Growth with endogenous resource use and population

Ratbek Dzhumashev
1

Gennadi Kazakevitch
Department of Economics
Monash University




Abstract
In growth models, natural resources are frequently treated as an exogenous factor. Moreover,
the relationship between non-renewable resources and population growth has not been exam-
ined thoroughly. This paper develops a growth model where resources and the fertility rate
are determined endogenously. The availability of resources is treated as a function of labour
employed to explore new reserves and develop substitutes for depleted resources. The agents
optimise their fertility rate by trading-off the quantity of children for their quality. In the long
run, it is found that the inflow of newly available resources is an essential factor that deter-
mines per capita consumption. It is demonstrated that a quasi-Malthusian population con-
straint is feasible, even with potentially unlimited resources.


1
E-mail: ratbek.dzhumashev@monash.edu
2

1. Introduction
Hotelling (1934) raised concerns about exhaustibility of resources and their importance for
production and growth. Nevertheless, most growth models assume that resources are not es-
sential for production in the long run and. Therefore, the long run growth outcomes are not
driven by resources. These growth models implicitly assume that resources are either fully
renewable or the stock of non-renewable resources is infinite; hence, resources do not play
any role in the long run growth. This assumption finds some support by results of Goller and
Weinberg (1978) based on their technical calculations argue that our planet holds enormous
(near inexhaustible), although diffused, amounts of most of the essential resources. They
demonstrate to substituting the depleted resources for ones that are more diffused would be
less costly than re-cycling the resource near depletion. Along these lines, Pindyck (1978) al-
so highlighted the existence of non-renewable resources with virtually no depletion.
The issues, raised by Hotelling (1934), and later by Meadows et al. (1972) are addressed in
the literature, by the framework known as the DHSS (Dasgupta and Heal, 1974; Solow,
1974a, 1974b; Stiglitz, 1974a, 1974b). The studies within the DHSS framework explicitly
assume that non-renewable resources are an essential input in production. That is, the re-
sources input should be positive, but can be negligibly small. The main conclusion reached
by these studies is that, for the long-run sustainability of growth, there should be a substitu-
tion of natural capital (resources) with produced capital. Hartwick (1977) generalizes the no-
tion of the substitution by stating that a long-run consumption level can be sustained by in-
vesting the resource rent in physical capital. This means that to achieve sustainable growth
resources should be entirely transformed into physical capital. However, according to Groth
(2007), theoretically the DHSS-type models allow growth to collapse if the substitution is not
sufficient to sustain growth.
Daly (1997) based on Georgescu-Roegen (1979), argues that natural capital and manufac-
tured capital are complements rather than substitutes; hence, the sustainability of growth en-
visioned in the DHSS model is not feasible. In the same vein, Krautkraemer (1998) argues
that there is a limit to the level of substitution of physical capital by a non-renewable resource;
therefore, ultimately production has to rely on renewable forms of resources. Ayres and Warr
(2009) also emphasize the importance of resource scarcity in driving innovations and suggest
that in the neoclassical paradigm resource consumption is not required to explain growth.
3

