afterthoughts on paley

Afterthoughts on PaleyAuthor(s): Colin ClarkSource: The Review of Economics and Statistics, Vol. 36, No. 3 (Aug., 1954), pp. 267-273Published by: The MIT PressStable URL: http://www.jstor.org/stable/1925602 .

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AFTERTHOUGHTS ON PALEY Colin Clark

mT HERE is now no danger of confusing one Paley with another. But in nineteenth-

century England "Paley's Evidences" was a household word. To pass an examination on this theological treatise was obligatory for Cambridge undergraduates; with certain alternatives allowed, it has remained an examination text until comparatively recent times. A direct descendant of the famous eighteenth- century ecclesiastic was Mary Paley, who married Alfred Marshall, and appears as joint author on the title page of The Economics of Industry, published in I879. A distinguished figure linking modern Cambridge with its past, she survived into the I940's.

To the modern world, however, the name of Paley means the long and sumptuously produced document whose official title is A Report to the President by the President's Material Policy Commission, of June I952.

It is not intended as a condemnation of the report, but rather as a commendation, to say that its primary object was to influence public opinion. To a reader outside the United States, it would appear that the magnificence of its production, the skillful choice of words, and still more of diagrams, whereby simple but important points are unobtrusively yet firmly driven home to the mind of a reader not accustomed to economic literature, all seem to indicate that it was designed to influence business leaders and Congressmen, who are accustomed to having a great deal of printed matter put before them and are only willing to read that which conforms to the highest standards of presentation.

This otherwise plausible hypothesis, however, becomes very difficult to sustain when one con- siders the extraordinary length of the document. One has to assume that one's hypothetical business leader or Congressman, once his interest is really aroused, is willing to go on reading for days. Not that any of the text can be called superfluous; though some of it is more specifically addressed to economists and statisticians, some to legislators. And least of all let us decry the imputed objective. That the United States in the coming generation, in respect of a number

of important raw materials at any rate, will have to be an importer on a largely increasing scale is a truth whose comprehension by legislators and businessmen is urgently necessary. It is indeed a truth of such importance that, if it fails to be properly disseminated and compre- hended, the entire world may be thrown into disorder.

Immediately on its publication, the report did succeed in attracting a great deal of attention in every quarter and in many countries, and com- ments and reviews in popular and other periodi- cals. At this date, no summary is necessary. But a few postscripts may be in order.

We may open the discussion with what at first sight appears to be one of the most important commodities, one moreover where the question of imports cannot possibly arise- namely water. Here is American prodigality at its most striking. Water consumption has risen from 550 gallons per head per day in I900 to i ioo. now. Of the present day figure, it is true, slightly more than half is accounted for by irrigation of crops. But even the remainder, over 500 gallons per head per day, is enormously high. In European cities, consumption of water for all purposes generally does not exceed 50 American gallons 1 per head per day. Even modern cities in hot climates, in Australia and South Africa, rarely exceed a figure of I00.

We see the matter in a different light, however, when we realize that, of the entire use of water apart from irrigating crops, industry takes 8o per cent, household and farm use only 20 per cent. We find a further concentration when we ascertain that much of the former figure represents the enormous demands of steel, chemicals, petroleum, and cooling of electric power gener- ators (for this latter purpose brackish water, which could not have been used for any other purpose, is often used).

'The difference between American and British gallons is an awkward anomaly which ought to be remedied by con- cession on one side or the other, or preferably the abandon- ment of both in favor of the metric system. This difference is said to have caused the loss of a number of aircraft and airmen during the war, when pilots misunderstood the units in which their fuel reserves were recorded.

[ 267 ]



268 THE REVIEW OF ECONOMICS AND STATISTICS

The most convenient unit for measuring large quantities of water is that used by irrigation engineers, namely the acre-foot, or amount of water which can cover an acre to a depth of one foot. Present United States consumption, of about half a million acre-feet per day, represents only about one-eighth of the aggregate flow of all United States rivers and streams. Furthermore, about 6o per cent of this consumption is eventually returned to the rivers, albeit contaminated, in the form of drainage and sewage.

