I just read an April report by Jeremy Grantham, who argues that in view of resource constraints we need to make serious policy changes. I agree that serious policy changes are desirable, but not simply because the cost of natural resources will now go up undefinitely, as Grantham predicts. It is almost always intellectually feasible to generate negative projections from a selection of current trends, as G does from the growth of population and wealth, the rising price of commodities, etc. He's a true descendent of Paul Ehrlich, who wrote the Population Bomb in the sixties. It is much harder, however, to generate positive projections for the simple reason that the driving forces are often unknowable.

In my view, there are four forces that generate economic growth. (1) Throughout most of history, population increase was the only one measurably operating. (2) With the development of systematic R&D in the late 19th century, innovation became a second force for economic growth. The availability of new and desirable products stimulated demand, and there was resulting economic growth PER CAPITA, not just in gross. (3) The third force for economic growth is marketing, a force that intellectuals like me often deride. But marketing makes goods and services desirable, often vastly more so than technological innovation. I think that marketing has vastly improved in quality during the late 20th century as R&D and technology have made it more effective. (4) Finally, we should not neglect institutional improvement.  As with innovation, this force was very much hit or miss for most of history. But with record-keeping, historical and social learning, and improved education—even for politicians—our understanding of how institutions affect economic activity has greatly improved, political craziness notwithstanding. Compare the 2007-8 response to market crashes with those of 1930-31. 

If we look at the resource constraints that concern Mr. Grantham—a longstanding bear, as I recall—population growth obviously works in favor of increasing constraints and, therefore, costs. Even that effect is greatly exaggerated in straight-line projections, however, because it ignores substitution. If we now factor in the power of innovation, marketing, and institutional improvement, I think the long-term impact of resource constraints becomes inherently unknowable, and just as likely to diminish as to increase.

My case is best made, I think, by comparing the resources needed to sustain a given level of economic activity in 1970, say, with today. With the possible exception of rare earths, I cannot think of any natural resource whose use would not have significantly decreased in this comparison.

Moreover, if we look at the costs of production even in China, it becomes clear that labor costs far outweigh material costs, and increasingly so as production moves up the value scale.  And the labor cost impact, due to technology and marketing and institutional improvement may well continue to drop, temporary fluctuations notwithstanding.

In short, I am not very worried about INflation; it is still DEflation that keeps me awake, especially given the current political threats to both the Euro and the Dollar.