To overcome this problem, the DHSS framework proposes a backstop technology that allows
switching to an alternative resource that is too costly to use while the traditional non-
renewable resources is not close to exhaustion yet. However, with depletion of the resources
their price increases and at some point, due to the discovery of the backstop technology, the
use of alternative resources becomes viable (Endress et al., 2005; Dasgupta and Heal, 1974;
Dasgupta and Stiglitz, 1981; Kamien and Schwartz, 1978). Modifications of the DHSS
frameworks provide similar results. For example, Robson (1980) considers an environment
where innovation is deterministic and continuous while Lafforgue (2008) considers a stochas-
tic version of the model. Both models give rise to similar results to that of a DHSS model.
The backstop technology approach assumes the existence of inexhaustible resources that be-
come available with the arrival of the backstop technology. Since there is no resource explo-
ration or production, by making the backstop technology available, it is implicitly assumed
that technological advancements in the final output production lead to a resource substitution.
This assumption seems a bit ad hoc. It would be more realistic to assume that resource substi-
tution is a result of a deliberate effort to explore new ways of extraction and use of non-
traditional resource substitutes, along with the final goods production technology improve-
ments. This reasoning is exploited in this paper.
In this regard, Pindyck (1978) considered a model where he assumes that the stock of non-
renewable resources is not fixed but can be increased by means of exploration and production
efforts. However, Pindyck (1978) focused on the optimal production and exploration of re-
sources depending on the possibility of decline in discoveries of resources. Our approach in
modelling the resource stock evolution is similar to that of Pindyck (1978), albeit we assume
that the new discoveries are independent of the cumulative stock of resource discoveries. We
instead assume that the marginal returns to the effort in resources discoveries are diminishing.
In light of this, the model developed in this paper accounts for the possibility of substitution
for the backstop resource by means of producing knowledge of how to extract and use it, but
not through advances in the final output production technology. That is, we synthesise the
implicit substitution for backstop resources assumed in the DHSS models and exploration of
resources envisioned by Pindyck (1978). In particular, we extend the approach of the tradi-
tional growth models by assuming that potential resource reserves are unlimited, however, as
in Pindyck (1978), the available resources need to be discovered through exploratory activi-
ties. We also take the Georgescu-Reogen-Daly argument seriously, as we consider the long
4

run growth in a framework where resources do not have to be entirely substituted by capital,
as soon as there is a room for a resource substitution.
Notably, the DHSS and Pindyck (1978) do not consider economic growth together with
population growth. In the literature, it has been recognized that demographic and economic
dynamics are related and; thus, they need to be analysed jointly. The unified growth theory
(UGT) developed in Galor and Weil (2000), Galor (2005, 2011) explain how an economic
transition from agrarian production to industrial production leads to a demographic transition
that the world has been experiencing in the last two centuries. In the UGT framework, re-
sources are modelled as a fixed land endowment; hence, assumed to be inexhaustible. The
UGT shows that, at the Malthusian stage, the benefits of technological progress are offset by
population growth, which, in turn due to the limits imposed by the fixed resource (land), re-
sult in a stagnation. However, this interaction between the rate of technological progress and
the size of the population boosts technological progress, and eventually gives rise to transi-
tion to the modern economy where human capital becomes the driving force of economic
growth. Assuming, a similar to the above authors, inexhaustible but limited resource
(land), Peretto and Valente (2011) consider a Schumpeterian growth model and show that
when labour and resources are substitutes, the stable equilibrium will be one with constant
population. However, they also find that if labour and resources are complements then popu-
lation dynamics may become unstable.
Another strand of literature (bio-economic models), devoted to analysis of the resource-
growth nexus, considers exhaustible and renewable resources and its interaction with eco-
nomic activity and population dynamics (Brander and Taylor, 1998; Pezzey and Anderis,
2003; Dalton et al., 2005; Good and Reuveny, 2006). These models explain how a Malthusi-
an-type growth regime can develop and in case of overharvesting can lead to a collapse of the
eco-system and the economy with it.
This paper differs from the existing literature by adopting a different perspective on the nexus
between population, resources, and growth. Unlike the UGT and Peretto and Valente (2011),
in our case, economic growth is affected by non-renewable resources that potentially unlim-
ited, but costly to explore and produce. The main difference from bio-economic models is
that in our model population growth is not Malthusian, and our focus is on the non-renewable
resources rather than the renewable ones. We explicitly model fertility choice in a similar
fashion to Peretto and Valente (2011), but instead of a dynastic family, we adopt a paternal-
5

