This course is a broad analysis of the interactions between human society and the natural world.  Indeed, we might argue that society exists because the resource constraints of the natural world require humans to cooperate in determining how those resources can be used with reasonable efficiency.

We will discuss the theoretical evolution of government as a social contract: individuals forego certain rights and liberties for security of person and property.  The exchange is mutually beneficial: we all enjoy a better standard of living if we all agree to forego our "rights" to kill each other or steal each other's stuff.  We create social institutions, including government, and surrender certain rights to them, in exchange for security, comfort, etc.

Cooperative exchange is a fundamental human activity predicated on some allocation of property rights.  In the simplest barter economy, if I have what you want and you have what I want, we may negotiate a mutually agreeable swap that leaves both of us better off than we were before.  But barter economies are terribly inefficient, since each transaction requires that the two parties have contemporaneous reciprocal needs.  We can facilitate exchanges a great deal by defining some medium of exchange such as gold or seashells or dollars.  Now people can exchange their goods and services for "money," confident that they can then exchange the money for whatever else they want.  Money is also typically a store of value; an individual sells goods or services for money in one time period, and the money holds its value until it is spent on purchases in a subsequent time period.  Money is thus a fundamental market-facilitating social institution.

In fact, many economists such as Mancur Olson would argue that the fundamental role of government is to facilitate markets.  Olson's final book Power and Prosperity (1999) argues that democracy naturally evolved to promote market efficiency, and that the principal reason some economies grow faster than others is that fast-growth economies have better market-facilitating institutions.  We will discuss various forms of government, and the interplay of politics and economics in each of these forms, later on in this course.

Economics--the "Dismal Science"

The most commonly-used definition of economics is "the study of the allocation of scarce resources among competing uses."  By definition, any economic resource or "good" is scarce, and if it is a market good, its scarcity will determine its price.  To reinforce this idea, consider the well-known "diamonds vs. water" paradox: because it is generally plentiful, water is priced very cheaply, even though it is essential for life; diamonds are expensive because they are scarce, even though they are comparatively useless.  (In contrast, economic "bads" such as crime and pollution are in excess supply and provided to you free of charge!)  Note that not all goods are market goods.  There are many non-market goods that have value, such as biodiversity, water quality, health, etc.

Most scarce goods and resources have alternative possible uses.  You can spend your money on a hamburger, or a piece of pizza.  Or you could skip lunch and spend it on a book, or save it to spend next year and maybe earn a little interest on it from the bank in the meantime--it's your choice.  If your objective is to get the most benefit you can from your money (which is a pretty reasonable-sounding assumption for a rational consumer), you will allocate it so that you get the maximum afordable level of satisfaction.

As the above definition suggests, economics is a general decision science.  It deals with a lot more than just money and markets.  We will use economic theory to contrast efficient market situations where the self-interested behavior of individuals results in socially optimal outcomes, with situations of market failure, where the self-interested behavior of individuals causes real social harm.

Econimics is sometimes called the "dismal science" because it is the science of scarcity.  One of the most articulate prophets of scarcity is Thomas Malthus, the 18th-century economist.

Born in 1766, Malthus graduated from Jesus College, Cambridge, in 1788, was ordained as a minister, and then returned to teach as Jesus College in 1793.  His famous Essay on Population, first publshed anonymously in 1798, argued that the human population increases exponentially (using US population data provided by Benjamin Franklin as evidence) while food production only increases arithmetically; consequently, unless society can somehow implement some "preventive checks" on population growth, population will inevitably exhaust the Earth's carrying capacity and encounter terrifying "positive checks:" war, famine and disease.  As humanity is reduced to a bare struggle for survival, society collapses.  Malthus notes that the poor will suffer first and worst, and his only prescription, admittedly weak, is that the poor and working class should use "moral restraint" to limit family size.  He also suggested gradual elimination of Britain's Poor Laws (public assistance), and restrictions on food imports and exports to raise food prices and stimulate domestic food production.

Malthus's logic is simple and compelling, and has been restated countless times over the last 200 years by many less talented writers.  He wasn't the first to fret about overpopulation (see Jonathan Swift's A Modest Proposal, published in 1729, for example), but his Essay has inspired a cottage industry of "crash and burn" prophecies that persists today.  A famous recent doom-and-gloom Malthusian forecast was published by Meadows and Forrester (aka "Club of Rome") in The Limits to Growth (1972): same basic argument with a few more wild extrapolations that had an aura of authority because they were done on a computer.

It turns out Malthus was using faulty data: the US population statistics he cited failed to distinguish births from immigration.  More importantly, Malthus was unaware of links between wealth and population growth that 20th century economists have discovered.  Economic development theory posits four demographic growth stages for societies:

1. a pre-industrial society has high death rates offsetting high birth rates, and a stable population;
2. an early industrial society has better health care, which lowers death rates while birth rates remain high, so population grows rapidly.  Children represent investment vehicles for families.  This "take-off" stage best describes Britain and the US at the time Malthus wrote; he never foresaw the next two stages.
3. a more advanced industrial society offers higher-return investment vehicles, and education induces families to have fewer children, so population begins to stabilize again.
4. a mature society with birth control, good education and work opportunities for women offers even more incentives to limit family size, so population stabilizes.

There's no question that the world's population is continuing to grow, and that we are gradually using up various exhaustible resources such as oil and gas.  Doesn't this support the Malthusian hypothesis?  Not necesarily.  Some optimists such as Julian Simon argue that population growth is necessary for continued economic growth, and evidence from developed nations tends to support this hypothesis.  Nations such as Switzerland and Italy that now have very low birthrates are facing serious long-term problems: they will have fewer and fewer working-age citizens to support disproportionately large elderly populations.  They will probably be forced to liberalize their immigration laws in order to bring more working-age people into their economies.  On the other hand, some African nations now in the "take-off" phase of economic development do have alarmingly high population growth rates that threaten their long-term growth prospects, particularly where they lack sufficient productive land and capital to support continued growth.

We aren't really "running out" of oil and gas the way most people imagine, either.  As we will demonstrate later in the course, competitive markets for exhaustible resources tend to allocate those resources over time in a manner that maximizes the total return from them.  This implies that resource prices gradually rise over time, motivating more conservation behavior, more exploration for new reserves, and more R&D into conservation and substitute technologies.  These all help postpone the time of depletion.  It is very unlikely that the depletion point will be traumatic: the lights won't just go out suddenly, leaving us all to just freeze in the dark.  Since markets anticipate scarcity, it's a lot more likely that the last barrel of oil will probably be pumped, processed and consumed unnoticed in some technologically obsolete backwater; the rest of the world will have moved on to one or more substitute resources.

What about those famines in Africa we read about in the paper or see on TV--isn't that evidence we're running out of food?  In fact, today's famines are strictly a consequence of war or grossly misguided government policies.  Unscrupulous governments often engineer famines as a means of suppressing rural insurgencies.  Or governments may set price ceilings on food to please urban interests, ignoring the fact that the low prices will cause farmers to reduce production and increase dependence on food aid from abroad.  Forty years ago, China and India, the world's two most populous countries, were both highly dependent on food imports.  Today they are largely food self-sufficient.  The Green Revolution of the 1960's, which introduced new hgh-yield crop varieties to many parts of the world, and today's biotechnology initiatives appear to promise plentiful food for the forseeable future.