The Development of the Extractive Industries

Author(s): Anthony Scott

Source: The Canadian Journal of Economics and Political Science / Revue canadienne
d'Economique et de Science politique, Vol. 28, No. 1 (Feb., 1962), pp. 70-87
Published by: Wiley on behalf of Canadian Economics Association
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THE DEVELOPMENT OF THE EXTRACTIVE INDUSTRIES*
ANTHONY SCOTT
Universityof British Columbia

I wish to consider how industries exploiting natural resources may be expected

to develop. It is not my purpose to consider their entire relation with the
economy of which they form a part. Rather, I wish to examine the logic of
their own changes in technology and technique in response to stimuli from
the rest of the economy. In tracing this development, I shall stress the changing
technology itself; the adjustment of property and tenure concepts; some
aspects of location and transportation; and the impact of all these changes on
industrial and market organization.
As an analytical technique for tracing these changes, I shall make use of a
"stages of development" approach. It will be shown that most industries
working natural resources may be said to be in one of three, roughly consecu-
tive stages. The precise dating of the transitions between the stages is highly
arbitrary, but this defect is unimportant since the chief function of the stages
approach in its present context is to bring out the successive impacts on
resource exploitation of two outside forces. The first of these is a mechanical,
capital-using technology. The second is tlhe application of science to "control"
the resource, biological or mineral, in the same sense that agricultural and
manufacturing industries have control over their processes.
In the model, stress is laid on the industries that today are still extracting
raw materials from nature: fishing, hunting, logging, oil and gas, metals, and
water. Agricultural activity also properly belongs with these industries.
However, since agriculture has already passed well into the third stage, it is
referred to chiefly for purposes of example and comparison. The farmer no
longer "hunts"his cattle, nor "collects" wild rice or fruit. Technically speaking,
he is in command, in that he is technically able to grow what he likes where
and when he likes. The fact that he does not choose to put hothouses at the
North Pole or establish dairy farms in city lots reflects economic unprofitability,
not technical inability. He may prefer to run more or less known climatic risks
to incurring large costs to protect himself against drought or flood. When he
is free to make such choices, nature can be said to be "under control." The
other extractive industries, it will be argued herein, have not yet "controlled"
nature. They can only hunt and collect what nature chooses to produce.

II
This is not the place to attempt to prove that the resource industries have
economic characteristics unlike those of the rest of the economy. In many
respects they are also unlike one another, but it is maintained here that charac-
*This paper was presented at the annual meeting of the Canadian Political Science
Association at Montreal,June 8, 1961. An earlier version of parts of it was presented to the
economics seminar of the Department of Political Economy, University of Edinburgh, in
January, 1960. Subsequently, I have discussed aspects of it with a departmental seminar
70
Vol. XXVIII, no. 1, Feb., 1962

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 The Developmentof the ExtractiveIndustries 71
teristic patterns in their development are common to all the primary industries.
These patterns are best seen when each industry's development is arranged
into stages. No "historicist" determinism, inevitable sequence, or absence of
choice is claimed here, but merely a useful classification of processes and their
consequences.l These are set out in Table I.
What is it that impels an industry through the stages? A sufficientcause is
the growth of demand in the face of limited known resources. Demand, of
course, can grow for a wide variety of reasons: change in tastes, population,
income, market area, or teclmology might be involved. It is also true that
autonomous changes may originate within the industry itself: there may be
accidental discoveries of new raw materials or new recovery methods. (I
shall argue later that such internal improvements are usually induced by the
pressure of demand.) For simplicity, however, it is assumed that raw material
requirements are growing in other parts of the economy, or throughout the
world market.
What names should be given to the three stages? A senior American
economist is said recently to have responded to questions about his opinion of
J. K. Galbraitlh'sfame and influence: "We said many of the same things in the
thirties, but we couldn't find suclh catchy phrases." My problem here is not
only to find catchy titles, but to avoid misleading ones. For the development
of the resource industries is not to be identified by successive forms of one
characteristic so much as the succeeding domination of differentcharacteristics.
Indeed, as I shall show, the third stage may be radically different from the
first two, and may even depend upon a different resource! In choosing names,
therefore, I have decided to be vaguely evocative rather than precisely
indicative.2
The first or primitive stage is one in which man exploits a resource by
taking what nature offers with the use of little capital or energy beside man-
power. Weapons and hand tools would, of course, be necessary. But man's
role is to collect minerals and vegetables; to hunt animals and fish.
The second or capital-intensivestage is one in which man has set up
specialized industries, using great amounts of capital and energy, to collect or
to hunt natural products. In most respects the technology is merely a more
sophisticated, roundabout version of that used in the first stage.
In the third or controlled stage, man no longer merely collects or hunts.
Having mastered nature, he is largely in control of his natural environment.
He uses a technology to suit what nature has provided. He applies the cheapest
technology to some abundant resource in order to obtain a particular consumer
good or service.
In the discussion of each of these stages, I shall begin with the leading
at the University of British Columbia, with members of the Department of Applied Eco-
nomics, Cambridge, and with Messrs. Peter Bauer and G. F. McGuigan. I have received
substantial comments from Messrs. Basil Yamey and J. D. Pattison.
'See Walter Eucken, The Foundations of Economics (London, 19500), 64-102; Karl
Popper, "The Poverty of Historicism," Economica, XII, 1945, 70; and F. A. Hayek,
"Scientism and the Study of Society," a series of articles in Economica, 1941-5, for some
criticisms of more general application of the "stages"approach.
2See the paper by Mr. J. H. Adler on the stages of economic development presented to
the SSRC-RFF Conference on Natural Resources and Economic Growth, April, 1960,
published as Natural Resoturcesand Economic Growth (1961).