These figures, at first sight, look very reas- suring, but in fact they are the opposite. The flow of rivers varies with the different seasons of the year, and between one year and another, and the water engineer cannot hope to capture anything like the entire flow of the river, even after making the most costly provisions for storage. In most cases, he has done extremely well if he captures, as a long-period average, as much as 20 per cent of the total flow. The present use of one-eighth of the total flow of streams is, therefore, not a small proportion.2

And while the demand increases, supply may contract, especially in the Western states where the situation is most critical. Large-scale storage is necessary, even to capture the present water supply, and storage capacity is being con- sistently and inexorably reduced by silting. "Dam sites are scarce, and when all available reservoirs are filled with sediment, storage and control of water will be practically impossible." Mr. Evelyn Waugh, who apparently took a dis- like to Los Angeles during his stay in Holly- wood, predicted that the city would disappear as quickly as it had grown, and that by the end of the century wild turkeys would again be nesting on what had once been Sunset Boule- vard. This he foresaw because, in any time of war or emergency, "a handful of partisans or parachutists" could cut off the city's water supply. Perhaps he will not even have to wait for a war.

But even if Los Angeles survives, the outlook is not good for the irrigated agriculture of Cali- fornia. We should certainly foresee an end to

its expansion, and probably its contraction. In the Australian state of Victoria, which has a climate similar to California's and which did not begin irrigation until the i88o's, some agricultural land has already had to be "de-irrigated" in order to insure urban and industrial water supplies.

The Paley Report discountenances irrigation, which takes half the available water supply, in favor of industry, which takes rather more than a third. For an acre-foot of water, it contends, used in agriculture produces some $30 worth of gross product, in industry about fifty times as much. But this reasoning is invalid. These are average, not marginal, products. In respect of water as a factor of production, the marginal product of agriculture is probably not greatly different from its average product, whereas industry can surely forego some of its enormous consumption of water without any appreciable effect on its productivity. The irrigation user is at present charged about $3 per acre-foot (which probably just pays for the cost of maintenance and operation of the storage and distribution system), whereas the industrial user has to pay nearly five times as much. Immense savings of water could be made - at a price - if other coolants, in closed circuit, were substituted for water in electric power generation and in certain heavy industrial processes - such substitution, we are told, is already technically feasible. The production of a ton of steel usually takes a fifth of an acre- foot of water, but according to Fortune, at the new plant at Fontana where water is really scarce, methods have been discovered to save 98 per cent of this amount.

Very well then, what about distilling water from the sea, particularly on the arid California coast? The lowest estimate puts the cost of this process at $400 per acre-foot, and another estimate puts the cost much higher still. Even the advent of atomic power will not change this order of magnitude, much of which represents the cost of equipment. So distilled water can never serve more than a limited use, or to meet emergencies.

From water let us turn to lumber. Here, the 2Fortune (March 1954) states that in the I7 Western

states 24 per cent of the total stream flow is already being used, out of an estimated maximum availability of 34 per cent.

3Fortune (loc. cit.) is of the opinion that ion exchange of sea water will be cheaper than distillation, but even so the cost will be $ioo per acre-foot.



AFTERTHOUGHTS ON PALEY 269

conclusion is pretty unequivocal - the price of lumber and of pulpwood, relative to that of other commodities, is almost bound to rise. An estimate for world output for the I970's is made, taking into account "available forest resources, current trends in rate of cutting or forest re- source developments, and continuing high ef- fective demand." In Europe, the Middle East, and Japan, forestry output is expected to be lower in the I970's than in I948; in the United States only 5 per cent higher; and in Canada only io per cent higher. Increases of 6o per cent or 70 per cent, however, are expected in the cutting of tropical hardwood (together with a small amount of softwood) in Latin America, Africa, and Southeast Asia.

