Intergeneration Equity and investing Rents from Exhaustible Resources, John Hartwick
- Intergeneration Equity- In Intergeneration Equity and investing Rents from Exhaustible Resources, John Hartwick interrogates the fairness of investment patterns to the future generations. While using several economic models, the author explores the behavior of consumption and output with regard to reproducible capital and profits made from exhaustible resources. In particular, Hartwick notes investing all profits on machines (reproducible capital) and consuming the remainder of the production output leads to depletion of exhaustible resources with time. Because all inputs are necessary to production, depletion of exhaustible resources indicates that such kind of investment model is unsustainable, hence unfair to the future generations.
- Increasing reproducible capital leads to overproduction- According to Hartwick, it is necessary to adjust the current investment models to control the depletion of resources, hence uphold intergenerational equity. The assumption that current flow from machines and labor can sustain consumption for an extended duration of time is wrong. Because of depreciation, machines require constant maintenance and replacement. In this regard, making a huge investment in machines yields high costs of maintenance and replacement to support production. While all profits are spent on machines, it is necessary to increase production to meet the rising cost of maintenance and replacement. However, high levels of production an increment of productive capital. Thus, an extended duration of investing all profits on machines demands an increasingly high amount of productive capital to support a constant per capita consumption.
- High reproducible capital leads to a decline in per capita consumption- the ratio of consumption to production output significantly declines when all profits are converted into reproducible capital. A high number of products is required to offset the depreciation costs. Thus, when all profits are converted into reproducible capital, it is necessary to increase production or suppress consumption to accommodate a rising depreciation
- Profits must accommodate deprecation cost- to sustain a constant consumption and production, it is necessary to ensure that profits can accommodate depreciation costs.
John Hartwick’s article on intergeneration equity and consumption captures the importance of the evolution of economic methods in addressing the depletion of resources. By using concepts and frameworks developed by other economists, such as Hotelling, Hartwicks reveals the need for conducting continuous research to develop effective solutions to economic solutions. In the process of solving the consumption, production and investment problem, the author uses the Cobb Douglas technology case to show the importance of having all inputs, including exhaustible resources, to generate a positive output from the produced units. Moreover, the author emphasizes the importance of research, by highlighting other economists, such as Solo and Solo and Wan, who had used the Cobb Douglas technology case in their work. However, Hartwicks challenges the Hotelling rule, which emphasizes the importance of efficient extraction of exhaustible resources. Developed by Hotelling Harold, the Hotelling Rule indicates that increasing the efficiency of production can reduce the marginal cost, hence increase the output of a product. Nevertheless, the model fails to accommodate the high cost of depreciation that emanates from converting a high amount of output into reproductive capital. In this regard, it is necessary to increase the level of production to accommodate high depreciation costs while converting a significant amount of profits into reproductive capital. Because all inputs are important to production, implementing an economic model based on the Hotelling rule, which demands an infinite supply of exhaustible resources is impossible. Thus, by highlighting this shortcoming of the Hotelling model and acknowledging other research-based milestones, Hartwicks, clearly articulates the need for conducting studies to uphold intergenerational equity.