istic family model as in Doepke (2004), J ones et al. (2010), and Mookherjee et al. (2012).
That is, in our model fertility is endogenous and evolves as a trade-off between quantity and
quality of children as well as parental consumption.
The main findings of this study are as follows. Availability of resources is an crucial factor
that determines the level of per capita consumption in the long run. Improvements in resource
expansion through new reserves and substitutes drive the long run productivity of the final
goods sector. Sustainability of long-run growth requires that, in steady state, all used up re-
sources should be replenished by finding either new reserves or substitutes.
The fertility rate increases with the level of consumption, but the cost of education reduces it.
This implies that the rate of fertility depends on the level of income generating capacity of the
parents and the cost of acquiring this capacity. In this sense, this results is in line with the
literature. For example, Schuler (1979) used a similar approach to model fertility by assum-
ing that the cost of raising a child is a function of per capita disposable income. Similarly,
Fioroni (2010) based on empirical evidence also suggest a way to model endogenous child
survival as a concave function of human capital. Yet, differing from these authors, in our
model, there is a negative feedback from the size of the population to the stock of human cap-
ital per worker. In this sense, this is akin to the interaction between the size of population and
the technological change modelled in the UGT. Consequently, increasing human capital rais-
es per capita consumption which increases fertility. However, increasing population will cre-
ate a drag on human capital accumulation, which ultimately limits both economic and demo-
graphic growth as soon as the return to human capital in resource production is diminishing.
Given this interplay between human capital, fertility, and resource production, the economy
reaches its steady state only when the population becomes static. If it is the case, then we ob-
serve a quasi-Malthusian constraint on population growth. Hence, even with potentially un-
limited resources, a quasi-Malthusian population growth limits are possible. It is shown that
only if the return to human capital in the resource sector is non-diminishing then the popula-
tion growth is not restricted.
We also consider implications of the assumption that the human capital elasticity of resource
production is equal or greater than unity ( 1 ). We have shown that this assumption does
not seem realistic as results in explosive growth of both the population and output.
6

Overall, our paper contributes to the literature by i) introducing a growth model with endoge-
nous fertility and an explicit mechanism of exploration and substitution of non-renewable re-
sources that are used as an input to final goods production; ii) demonstrating that the capacity,
to discover new reserves and substitutes drives the long run consumption per capita; iii)
showing the possibility of a quasi-Malthusian trap even with potentially unlimited resources.
The rest of the paper is structured as follows. Section 2 presents the set-up of the model. Sec-
tion 3 lays out the social planners problem and presents its solution. In Section 4, evolution
of resources and how it affects the steady state capital stock is discussed. In Section 5, we
discuss interactions of population and economic growth in the long run. Section 6 concludes
the paper.
2. The model
2.1. Basic setup
The basic setup used is similar to Endress et al. (2005), and Schou (2000) that extends the
Uzawa-Lucas-type model where human capital accumulation serves as the growth engine of
the economy (Uzawa, 1965; Lucas, 1988). That is, we assume that the production technology
employed to produce a single homogenous good that combines capital and labour, as well as
a flow input of natural resources, which is extracted from the currently available aggregate
resource stock. Thus, the production function is in the form of ( , , ), F K H R where , K

, H

and
R are physical and human capital and resources correspondingly. However, different from
Endress et al. (2005) and Schou (2000), we are not assuming either population or endowment
with resources to be exogenous or fixed. Instead, we make a rather more empirically-based
assumption that the population increases in time, and we treat both aggregate resource stock
and flows are endogenous. We also ignore any uncertainties in the economic activities and
abstract from the use of exhaustible and renewable resources.

Following, Galor and Weil (2000), de la Croix and Doepke (2003), and Kolmann (1997), a
paternalistic utility function is assumed. That is, the parents derive utility from the quantity
and quality of children, but not from their future welfare. Therefore, the utility function of the
representative agent is given by ( , ) u c nh , where c is consumption, n is the number of surviv-
ing children, h is their human capital per capita. Following the above-mentioned authors, we
adopt an utility function of the following specification:
7


| |
exp( ) log( ) log( ) u t c qbh = + . (1)
It is assumed that the number of surviving children is found as
, 0 1 n bq q = < < , (2)
where b is the number of births, and q is the probability of survival. The agent incurs costs
while having a child and then has to bear the cost of education of the surviving children. That
is, the cost related to child rearing is given by
[ ( ) ] ( ), qe t b t + (3)
where cost of having a child given in terms of consumption goods, ( ) e t is expenditure on
education.

