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Source link: http://archive.mises.org/5842/new-working-paper-on-resource-exhausibility/

New Working Paper on Resource Exhausibility

November 2, 2006 by

Resource Exhaustibility: A Mythology Refuted in Entrepreneurial Capital Maintenance by John Brätland (Department of the Interior)

Contrary to myth, extractive resources are replaceable capital goods in the context of entrepreneurial plans to maintain capital. The existence of extractive-resources has no economic significance outside of this context. Aggregate resource stocks have no bearing on human action. The exhaustion myth ignores entrepreneurial action and reflects preoccupation with global exhaustion and presumed ‘un-replaceability.’ But entrepreneurial capital maintenance refutes this myth. Capital is the entrepreneur’s net capitalized appraisement of ‘entrepreneurial rents’ obtainable through strategic investments in capital goods. Hotelling rents are subsumed in entrepreneurial rents. As extraction costs increase from site-specific depletion, entrepreneurial firms strategically maintain capital by choosing the scale, timing and location of investments in exploration, development and other means to resource replacement. But capital maintenance is not necessarily limited to physical replacement of depleting capital goods and cannot be limited to exploration and development. A final section examines existing institutions that impede this capital-maintenance process.

{ 2 comments }

N. Joseph Potts November 2, 2006 at 7:32 pm

From liberal friends of mine, I hear much wailing about government subsidies to the petroleum industry. As best I can make out, they are referring to the depletion allowance, though they never seem to know this term, which is not a subsidy, but a provision in the Internal Revenue Code whereunder extractive industries are allowed to reduce their taxable income by an amount related to the quantity of “irreplaceable” natural resources they extracted in the course of generating their taxable income. This is over and above whatever cost (also deductible through amortization) the taxpayer may have invested in acquiring rights to said resources.

This paper would appear to argue that depletion allowances have no economic validity behind them, which might align Austro-libertarians who agree with it, with the aforementioned liberals who are in such dudgeon about “subsidies.”

But before we align ourselves against the depletion allowance, let’s not overlook that it IS a reduction of a TAX. Most of us (this includes me) never met a tax break they didn’t like, as a matter of principle. Yes, of course it’s distortive, and so in the tax it provides a break from. Yes, we don’t get it – Big Oil does -but the point is, that the GOVERNMENT doesn’t get it.

So I’m against the depletion allowance only in this sense: I favor reducing the income tax RATES (or perhaps eliminating the income tax). Either step will reduce the VALUE, and hence the importance, of depletion allowances. Let it fade to insignificance along with the tax it provides some with a break from.

David C November 2, 2006 at 10:31 pm

There is one other institution that causes resource depletion, the Fed. The Fed intentionally distorts their monetary policy to ensure that all that extra money they push into the system goes into stock bubbles, into real-estate bubbles, even into foreign reserve accounts. But they fight tooth and nail to keep it out of the resources sector because those costs limit debt and consumption. Especially with gold and silver which compete against the dollar as a currency. For example, in the 90′s several silver mines closed even though there is an ongoing silver shortage. Why? Because in spite of supply shortages, the price of silver kept getting driven down.

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