Absent a huge time discount, leave it to the market

Decades ago, I came home from university for holidays, filled and thrilled with the knowledge acquired from a course in international energy. "The world only has twenty years of oil left!" My father, an independent in the international oil industry with more than thirty years experience in the cycles of the industry, and an engineer's engineer, quietly responded, "The world always only has twenty years of oil left." He then elaborated on the cost of capital, the lead times between exploration and production, the cost of finding oil for which there is no market, and the delicate interplay of trying to find enough oil to produce for the volume of oil you think will be needed at a price you think the market will be willing to pay a decade or two in advance.

I probably learned more in that brief exchange than in the entirety of the rest of the course (which was, in the scheme of things, a pretty good course despite my callow naievete.) My take-away was that there are two miracles in play: 1) the science and engineering miracle of finding and producing the oil and gas and 2) the miracle of coordination, communication, and the delicate interplay of multiple parties with multiple agendas and priorities. Only later would I come to understand the second miracle as The Problem of Knowledge as explicated by Friedrich Hayek, the great Austrian economist.

I am reminded of this by A Rare (Earth) Case of Wisdom by Alex Tabarrok. The story essentials are that half a decade ago there was a sudden alarm about the concentration of rare earth production in a near monopoly held by China. The lesson of my father told me that while this might conceivably be concerning if your horizon was a week, a month, or a year, that in fact, if it were a real issue, that the market would adjust and the monopoly would be eroded.

Four years ago we were being warned that China’s monopoly on rare earths was a threat to the United States. Since rare earths are key resources for both national defense and green technology, the crisis united right and left in fear and anger.

[snip]

Yet you probably haven’t heard much about this crisis recently. Why not? Ans: The crisis was exaggerated and what wasn’t exaggerated the market alleviated. Eugene Gholz of CFR has a balanced examination of what happened. I summarize:

The Chinese government might or might not have wanted to take advantage of their temporary monopoly power (it’s still unclear what the fishing incident was all about) but Chinese producers did a lot to evade export bans both legally and illegally.

Firms that had been using rare earths when they were cheap decided they didn’t really need them when they were expensive.

New suppliers came on line as prices rose. Innovations created substitutes and ways to get more from using less.

It is surprising how some of our best "experts", or at least our loudest commentators with the most confident pronouncements, get it so wrong. I suppose it is function of the desire on the part of the totalitarian "to do something" and who therefore ignores, forgets, or simply fears simply waiting for the complex system of the market to work its way around the purported problem.

I also suppose that the issue is not, "What should be done?" Broadly and in most instances, we should wait for the market to clear, even if that takes time. Rather, the question becomes, "Is there a pressing reason to address this problem faster than the market will adjust?" There are times when the answer may well be Yes. But probably not as often as special interests, rent seekers, special pleaders and other accretions of the regulatory system wish it to be.

This is similar to the issue of economic development. Post World War II, and particularly with the lessons learned about central planning for the war effort and then the success of the Marshall Plan in reigniting the German, Japanese, French and British economies, there was a huge time discount regarding economic development. We couldn't leave it to the market. People around the world were in poverty! For three decades in both the developing countries themselves and among the aid donors, there was an immense amount of project-based central planning. The clerisy ran from the chaos of constantly adapting open markets.

Then in the late seventies and eighties, emerging frustration with the wasted dollars and low levels of progressed led to a slow and reluctant adoption of freeish market economies. And the rest is history in terms of reducing poverty.

The lesson seems to be that your default solution should be to let people have choices, you should facilitate free exchanges, and you should provide the rule of law if you wish to really want progress towards abolishing poverty. Too often, policy makers still rely on their belief in themselves to arrive at better answers than their track record would justify.