The law of motion of the adult population is
( ) ( )( ( ) ), L t L t qb t d =

(4)
where d is the death rate that is given exogenously.

2.2. Production and explorations sectors
The households own the firms, and they supply human and physical capital to firms. Since
two sectors of production are considered, we need to specify the technology employed by
each of them. We assume that the production function for the consumption good is given as:

( )
1
1
( ) Y AR K vH

= (5)
where stands for the technology coefficient and

is the fraction of labour engaged in the
final consumption goods sector. Accounting forH hL = , where h is human capital per capita,
the production function is written in the intensive form as:


1 1
( ( ) ) y Ar k vh

=
.
(6)
Since we assume that the resource stock is expandable, this also requires some costly activity.
The expansion depends on the exploration, research and development effort that makes new
resources available. We denote the incoming flow of resources by , Z and assume that re-
source-creating activity is captured by a production function:
(1 ) Z E v H

= (7)
A v
8

where is a technological coefficient, 0 1 < < , and (1 ) v is the fraction of labour engaged
in this industry. Further, we will consider a more general case and analyse cases with 1 .
In per worker terms, we write as:

1
(1 ) E v h
z
L

= . (8)
Expression (7) involves the assumption that the formation of incoming resource flow requires
human capital only. Therefore, the dynamics of the aggregate resource stock is defined as the
net flow (inflow less outflow) of the aggregate resource and evolves according to the follow-
ing differential equation:

x r z = + (9)
We follow Hartwick (1977, 1978) in modelling the resource use. That is, the resources are
not owned privately, so cost of extraction is a pure cost to the economy. Given this environ-
ment, the capital accumulation process in per worker terms is governed by:
( ) ( ) , k y k X r c qe b = +

(10)
where is the unit cost of extracting the resource. Following Endress et al. (2005), we model
resource extraction as cost in terms of final goods. Such a simplification is especially suitable
for our model as it focuses on resource expansion rather extraction. This cost is a decreasing
function of the resource stock, X . That is, 0
d
dX

< . For further simplicity, we assume that

this function is given as:
( ) X
X

= , (11)
where is a cost parameter.

Both sectors consist of the firms maximising their profits. We assume that both types of firms
take the interest rate, the wage rate, and the cost of resource extraction as given. This optimi-
zation then yields the rate of return to physical capital, i , the rate of return to human capital
in the production sector,
Y
w , and in resources sector,
Z
w , and the optimal amount of resource
inputs (the outgoing resource flow), , r as follows:

1
1
1
( )
XA
r k vh

| |
=
|
\ .
, (12)

E

9


(1 ) 1 (1 )(1 )
(1 ) ( ) , i A r k vh



= (13)


(1 ) (1 )(1 )
(1 )(1 ) ( )
Y
A r k vh
w
h




= , (14)

1
(1 )
( )
Z
E v
w
Lh

= . (15)
Observing equations (13) and (14), we conclude that the rate of return to capital and the wage
rate depend on the optimal amount of resources used in production. That is, in an environ-
ment with higher optimal levels of resource input, the rental prices of factors of production
are higher. Therefore, it is crucial to ascertain what drives the optimal levels of resource input.

By observing (12), we establish that the optimal level of the resource use, not surprisingly,
increases with the larger aggregate resource stock, X ,technology coefficient (productivity),
, A and with a decrease in the exogenous cost of extraction, .

One can also see that the optimal amount of the aggregate resource used in the production of
the aggregate final consumption good increases not only with the level of per worker capital
stock, but also with the share of labour engaged in the production of final consumption good.
Intuitively, the share of labour in the final consumption good production is possible only if
the share of labour engaged in resource expansion sector is shrinking. Optimality requires
that any decrease in the labour input is offset by an increase in labour productivity. We will
analyse this link after determining the equilibrium values for the proportions of labour used in
both sectors.

