Crowding, however, is not a necessary condition of growth.


does crowding necessarily lead to the evils it has produced in many places.
Japan is an example of a country with little space and considerable crowding
which nevertheless maintains a very orderly society.

The United States is

an example of a large empty country with high local concentrations of people
which has allowed its cities to deteriorate.

Mexico City reportedly is

expected to have 30 million inhabitants by the end of the century, a good
part of whom will in effect be out of touch with the normal processes of
government and the infrastructure of the city.
Evidently the mechanisms that one might expect to operate to fore­
stall or correct such developments are not fully operative.
they exist.


In the United States, the movement of population is by no means

all into the cities.

A substantial outward movement is going on which in

some cities already is leading to net outmigration.

The economic forces at

work are, on the side of inmigration, the attraction of jobs, higher pay, and
city life.

On the side of outmigration they are the high cost of city living,

its inconvenience and risks, and the growing possibilities of making a good
living outside the cities without becoming a farmer.
Technology, it would seem, is mostly now on the side of dispersal.
Prospective improvements in transportation into and within the city seem to
be few.

The communications technology that would make it unnecessary for

large numbers of white-collar workers to come together under one roof seems
to be expanding rapidly.
the cities.

Most major industrial operations have long abandoned

-12These corrective mechanisms do not work with adequate strength
because most of the negative effects of crowding are externalities.


is to say, the individual who comes to the city does not bear the full
burden of the addition that he makes to the city's problems.

Most of the

burden, from increased apartment rents to crowded sidewalks, is upon those
diready there.

Needed is a device to internalize these externalities that

the newcomer inflicts upon others.

It is not easy to conceive of a tax,

of course, that might be paid by newcomers but not by old residents, but
something with the effect of such a tax would weight the scales in the right

So would a subsidy to those who would outmigrate, although its

political viability is equally questionable.
social engineering.

There is room here for innovative

In any event, I find it difficult to argue that a country

like the United States should limit either the growth of its economy or of
its population in order to deal with the problem of crowding of cities.
There are other countries where this advice would be more appropriate.

In the computer runs of "Limits," pollution is always the ultimate
source of catastrophe if the problems of energy, resources, and food are
somehow solved.

Since the appearance of "Limits," we have learned something

about pollution, just as we have learned something about energy. Government
action against pollution has been one of the more effective approaches of
the government to problems associated with growth.

One reason for this may

be that the actions taken have been politically popular because typically
they have been, or at least have been perceived as, directed against

-13producers rather than consumers.

As a result, substantial success has been

attained In cleaning up air and water.
Considerable resources have been Invested, and the cost of these
undoubtedly has helped to limit productive investment and has contributed
to the marked slowing cf productivity gains in the American economy, from
an earlier 2-3 percent per year to practically zero in recent years.


disappearance of productivity gains, in turn, has aggravated the problem
of inflation, given the habituation of the labor force to continuous realwage increases of 2 or 3 percent.

Inflation, again, has contributed to

unemployment directly and indirectly.

The total cost of controlling

pollution, therefore, is higher than its direct cost.

But by no means all

of the slowdown in productivity can be charged to pollution control, in
view of the fact that other countries have also made progress in that
direction and have nevertheless maintained some, although a reduced, rate
of productivity gains.
The control of pollution has not been done by the most economical
it —

The naive response to the presence of pollution —
has been the typical response.

to economic costs.

simply to prohibit

Only of late has attention been given

Little progress has been made with the internalization

of pollution damage, i.e., with tax and other devices that would throw upon
the polluter the cost of his pollution and give him an incentive to remedy it.
More could be done than we have at lesser cost if more sophisticated techniques
were employed.

-14Overall, the experience of pollution control over the last ten
years seems to suggest that we can deal with many forms of pollution.


are some forms of such cosmic magnitude that it has not even been possible
to make sure how they work, let alone come to grips with them.

There are

those who believe that high-flying planes, or aerosol cans, or whatever,
will cause a hothouse effect by trapping heat permanently in our atmosphere.
They see the ice caps melting and the continents inundated.

Others observe

mechanisms that cause the rays of the sun to be reflected by the atmosphere,
leading to a cooling off and perhaps a new ice age.
At this point, the well-meaning but not very focussed and rational
character of doomsaying becomes very apparent.

It is not essential

whether the citizen is threatened with a new deluge or a new ice age
as a result of economic growth.

The main thing is that he be scared and

carry away some predisposition against growth.