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72 CanadianJournalof Economicsand Political Science
technological characteristic. Then I shall suggest other characteristics that
have changed and developed at the same time, suggesting that these too can
be grouped into the three stages. Among these characteristics are industrial
organization, quality control, and legal control. Table I, which is indicative
of the matters to be dealt with, may also be useful as a sort of table of contents.
TABLE I
CHARACTERISTICS OF THE THREE STAGES OF EXTRACTIVE INDUSTRY DEVELOPMENT
(Roman numerals refer to sections of the text)

First Stage Second Stage Third Stage

Characteristic "Primitive" (III) "Capital-intensive" "Controlled"
(IV) (VIII)

Technique: Hand tools (III) Mechanical, powered All technologies,

Large uinits powered
Labour and power chief Smaller units (IX)
inputs (V) Diverse inputs (X)

Location: Accideiital (III) Intense search, high Under control

exploration costs, Mineral: planned
folloved by depletion location near markets
(V) Biological: growth near
markets (XI)

Inidustrial Small and local Vertically integrated Vertically integrated

organization: (III) backward from forward from "land-
market lord"
Some oligopoly and com- Differential goods with
petition in staples (VI) monopolistic competi-
tion (XI I)

Quality of Haphazard (III) Tenidency to explore for Under control (XII)

product: sources of staples with
desirable qualities (V)

Teniure and Law of capture or Exclusive tenure over life Tenure over "life" of
property common property of capital goods (VII) resouLrce(XIII)
(IV)

III
In the first or primitive stage, man merely collects what nature provides.
He adds himself to those natural forces of erosion that gradually destroy
geological formations. He joins the animals in harvesting fruit and vegetables.
He emulates the predators in capturing and killing animals and fish. He does
not produce, but hunts. Adam Smith calls it "that early and rude state of
society which precedes both the accumulation of stock and the appropriation
of land," and uses it as a setting for his 'nation of hunters."3 Doubtless, man's
earliest economic environment was something like Smith's description, in
which he was followed by generations of armchair historians. No rent, no
3Wealth of Nations, ed. E. Cannan (New York, 1937), 47.

