The Economic Way of Thinking

The Peak Oil Fallacy

Take a good look at this graph:

Projections like this have been around for decades.  Take a look at the "peak oil" discussions at World Without Oil and Scenario Thinking, for example. To expose the fallacy, we provide a similar one in the appendix to chapter 6 of our EWOT textbook.  Notice that the graph predicts a shortage of oil over the next twenty five years.  It uses supply and demand curves -- the language of the economist -- but those cannot possibly make sense.  Supply and demand represent the plans of sellers and buyers at differing prices a scarce good on the market.

But where are oil prices in this graph?  There aren't any.  Price, and its role in adjusting quantities supplied and demanded, is nowhere to be found.  Should demand grow and/or supply fall over time, the price would rise to capture the greater scarcity of oil, and oil would therefore be conserved or economized in response.  All that is absent in this type of model.  In short, the model is economic nonsense.

It seems like this type of model undergirds the new "biophysical economics:"

The new field shares features with ecological economics, a much more established discipline with conferences boasting hundreds of attendees, but the relatively smaller number of practitioners of biophysical economics believe theirs is a much more fundamental and truer form of economic reasoning.

These physicists, ecologists and a few weak economists focus only on the projected quantities of oil, and energy, that are expected to exist in the world, and have no understanding or appreciation of the use of market prices to coordinate the plans of its producers and users.  I call their approach the Peak Oil Fallacy, and I've discussed it for years in my EC 101 course.  While "biophysical economics" seems to examine quantities alone in its so-called supply-demand model, economics is about choices and decisions in a world of ever-present scarcity.  When will they learn?  Have the economists among this group ever learned the coordinating role of markets and prices?

The Economics Of Congestion

No, not nasal congestion.

When roads and other publicly-owned property are "congested," the blame is almost always placed on a growing population.  But that same population uses a variety of privately owned goods and services from movie theatres and dude ranches to "necessities" such as grocery stores and healthcare. 

Yes, sometimes even the private suppliers face "congestion," such as the latter.

Why is it that we tend to explain "congestion" and "scarcity" as a result of a growing population when that same population demands a variety of other goods and services without the lack of physical space, without lines and shortages?  In short, why, in the economic way of thinking, is the growing population argument in itself an unsatisfactory explanation of the facts that we witness daily?  Go back and think about roads, such as the highway system around Los Angeles or the roads in Mexico City or New Delhi.  Can you think of a better explanation?

EWOT Question Of The Moment: Supply and Demand

Why do travelers through the western U.S. during the summer often encounter a shortage of camping spaces in the national and state parks but not a shortage of motel rooms in nearby areas? (p. 117).

Not the Age-Old Question

Which is more scarce:  a chicken or an egg? 

Briefly explain how you arrive at your conclusion.