It is probably true that these tropical hardwoods (whose rate of growth or regeneration is far higher than that of cold-climate timbers) will eventually fill the gap in the world's needs. But builders and other users of lumber will still have a preference for softwoods for many important purposes - hardwoods are much heav- ier and more laborious to handle. As softwoods become relatively scarcer, their price may be expected to rise much more rapidly than that of hardwoods.

Until recently, it was only from softwood that pulp, for making paper and for other industrial processes, could be at all economically obtained. In I939, after laborious experimentation, a process was discovered whereby satisfactory pulp could be made from certain Australian hardwoods. It is still a fairly high-cost process. But it seems worth developing further, and the ap- plication of such processes to tropical hardwoods should be of great economic importance.

There are persistent rumors that a process is being perfected for producing usable pulp from sugar-cane fiber - a by-product which the world produces in enormous quantities and which is at present only used for fuel. With the steady upward trend of world prices of pulp, any such discovery would revolutionize the economic prospects of the principal sugar-producing countries. At present they obtain, and burn, about six tons of fiber for every ton of sugar produced.

But have we not heard all this before, about a lumber shortage? Did not President Theodore Roosevelt, about I904, predict a lumber famine

within a generation? So he did, and with some justification, on the basis of the information available to him. He was advised by honest and competent foresters. What he lacked was advice on the simplest principles of economics. At that time, saw timber prices were very low, by present-day standards; and it was in fact actually in the year I904 that United States timber consumption per head reached its maximum. From that date onward, it started to decline rapidly, coming into line with available supplies and averting threatened famine. There can be few simpler examples, indeed one might say there can hardly be a more classical example, of the working of the price mechanism.

But, by the same token, when we find prospective world output of lumber (pulpwood and saw timber taken together) in the I970's nearly 30 per cent below expected requirements, even when we allow for no rise in consumption per head, but raise requirements only in proportion to population, then we are bound to predict a further substantial relative rise in timber prices.

It is hard to foresee any technical change which will really displace timber from building and the other main uses to which we now put it. It is however possible, as indicated above, that technical discoveries will in future enable us to obtain all our pulp requirements from sugar- cane fiber or similar abundant materials. About 6o per cent of all the lumber now cut in the world (other than firewood) is for pulp, the remainder for sawing. But if the demand for pulp should suddenly -or gradually -cease, this would not affect for many years, if at all, the supply of saw timber. Pulp is cut from trees which are too small for sawing, much of it in sub-Arctic climates where the rate of growth is very slow (though a good deal also comes from the southern United States). But generally speaking, saw timber and pulp wood are grown in widely differing areas.

However, what we can fairly safely predict over the long period is a greatly increased relative importance of the tropics in the lumber trade, whether for pulp or for saw timber. An acre of land devoted to food production in the tropics will, if the rainfall is adequate, grow two crops a year and will grow valuable crops which cannot be cultivated in cold climates. It may be three times as productive as an acre of




farm land in Canada or Sweden. But the growth rate of a forest may be seven or ten times as high in the tropics as in cold climates. The law of comparative advantage indicates that the world will eventually draw more of its forest products from the tropics, of its farm products from the colder climates. Exploitation of the most valuable tropical forests has hardly begun yet, for the obvious reason of lack of adequate trans- port, but also for the less obvious reason of lack of labor - most of the tropical forest regions, whether in the Amazon area, Central Africa, or Southeast Asia, are virtually uninhabited. Any developments which will make the economic exploitation of these areas possible should be watched with great interest.

On fuel, the Paley Report manages to give a very misleading impression. Between I925 and I950 in the United States, consumption of fuel is said to have risen from 8oo million to I300

million tons of "bituminous coal equivalents.' But between these years the actual consumption of coal fell from 562 million to 493 million tons. There was a threefold increase in consumption of liquid fuel and natural gas. For some unex- plained reason, the Paley Report converts these fuels into coal equivalents on the basis of their money value, not their energy value. Apparent- ly, even in its private researches, it has not oc- curred to the Commission to perform the simple operation of adding up the different fuels in terms of their gross energy content. If they had done so, they would have discovered that the gross demand for energy, per head of population, is rising remarkably slowly; and they would have been saved from making the unwise prediction that this demand, in many countries, is likely to double in the next twenty-five years. In fact such demand, per head, is rising only slowly in the United States and is actually fall- ing in many countries.