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 The Developmentof the ExtractiveIndustries 73
profit, no market, no money, no exchange, no division of labour, no accumula-
tion: mankind and economic theory start easily enough.
In the more recent past, peoples have hunted and collected with tools,
weapons, and implements of wood, stone, and metal. But even these improve-
ments, important as they may be archaeologically, do not represent a sub-
stantially roundabout technique to modern eyes. Neitlher did they provide a
means by which energy other than manpower might be put to use.
Men in this stage certainly had little control over their resources. Rough
rules of thumb were developed for determining where and when certain plants,
fish, and animals might be available. Men might also be able to predict, by
surface showings, where minerals or water were to be found; but they did
not know why their rules were valid, and they were not able to make products
become available by their own actions.
Neither, in this stage, had they modern concepts of property, although there
is every reason to believe they had some rules for sharing the catch or dis-
covery. In a few instances, as in some modern fishing and hunting enterprises,
anyone could participate. Possession through capture is then nine points of
the law. In other instances, certain groups or persons appropriated whole
areas for their own use. Such appropriation as existed, therefore, had mainly
distributional significance; it did not have any necessary effect on the total
yield of the resource.4
The resource may be exploited by specialists, or by the whole tribe; their
position as traders is endangered by their inability to deal with qualitative
changes in their "resource base." Miners, for example, are plagued by changes
in grade of metal, stone, or fuel. Thus, in matters of both quality and quantity
they are at the mercy of nature.
Because of the niggardliness of nature, we would expect to find monopolies,
as when one man or tribe wins control of a source of water, mineral, food, or
fibre. But this may be insecure and monopolies may survive only for the
"smarketperiod." In any case, unless there is some kind of money, notions of
cost and monopolistic profit are fairly empty.
But primitive resource industries can also exist within modem economic
society. The trades in furs and jewels are good examples. In more recent years
the world has seen the great placer gold rushes, in which non-capitalistic
producers, highly specialized, have used techniques little different from those
of five thousand years earlier. Even today the trapping of fur-bearing animals,
the finding of diamonds, inshore and inland fishing, the gathering of berries,
wild rubber, cascara, and animals for zoos and laboratories, are fairly common-
place, common-property, non-capitalized, hunting or collecting activities, which
we may place in our primitive stage.

4This statement requires some modification. If there is no property, then people must
attempt to forestall rivals in collecting or hunting. Even at this stage, therefore, property
';rights"allow men to allot their hours and days between activities in a convenient (and
efficient) manner. Hence there is an economic advantage in property even when there is no
investment and no knowledge of the factors affecting the yield of the resource (i.e., no
attempts are made to conserve or manage the resource). There are many examples of first-
stage property rights: mining claims, hunters' territories,exclusive fishing rights, and rights
to wood in common forests.

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74 CanadianJournalof Economicsand Political Science
IV
In this section I shall discuss the transition to the second stage. Once trade,
money, implements, organization, and ideas about property exist, the simple
collection of raw materials by hand methods is unlikely to endure for long.
With an increase in demand, the way is clear for the adoption of substantially
roundabout, fixed-capital methods.
Among the many reasons for any possible delay of the advent of the second
stage is the purely economic one that the optimum technology may be labour-
intensive. If the material is abundant and easy to extract, and if demand is
small, hand methods may be rationally used. On the other hand, if the material
is becoming depleted, low-grade, or remote, incentives may exist to hasten
the adoption of fixed plant and equipment. There are obviously many possible
degrees of capital intensity, and particular industries may build up to their
full equipment, inventories, and auxiliary transportation services very slowly.
Once demand has increased beyond the capacity of primitive methods,
capital and energy-using techniques may most easily be introduced by intro-
ducing inventions from other parts of the economy. The power-saw in logging
is a good recent example. Alternatively, an invention may be "induced," as the
steam engine was invented for mine drainage, or the net for fishing. Finally,
there may be "autonomous"inventions, but it is difficult to vouch for examples
in the resource industries. Most new techniques whose history is known were
urgently desired and sought for. Hence the main stimulus was demand or
price. Price may rise not only because demand increases but also because
known supplies peter out. In either case the resource suppliers are impelled
to change their ways of operation; the resource industry becomes highly
capitalized and moves into the second stage.

V
Resource industries that are in the second stage are capital-intensive. Im-
pelled by the pressure of demand to multiply their rates of extraction, they
respond by applying new techniques, bulk transportation methods, mass ex-
ploration devices, and, above all, large amounts of fixed capital.5
If we search for a single explanation for this dependence on fixed capital,
we find it in the response to demand by a mechanical technology. I use the
5Capital-outputratios, derived from national wealth estimates, usually show tlat the
"resource industries" (metals, petroleum, coal, forestry, and water power) have ratios
higher than other sectors, although, admittedly, estimation of these ratios is at best a ten-
dentious business.
We may also consult the work of Leontief and his associates on American incremental
capital-output ratios. Elsewhere I have calculated from Grosse's 1939 estimates that the
ratio for the resource industries' sector was 2.1, exceeded only by the 2.6 requirement of
the transport,storage, and communicationssector. That other writers have noted this high
ratio is shown by its use in their comments on Leontief's scarce-factor paradox. See:
Raymond Goldsmith and Christopher Saunders, eds., Income and Wealth, Series VIII
(London, 1960), passim; Wim. C. Hood and Anthony Scott, Output, Labour and Capital in
the CanadianEconomy (Ottawa, 1957), 289-96, based on R. N. Grosse, Appendix I in WV.
Leontief, ed., Studies in the Structure of the American Economy (New York, 1953); and
Daniel Creamer, Sergei P. Dobrovolsky, and Israel Borenstein, Capital in Manufacturing
and Mining: Its Formationand Financing (Princeton, 1961).

