Population growth, agricultural intensification, induced innovation and natural resource sustainability: An application of neoclassical growth theory

Using a simple neoclassical type growth model including both man‐made and natural capital as inputs to production, the theoretical basis for a U‐shaped relationship between agricultural intensification and farm household investment in renewable resource capital is established. As development of technology, infrastructure, or markets increase the relative return to investment in man‐made capital over natural capital, resource depletion occurs as man‐made capital is substituted for lower return natural capital. Once returns are equalized, both man‐made and natural capital are accumulated. If labor and these forms of capital are complementary, the output effects outweigh the substitution effects in the long run, leading to net accumulation of natural as well as man‐made capital as a result of such technological or market development. Population growth also induces investment in both man‐made and natural resource capital in the long run by increasing their marginal products. However, population growth causes declining per capita levels of both natural and man‐made capital and production per capita in the long run, if technology is fixed and decreasing returns to scale. The model thus supports the Boserupian argument of induced intensification and resource improvement, as well as the Malthusian argument of the impoverishing effects of population growth. However, population growth may also induce development of infrastructure, markets, and technological or institutional innovation by reducing the fixed costs per capita of these changes, though these developments may not occur automatically. Government policies can play a large role in affecting whether these potential benefits of population growth are realized. In addition, credit policies may reduce resource degradation caused by substitution of man‐made for natural capital, by allowing farmers to accumulate man‐made capital (such as fertilizers) without depleting their natural capital. Policies to internalize the external environmental costs of using man‐made capital will reduce both types of capital and production, indicating a clear trade‐off between addressing environmental concerns on the one hand and reducing poverty and promoting resource conservation investments on the other. By contrast, internalizing the external benefits of investments in resources increases wealth and production per capita in the long run. The ‘intertemporal externality’ due to a higher private than social rate of time preference does not justify interventions to promote investments in resource capital; rather it argues for the promotion of savings and investment in general.