By the same token, if one

supposed road to disaster, say the depletion of resources, is plausibly shown
not to lead there, another readily can be put in its place.

Thus, as it

became increasingly less plausible that depletion of resources will ensure
trouble, emphasis has been placed on environmental factors.

And as these

increasingly come to be seen as controllable, the arguments shift to social

Instead of starting with the premise that growth is bad and then

finding the arguments to prove it, why not assume that it is good unless there
is compelling evidence of damage?

The question about the limits of economic growth is a question, of
course, as to the level of population that the world can sustain.

If world

-15population tapers off at a moderate level (it is now 4.3 billion), the
problems of food, crowding, and pollution will be more readily solvable
than if it tends toward a higher level.

"Limits" sees world population

overshooting the support capabilities of our planet and then diminishing
drastically in starvation, pollution, disease, or war.

This leads to the

necessarily extremely speculative examination of the outlook for world
population growth.

But first two points should be made.

First, the

problem of nonrenewable resources would not be resolved permanently by
the lower world population.
would be postponed.

Only the time when these resources ran out

Second, a reduction in world population does not have

to be associated with visions of disaster.

To be sure, the world has seen

such disasters -- in the fourteenth century, the Black Death reduced the
population of England by perhaps one-half.
of numbers is conceivable also.

But a much more humane reduction

If the average number of children per family

were to drop progressively from present levels, population would soon begin
to decline.
Estimates of world population by the year 2000 run from 5.7 billion
to 6.35 billion.

Beyond that, they diverge even more imaginatively.


2000 estimates of a minimum of 10 billion by 2030 and a maximum of 30 billion
by the end of the 21st century have been cited.

Once more, the question is

what mechanisms are in place to cope with tendencies toward excessive growth.
The simplest mechanism, of course, is that described by Malthusians for many
years and spelled out in greater detail by "Limits":
survival is impossible.

People die off because

This mechanism has not been validated in general

-16although it seems to have operated in some cases.

Growth patterns have

been well defined for many countries that have reached approximate population
stability or at least a slow rate of growth.

The population cycle begins

with declining death rates, thanks to better health, food, and general
sustainability of life.

For a while population explodes.

Then birth rates

begin to come down and eventually population slows or levels off altogether.
The outcome depends on how quickly birth rates follow death rates.
A reasonably good correlation has been observed, across nations,
between per capita income and birth rates.

This relationship can be used

to derive population estimates from income growth estimates, within a very
wide margin.

This is one technique by which some estimates of future

population levels have been made.

There can be no assurance, of course,

that the past negative relation between birth rates and per capita income
will be stable hereafter.
There is, however, a discernible mechanism that tends to drive the
birth rate.

In low-income societies, which means predominantly farming

societies, children are assets.
investment in a producer good.

Economically speaking, procreation is an
As people leave the farm and the society

becomes increasingly urban, children cease to be earning assets to their

Economically speaking, they in effect become consumer goods, b o m

for the enjoyment of their loving parents.

As the costs of child rearing

and education rise, and, in some cases, the problems of family life multiply,
parents tend to reduce the number of children.

In countries without primo­

geniture, or where stable family fortunes of a financial sort are significant,

-17the desirability of avoiding a fragmentation of the inheritance becomes
another driving force for family limitation.
Are these mechanisms likely to operate as effectively in developing
countries as they have in present-day industrial societies?
the matter is complicated by religious factors.
an important role.

In many countries,

Government policy can play

China, for example, has achieved a level of population

growth of 1.6 percent which for its per capita income is remarkably low.
In a democracy, things are less easy.
may be the key.

Information rather than propaganda

Power politics between developed and developing countries

can also play a role, although it is obvious even now that within two
generations the people of today's industrialized countries will represent
a small minority, perhaps 1.3-1.4 billion, out of a much larger world

Let me summarize the conclusions at which I believe we have arrived.
The course of events following the publication of Limits to Growth has
superficially seemed to bear out the predictions of the book with remarkable

Actually, events have provided some test cases that allow a better

evaluation of these predictions.

What we have observed so far is that the

pressures generated by growth and the problems resulting from them are real.
But we have seen also that, at some cost, it has been possible to overcome

We have also found that there are mechanisms at work that should

produce a soft landing, if the limits to growth are ever reached, as they
may be.

Some of these mechanisms require strengthening.

The means to do

-18that are at hand also.

Given expected private behavior and sensible

public policy, therefore, no catastrophe seems to loom in the distant

We can be even more confident today, after ten more years of

experience, than we had reason to be in 1972, that these problems can
be solved.