A stationary or even declining gross demand is quite compatible with a rapid increase in the horsepower available. Let us not underrate the importance of fuel economy. So long as fuel is cheap, businesses do not have an adequate in- centive to economize; but once it becomes scarce and dear, then remarkable economies are soon achieved. We may find the world demand for fuel only a little increased in twenty-five years'

time, even assuming that atomic power has not yet begun to displace it.

The Paley Report discusses the possibilities of solar energy. In a climate like that of Ari- zona it may eventually prove to be economically practicable, but hardly in higher latitudes. No engineering development at present foresee- able is likely to make its cost less than 20 cents per kilowatt hour. Fuel would have to be very expensive indeed before solar energy became economically worth while.

Before turning to the two main issues of metals and agricultural products, we must point out that the Paley Report assumes that the United States population will rise from I52

million in I950 to I93 million in I975, a rise of less than i per cent per annum. This appears to be based on a projection prepared for them by the Bureau of the Census. The Census Bureau statisticians, like the majority of American demographers, took it for granted that the "postwar baby boom" would prove transitory and that the average American family would slip back to the low level of the I930's. This fore- cast proved entirely wrong. Earlier marriage and larger families appear to have come to stay, and the rate of population growth is now more like I3/4 per cent per annum than i per cent per annum, and looks as if it will stay at this level for a good many years. The best population estimate that can be made for I975 seems to be 234 million. All the Paley Commission's estimates of United States consumption in I975 should therefore be increased by a factor of no less than 22 per cent, on population grounds alone.

For the four important base metals - copper, lead, zinc, and tin - this correction factor for United States population is applied, but in ad- dition the prospective consumption of the rest of the free world is also re-examined. Here also the Commission appears to have made its estimates too low.

The Paley Report estimated that by I975

world consumption of copper would be 3.5 million metric tons per annum, but the revised estimate is 4.65 million. This demand, however, will not necessarily mean a rise in costs. United States mines are at present successfully exploit- ing far leaner ores than those which have been worked in other countries, and if we assume that




American methods come into use elsewhere, the world price of copper, relative to other commodities, may actually fall. It does appear probable, however, that the world's richest copper deposits (as now known), namely those of the Belgian Congo, will be about exhausted by I975; and that both Canada and Rhodesia will be producing greatly increased outputs.

World demand for zinc in I975 is estimated in the Paley Report at 2.9 million metric tons; this estimate is raised to 3.3 million. Most of the United States zinc deposits will by that time have become uneconomic to work. It seems im- probable that conditions in Burma will permit the exploitation of that country's large-scale deposits, and it is to be concluded therefore that the zinc deposits of Canada and Australia will acquire a much greater relative importance in world commerce. The two countries with the next largest mining potentialities in zinc are Germany and Peru.

What applies to zinc also applies to lead, for nature seems to have provided that zinc and lead are always found together, in roughly similar proportions. The world demand for lead in I975 is estimated in the Paley Report at 2.45 million metric tons, and the revised figure is 3.37 million. As with zinc, the United States deposits will probably prove uneconomic, and both Canada and Australia will contribute a larger share of the world's requirements. Mexico may also be a fairly important producer.

For tin, the Paley Report estimates the I975 world demand at I95,000 metric tons, and the revised estimate is 259,000. While the world demand for the other three metals in I975 is expected to be twice or more than twice that of I950, the rise in the world demand for tin is expected to be only about 50 per cent over this period. Little is known about the extent of the reserves of tin in any of the important mining areas. If, as appears probable, Indonesia leaves her tin deposits unused and Malaya's reserves are uncertain, some expansion may be expected in four other producing or potential producing areas, namely Bolivia, Nigeria, Belgian Congo, and Thailand.