3. The representative agents problem
The representative agent maximizes inter-temporal utility given by:

| |
, , ,
0
max exp( ) log( ) log( )
c v b e
U t c qbh dt

= +

(16)
where exp( ) t is the coefficient discounting the utility of consumption over time, and sub-
ject to the following constraints:

10

( ) ( ) , k y k X r c qe b = +

0
(0) , k k = (17)
x r z = + , (18)
( ) 0, ( ) 0, ( ) 0, x t k t h t > > > (19)
h e h =

. (20)
We write the Hamiltonian of the problem as follows:

| |
( , )exp( ) ( ) ( )
(1 ) ( ).
J u c qbh t y k X r c qe b
E v h r e h

= + + +
( + +

(21)

The first-order conditions for this optimal control problem are given as:
exp( ) 0,
c
J
u t
c

= =

(22)
(1 )(1 )
(1 )
( )
(1 )(1 ) 0,
J vh
Ar k Eh
v v

(
= + =
(

(23)

(1 ) 1
(1 ) [( ) ]
,
J Ar vh k
k k




(
= = + +
(

(24)

2
,
J
X X

= =

(25)

( )
(1 )
1
1
( )
(1 )
exp( ) (1 )(1 ) ,
h
k vh
J E v
u t Ar
h h h

= = + +

(26)
exp( ) ( ( )) 0,
b
J
u t qe t
b

= + =

(27)
0.
J
qb
e

= + =

(28)
Accounting for that
| | exp( ) log( ) log( ) u t c qbh = + , and combining (22) and (24) we ob-
tain that the growth rate of consumption:
(1 )
(1 )(1 )
( )
(1 )
( )
c t r k
A v h
c t h h

| | | |
=
| |
\ . \ .

. (29)
From (27) and (22) we obtain the birth rate function:
11


( )
( )
( )
c t
b t
qe t

=
+
. (30)
Another equilibrium condition is that the marginal product of physical capital should equal
the marginal product of human capital. That is,

(1 ) (1 )(1 )
(1 )(1 ) (1 )
(1 ) ( )
( ) (1 )(1 )
Ar k vh
vh Ar k
k h

= ,
Solving which we obtain the physical-to-human capital ratio in equilibrium:

1
k
h

. (31)
That is, the stocks of physical and human capital should grow at the same rate in equilibrium.
These findings immediately give rise to the following lemma.
Lemma 1. The per capita consumption growth rate in the transition to the steady state posi-
tively depends on the evolution of the aggregate resource stock, the share of workers engaged
in final good production, the human to- physical capital ratio, and negatively on the cost of
resource extraction.
Proof. The growth rate given by (29) can be re-written as:

(1 ) (1 )
1
(1 )
(1 ) .
c XA h
g A v
c k

| | | |
= =
| |
\ . \ .

It is straightforward to verify that 0
g
X

>

, 0
g
v

>

,
( )
0
h
k
g
>

and 0
g

<

.
This result implies that in an environment where initial stock of resources high, the growth
rates also should be relatively higher. However, the steady state growth rate depends also on
how effective the country is in terms of maintaining the stock of resources. This implies that
if the economy is more effective in extending and extracting resources, a smaller share of the
labour force is employed in the resource sector, and a greater share of the labour force is en-
gaged in the production of the final goods, hence, faster transition to steady state.
4. The steady state analysis
Intuitively, in the long run the extraction and creation of resources in per capita terms should
be equal. Otherwise, either the economy would run out of resources or it would accumulate
excessive resources. Clearly, both strategies are not optimal. This discussion results in the
following lemma.
12

Lemma 2. In steady state, r z = holds.
Proof. Let us recall the equation describing the evolution of the aggregate resource stock giv-
en byx z r = . In general, we cannot assume that . If is true, then it will lead to
an increase in the stock of resources, X . Then given that
1
1
1
( )
XA
r k vh

