Wednesday, May 27, 2009

Production-possibility frontier & sustainability

As of today (well, it's after midnight here now, so to be precise, the 26th), I've started a short but intense macroeconomics class at school. Since it's sure to be fairly relevant, I'm going to blog about various subjects that come up, as we cover them (or sometimes, just because it's suggested by something covered), hopefully on a regular basis for as long as it lasts. For the first installment, I'll discuss the production possibility curve, as my teacher calls it. Wikipedia uses a slightly different term; I don't have a special preference myself, yet.

Let's start off with the basic Wikipedia definition of a production-possibility frontier:

In economics, a production-possibility frontier (PPF) or "transformation curve" is a graph that shows the different rates of production of two goods that an individual or group can efficiently produce with limited productive resources. The PPF shows the maximum obtainable amount of one commodity for any given amount of another commodity or composite of all other commodities, given the society's technology and the amount of factors of production available.

Here is a graph I made of the particular example that was used in class, where the X-axis represents butter, and the Y-axis guns. (A classic hypothetical example; no particular significance, other than one being a military want and the other a civilian want.) It represents this idea that as more of one good is produced, more of the other good must be sacrificed to produce the first, at an accelerating rate. When very little butter is being produced, sacrificing a small part of gun production can increase butter production significantly. When a great deal of butter is produced, a much greater part of guns must be sacrificed to achieve a similar gain in butter production.

The relevant facts of the curve for my purpose at the moment are that areas above or to the right of the curve represent productions that cannot be obtained with current technology, resources, and time (that is, the curve represents maximum production for a certain period, whether that's a year, or month, etc.). Points to the left of or under the curve represent production combinations that can be achieved, but the further they are from the curve (and the closer to the origin), the less the productive efficiency is. That is, at such points, the resources available are not being converted into guns and/or butter at the fastest rate possible. At points on the curve, this fastest rate is being achieved, and productive efficiency is maximized.

This is where I have to object to the way this is expressed and presented. It seems to be implied that any of these points under/left of the curve are inherently undesirable outcomes, and productive efficiency should be maximized. (We also covered positive and normative statements in economics today; this would be one of the latter.) This, in turn, means that we should seek to exploit natural (and other) resources as quickly as we can extract them. But, for resources that are nonrenewable and consumable (or those that are renewable, but at the PPF, are being used at a rate in excess of their renewal), such as oil and other fossil fuels, it can mean that in the end, they will be used less efficiently overall (there's probably a name for the particular kind of efficiency I mean here, but we haven't gotten to a term for it yet), and they will dry up sooner.

The End of Civilization As We Know It being accelerated is not what I, for one, would really consider an optimal solution. I hope that those who've taken more serious economics classes are getting a good clarification, that this production efficiency isn't always most overall efficient, and something to always strive for. But I'm afraid it might well be that it's promoted, with at best a few of those crazy tree-hugging liberals pointing out that this efficiency isn't necessarily ideal. And that would be, frankly, tragic.