Finally, we turn to the question of farm produce. This section was written for the committee by Professor J. D. Black, the retired Harvard

professor; it is the most difficult and controver- sial.

The critical question is the income elasticity of demand for farm products, which Professor Black, after some reflection, puts at 0.2. Pro- fessor Schultz recently enjoyed a little quiet academic fun by publishing a table containing all available estimates on this subject. Though they all dealt with the United States and referred to fairly similar periods, the results showed an extraordinary range between 0.2 and o.6.

It is only recently that it has begun to occur to most statisticians that income elasticity of demand for farm products (and for a number of articles too) may not be a constant at all, but may be a quite rapidly changing function of real income. The official studies of family budgets and consumption carried out in the United States in I935-36 were comprehensive in their scope but exasperatingly unfinished. From them it appears that in the case of a critical commodity like meat, for instance, while striking regional differences prevail, there is nevertheless an extremely high income elasticity at the lower income levels, which however flat- tens out very quickly as higher levels of real income (more like those of the present day) are reached.

Attention should be drawn to a very careful study by Mr. J. L. Nicholson, published in the Journal of the Royal Statistical Society for I949, in which income elasticities are measured for numbers of comparable families at different income levels, but with the same numbers of de- pendent children. These results also show a rapid fall in income elasticity of demand with rising income. They are based on the British Family Budget Enquiry of I937, and there may have been some change of tastes since that date, but the general trend seems to be established.

The best conclusion which can at present be drawn from a review of the available evidence in different countries (see the present writer's paper to the Royal Statistical Society of 24

March I954) indicates, for the United States level of real income per head probable over the period I950-75, an income elasticity for demand for farm products in the neighborhood of 0.2.

This conclusion confirms Professor Black's




judgment in this respect, though it was probably reached by a very different method.

Professor Black, like all the other contribu- tors, had to make use of the inadequate official estimate of the rate of population growth, and his results must be revised accordingly. It is more convenient to express the trends in per cents per annum, and it looks as if something like the present upward population trend of i 4 per cent per annum will be maintained. Over a long period in the past the upward trend of real income per head has been at the rate of 2 per cent per annum. The Paley Report expects this rate to accelerate to 2.5 per cent per annum, which expectation is not unreasonable. Applying an income elasticity factor of 0.2, this means that per head consumption of farm products, at present-day price level, is likely to rise at the rate of 0.5 per cent per annum. Added to the expected rate of population increase, this gives an upward trend in the aggregate demand for farm produce of 214 per cent per annum, making the demand in I975 74 per cent above that of I950.

In I950 farm output (cash sales plus value of produce consumed in farm households) was $30.3 billion, but the true output is $26 billion if we exclude the fodder, seed, and livestock produced by one farmer for sale to another. This figure, of course, in no sense represents the income of the farm community. There are still very large deductions to make for the cost of equipment, fertilizers, etc. This figure represents the supply of foods and other farm products available for use, after deducting that which has to be used up in the process of farm production itself.

This output had to be supplemented by net imports of farm produce to the extent of $I.7

billion, or 6 per cent of farm output. Although most Americans are unaware of it, the United States is a net importer of farm produce and has been for a very long time - according to Pro- fessor Pearson the United States became a net importer as early as I9II. Many people have to have this explained to them and are still un- convinced. "Oh, well," they say, "if you count coffee, sugar, wool, and hides as farm products." If they are not farm products, what are they?

This requirement of farm products of $27.7

billion in I950 is thus expected to rise to $48.3 billion in I975, both figures measured at I950 prices.

What about the trend of production? Here again use must be made of figures which are given in more detail in the Royal Statistical Society paper referred to. As in some other countries, productivity in units of real product per man-hour, which had been rising on a fairly steady trend since the I870's, began to show an astonishing acceleration about I940. Many economists thought that, by I949, this extraordinary acceleration had exhausted itself and that a slower upward trend would prevail; but the events of subsequent years disproved this judgment.