| |
=
|
\ .
, the opti-
mal level of resource inputs also increases at a growing rate with the stock of resources, the
system will move towards . If holds then the opposite would happen, given that the
stock of resource would be diminishing. This consideration implies that, in the long run,
steady state is achieved only if 0 x = holds.
This result implies that, in the long run, resource use should not depend on the substitution
between capital and natural resources; it rather depends on the productivity of the exploration
sector and the share of the labour force engaged there. The long run resource extraction cost
is constant because the stock of resources becomes constant, unlike exogenously given back-
stop technology driven cost of assumed in Endress et al. (2005). Unlike in Hartwick (1977),
this equilibrium condition does not imply that resource rents should be entirely invested into
physical capital. Moreover, for a fixed amount of resource extraction, equation (8) implies
that a larger population size results in lower resources use in production. This condition deals
with the sustainability bias argued by Groth (2007), as the resource creation in this model
(and extraction in steady state) exhibits diminishing returns to human capital, and has a nega-
tive scale effect on the size of population.
We can find the optimal share of labour engaged in exploration from the optimality condi-
tions in the labour market and the inputs market. First, the optimality in the labour market
leads to the equality of the returns to human capital in both sectors. That is,

Z Y
w w = . (32)
The wage rate,
Y
w , is given by (14),
(1 ) (1 )(1 )
(1 )(1 ) ( ) A r k vh
w
h




= , while the wage
rate in the resource sector is equal to the marginal product of labour, hence,
Z
z
w
h

= . In
steady state, z r = , therefore,
Y
r
w
h

= . Taking these ideas into account, we write

z r = z r >
z r = z r <
13


1 1
(1 )(1 ) ( ( ) ) r A r k vh
h h




= . (33)
By solving (33) for v we obtain:

1
(1 )(1 )
(1 )
(1 )(1 )
r
h
v
k
A
h

(
| |
(
|
( \ .
=
(
| |
(

|
(
\ .
. (34)
Here, the bar denotes the steady state value. We notice that due to
r
w
h

= the following
holds,

1
(1 )
.
E v h
r
L

= (35)
That is, with h ,
r
h
will be decreasing. We can find the steady state value of human capital
from the condition that both (35) and (12) equations should be satisfied simultaneously. That
is,

1
1
1
1
(1 )
( )
E v h XA
k vh
L

| |
=
|
\ .
. (36)
We recall that
1
k h

. Then taking this into account, from (36) we find:

1 1
1 (1 )(1 )
1
1 (1 ) (1 ) E v
h
L v XA

| | | |
=
| |
\ . \ .
. (37)
Proposition 1. In steady state, the stock of human capital is static only if the population is
static.
Proof. It is straightforward from(37).
One can also analyse comparative statics for h and draw the following conclusion.
Corollary 1. The steady state human capita per worker is decreased in the size of population
and the steady state stock of resources, and increased in the productivity of resource sector
and cost of resource extraction.
14

Proof: Taking respective derivatives of expression(37) yields the following: 0
h
L

<

,
0
h
E

>

, 0
h
X

<

, 0
h

>

.
4.1. Steady-state consumption
Using the population growth equation,
( )
( )
( )
L t
b t q d
L t
=

,

and the birth rate equation in equi-
librium,
( )
( )
( )
c t
b t
qe t

=
+
, one can write the steady-state consumption function:

( ) d qe
c
q

+
= . (38)
Once again, analysing the comparative statics can give us some insights into how the level of
steady-state consumption is altered if the parameters and variables on the right-hand side of
(38) are changed.
2
( )
( )
c deq d qe
q q

+
=

Long run population growth
The findings to this end allow us to determine the long run population growth. This result is
formulated as the following proposition.

Proposition 2. In steady state, the population is static.

Proof. Recall that
( )
( )
( )
L t
b t q d
L t
=

and
( )
( )
( )
c t d
b t
qe t q

= =
+

*
( ) d qe
c
q

+
= . Hence,
when ( ) ,
d
b t
q
= and
*
c c =
( )
0
( )
L t
L t
=

. If per capita consumption is

*
c c < then 0
L
L
<

.
Falling population leads to increasing per capita human capital in equilibrium, due to (37).
This, in turn, leads to more resources per capita being used (see (35)). Given these increases,
the production technology implies that income per capita y rises. This will lead to rise in the
level of consumption. Thus, consumption will rise, which lifts the birth rate and the economy
will be adjusting till it reaches the point when
*
c c = . In case, when
*
c c > , the adjustment
will occur in the opposite direction. Therefore, the equilibrium when population is static is
stable equilibrium.
This finding immediately leads to the following conclusion.
15

