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A century of misunderstanding of a key tool in the economics of natural resources

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In an article written in 1931, the American economist and mathematician Harold Hotelling printed a mannequin to explain the evolution of the costs of non-renewable assets. Following the 1973 oil disaster, the mannequin aroused contemporary curiosity: the expansion theorist Robert Solow named the preliminary equation on this article ‘the Hotelling rule’, establishing it as a elementary precept of the economics of non-renewable assets. Nevertheless, the costs noticed over the previous century have by no means been consistent with this equation*, one thing which has consistently puzzled economists.

Regardless of every little thing, the Hotelling rule nonetheless retains its central standing within the economics of mineral and vitality assets: it’s on this foundation that extra refined ‘extensions’ are constructed to account for market realities. Roberto Ferreira da Cunha, from the Berkeley Analysis Group (Brazil), and Antoine Missemer, a CNRS researcher hooked up to CIRED, the Worldwide Centre for Analysis on Atmosphere and Improvement (CNRS/CIRAD/AgroParisTech/Ecole des Ponts ParisTech/EHESS), undertook an in depth and unprecedented examination of Harold Hotelling’s archives**. By analysing the origins of the mannequin, they conclude that its scope of validity is extra restricted t han generally established, and decisively make clear the explanations for its empirical weaknesses.

Hotelling’s drafts, in addition to his correspondence, with oil engineers for instance, level to a reinterpretation of the 1931 article. It seems that the ‘rule’, which he had devised as early as 1924 for summary belongings, was on no account meant to be utilized to the concrete case of mineral and vitality assets. From 1925 to 1930, Hotelling himself recognized unavoidable geological constraints that modified his preliminary consequence: elevated manufacturing prices as extraction progresses, or the price ensuing from ramped up manufacturing. As he outlined, this reworked his mannequin, which was then doubtlessly capable of describe bell-shaped manufacturing paths, equivalent to these utilized in debates about peak oil.

The 2 researchers thus present that, if the Hotelling rule has such issue in passing the hurdle of empirical checks within the subject of vitality and mineral assets, it’s as a result of it was not designed for that! They suggest to reconstruct the fashions used on this space, taking as a place to begin an alternate Hotelling rule that’s extra consistent with geological realities. Extra usually, their examine questions the theoretical devices used to handle vitality and environmental points at present. Historical past, and on this case the historical past of financial thought, may also help to take a contemporary take a look at instruments that, though thought of properly established, nonetheless need to be questioned.

This work was carried out as a part of the mission Bifurcations in Pure Useful resource Economics (1920s-1930s), funded by the European Society for the Historical past of Financial Thought (ESHET).

*- The equation states that, in a aggressive state of affairs, the worth of such assets will increase over time on the rate of interest noticed within the financial system.

**- Hundreds of pages, contained in 58 archive containers, saved at Columbia College, New York. 20 to 30 paperwork taken from varied information have been recognized after which utilized by the 2 researchers for his or her evaluation.

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Materials supplied by CNRS. Notice: Content material could also be edited for model and size.


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