With this greatly increased rate of growth in productivity per man-hour, however, there has prevailed not only a rapid, but an accelerating, decline in the farm labor force. Professor Black estimated that between I950 and I975 the farm labor force (including the labor of farmers and their families) would only decline by io per cent. No assumption could be more wildly mistaken. In the period I950-53 alone, the farm labor force, as shown by the Bureau of Census sample, declined I3 per cent.

The sudden change in trend in productivity and the accelerating downward trend of the farm labor force are clearly shown in the chart on page 273, which is projected forward to I975. (Productivity is measured in Interna- tional Units or dollars of I925-34 purchasing power; to convert to dollars of I950 purchasing power in respect of farm products, these results should be multiplied by factor of 2.2.)

Very often farmers' representatives and official spokesmen describe the decline in the farm labor force as if it were the consequence of greater mechanization and increased efficiency. But surely this is putting the cart before the horse. A priori consideration and study of the evidence alike lead us to the conclusion that the decline in the farm labor force is the deter- mining factor, and the accelerating pace of mechanization is the consequence.

Factors leading to some decline in the farm labor force have been with us since civilization began. The accelerated decline in modern times, in all countries, can be clearly traced to the increased ease of modern communications,




the wider diffusion of education, military service, and many other social factors.

Projected to I975 we find a farm labor force of only 2 million, and a product per man-hour of 2.8 I.U. (International Units). Assuming, as we certainly should, that the farm worker

CHART I. - U. S. FARM LABOR FORCE AND PRODUCTIVITY *

/0 LADOR PO$(t r

04 ,1 /0 E

4 ,/" So~~~~~~~~~AooLr/cTvIrr*

0O/

t*70 E090 /9/0 /9.10 /950 1D70

* Reproduced by kind permission of the Royal Statistical Society.

by that time works a 40 hour week as does the industrial worker today, this gives us a total farm product of I1I.2 billion I.U. or about $24.5

billion at I950 prices. The United States in I975, therefore, will probably be importing one half of all requirements of farm produce. "No," the reader is saying, "a farm labor force as low

as 2 million in I975 is quite inconceivable." In I938, what economist would have admitted that it was conceivable that the farm labor force should fall from io million to 6X2 million in the short period of I 5 years?

The idea of rapidly increasing imports of farm products is so alarming to the average politician that the writers of the Paley Report were probably wise in discussing the matter as little as possible. Congressmen may, however, see the matter in a different light when the farm surpluses disappear, as they should after a few years.

If increasing imports of farm products are "a political impossibility," to use a favorite cant phrase of the modern world, there are two other alternatives. The first is that much of the vacant or unutilized farm land should be re- peopled by a large population of immigrants. It is there that rural workers from Latin Amer- ica and Canada are now entering in substantial numbers, but to insure permanently increased rural population far greater numbers will be required, and men of a different type -the peasant settler who intends to buy land and to stay on it.

The third course is a further relative rise in farm prices and wages. With the steadily increasing real wage which is being offered by industry, a really substantial rise in farm in- comes and farm wages will be necessary to bring about any check to the long period decline of the farm labor force.

Otherwise, prices will just have to rise till they adjust demand to supply, and with rapidly increasing demand and a low price elasticity coefficient, the required rise will be substantial.

COMMENT

Edward S. Mason

While approving in general the analysis and conclusions of the Report of the President's Materials Policy Commission - including a central proposition concerning increasing United States dependence on foreign sources of raw materials supply -Professor Colin Clark finds the Report seriously mistaken in a number of important respects. Specifically, "on

fuel, the Paley Report manages to give a very misleading impression"; the projection of population growth yields a figure for I975 that is far below Clark's estimate, with the consequence that future requirements for all materials are seriously underestimated; both the present and future dependence of the United States on agricultural imports are incorrectly



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