Making Our Food Fuel Isn’t the Answer

Economics has only four basic principles: marginality, elasticity, substitution and time preference. And as anyone who ever completed a basic course can attest, prices are set at the margin. It is the price offered for the last unit produced and the cost of producing the last unit that really matter.

These principles from the so-called dismal science paradoxically give us reason to be optimistic about the world’s energy picture. As I never tire of pointing out, usually to the consternation of the hot-commodities crowd, long-term constant-dollar prices for commodities must decline for reasons of substitution and the price elasticity of demand. As price rises, additional substitutes become economic and demand for the marginal unit declines.

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