Corollary 2. In steady state 0
h k c
h k c
= = =


hold.
Proof. When
*
c c = , and hence 0 L =

, (37) implies that in steady state 0

c h
c h
= =

. Since,
1
h
k

, a fixed human capital implies that the steady state per capita physical capital is
also constant, or 0
k
k
=

.
Furthermore, the fixed human capital in steady state implies that education spending per child
is given as follows:
e h = . (39)
4.2. Transition Dynamics
We can consider the following transformed variables to analyse the transition dynamics:
k
h
,
c
k
,
r
k
. Then the following equations
( ) ( ) , k y k X r c qe b = +

1
1
(1 )
(1 ) ,
c XA k
A v
c h

| | | |
=
| |
\ . \ .

After taking into account that

1
1
1
r v XA
k

| |
| |
=
| |
\ .
\ .
, (40)
the growth of physical capital can be re-written as follows:

(1 ) (1 )
1 1
(1 )
k v XA v XA
A
k








| | | |
| | | |
= +
| | | |
\ . \ .
\ . \ .

, (41)

(1 )
1
(1 )
c v XA
A
c

| |
| |
=
| |
\ .
\ .

. (42)

Then from 0
c k
c k

= =

one obtains the condition 0 = .
16


1 (1 )
1
1
(1 (1 ))
1
v v XA
A

(
| | | | | |
= +
( `
| | |
+
\ . \ .
\ . (

)
. (43)
The steady state for will be determined when
1

, which will determine .

Then the dynamics of the system can be shown as in Figure 1. The figure shows that
when consumption and productive capital are in steady state, the population turns static.
Figure 1. Phase diagram

5. The case with 1
Since, in the above analysis, we assumed that0 1 < < , which obviously drives the steady-
state results obtained. To see what will be different if we alter this assumption, let us consider
the case when the return to human capital in resource production sector is constant. That is,
1 = . In this case, from(35), we can find that
(1 ) r E v h = . (44)
This implies that in steady state, resource use in production, r , will increase with the stock
of per capita human capital. Moreover, in this case, we will not get a negative relationship
between human capital and the size of the population such as(37). Instead, per capita capital
will be independent of the size of population. Let us take a closer look at the expression for
growth rate in this case:
17


(1 )
(1 )(1 )
(1 )
r k
g A v h
h h

| |
| |
=
| |
\ .
\ .
. (45)
The main difference from0 1 < < case is that the stock of human capital h on the balanced
growth path can grow unboundedly, when 1 . Therefore, the growth rate given by (45) can
also grow without a limit as soon as h keeps growing. This result also implies that growth of
consumption will lead to higher population growth rates. Since, there is no feedback from the
size of the population to human capital accumulation; the size of the population will not be
limited as soon as the level of per capita consumption keeps growing. All in all, in the envi-
ronment with 1 , we will see explosive growth of both the economy and population. Ob-
viously, it does not sound realistic.

6. Conclusions
By assuming the endogeneity of both the resource stock which is dependent over time on the
efforts of exploration, research and development, and of the population which ultimately de-
pends on the dynamics of income stream, we have made a few conclusions.
Availability of resources made through exploration and substitution is an important factor
that drives the long-run level of per capita consumption. That is because improvements in
resource expansion through new discoveries of reserves and substitutes determine the produc-
tivity of final good sector in the long run. Differing from the extant literature, we address the
sustainability bias in the resource sector by assuming diminishing returns to scale in the
resource sector. We find that sustainability of long-run growth requires that in steady state all
used up resources should be replenished by either finding new reserves or new substitutes.
Given that the productivity of human capital in the resource sector is diminishing, the econ-
omy reaches its steady- state only when the population reaches its steady state. If it is the case,
then we observe a quasi-Malthusian constraint on population growth.
Environment and renewable resources are not considered here. Accounting for these factors
may impose binding constraints that will make sustained economic growth challenging. This
question is left for future research.


18

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