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 The Developmentof the Extractiveindustries 75
word mechanical advisedly, in the sense stressed by Usher in his History of
Mechanical Inventions. "At the lower levels, mechanical invention involves
little more than some improvement in the skills required for the making of
simple tools, and as long as invention is essentially empirical, even the
development of relatively complex mechanisms does not seem to involve
abstract thought or organized scientific knowledge."6 If we take into account
the transporting and weight-reduction aspects of the resource industries, the
technology does seem quite complex (fish canning, for example, or electro-
lytic reduction). But the actual technology of exploitation is unashamedly
mechanical, as indeed are often the transport and reduction phases too. Man,
having found it impossible to supply a large demand by hand operations, has
made machines that work analogously to hand methods. There is little scien-
tific difference between hydraulic mining, dredging, open-cast mining, even
drilling, and the primitive techniques which they have supplanted. The same
is true of logging and fishing methods. What has changed is the scale. In
order to get large amounts of raw materials it is necessary not only to exploit
more natural-resource sites but also to work them at a higher rate of extraction
per year and at a lower level of natural richness. In modem mining, for
example, immense tonnages of waste rock or dirt pass through the works,
requiring a high ratio of capital to final output. The lower the grade of raw
material, the higher the ratio. A similar statement applies to all the extractive
industries. What is important is that the problems of increasing volume and
diminishing accessibility have been met by the use of a mechanical technology.
There has rarely, it seems to me, been a revolution in what the industries
were trying to do. Let us take a few examples.
Newcomen and Watt worked out mechanical pumping methods for coal
mines. We are told the steam engine was the basis of an industrial revolution,
because those who used it could do new things. But in the mines, the steam-
powered pumps merely improved and extended the old workings. Manpower,
waterpower, and horsepower had already been applied, and the actual tech-
nology of coal extraction was merely altered in scale.7 A really revolutionary
technique in the mining of coal would be its underground gasification; this
would not merely improve the primitive "break it off and drag it out" approach,
but would be a non-mechanical technology. It does not require an engineer to
point out that fishing today is merely a mechanical extension of primitive
methods. The trawl, the long-line, and the seine net, made of fine new materials
and exploited in the deep sea from speedy large vessels, are still the old
techniques. Only recently has man begun to wonder whether there is not a
more efficient way of getting food from the sea than hunting for fish. The
same general statements apply to logging, water supply, and oil drilling
(though this is a relatively new industry, and an 'ancient" technology scarcely
existed).
In the second stage resource industries remain collectors or hunters, as they

6A. P. Usher, A History of Mechanical Inventions (revised ed., Harvard, 1954), 5-6. See
also Charles Singer et al., A History of Technology (London, 1958), II, chapters on primary
industries.
7See J. U. Nef, The Rise of the British Coal Industry (London, 1932), I, 350-80.

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76 CanadianJournalof Economicsand Political Science
were in the first stage, but the increase in scale has replaced man with a
machine. It has also replaced his strength with outside sources of power. For
the most part, power has been required at all stages: the transportation aspects
of actual extraction, lifting, and the subsequent carrying of large volumes over
long distances. Waterpower, steam, gasoline, and electricity-especially the
first two-have been essential in this role, and their invention has been
intimately associated with the resource industries and with mining in particu-
lar. Extraction per se has also required power for drills, saws, nets and lines.
And of course bulk-reduction has required immense amounts of mechanical
heat and mechanical energy.
Another implication of the second stage is that the resource margin is
extended by discovery. While the technology of extraction remains mechanical,
the technology of discovery has made use of all the main branches of the
natural sciences. In the nineteenth century man started out to look at the
surface of the whole world for traces of valuable minerals. Private prospectors
and public geological surveys share the task today. The traces were originally
surface showings of the underground deposit itself. But today physical, electric,
magnetic, and chemical techniques, coupled with an expanding geophysical
knowledge, are tending to enable men to predict where minerals may be
found. In the search for wood, such power of prediction is obviously less
difficult to come by. Apart from vastly improved inventory techniques and
some botanical and genetic knowledge useful for the growing of trees, the
chief "discoveries" have been in the processing of previously neglected sizes
and species of trees and plants and other sources of cellulose. (This tendency
may herald a movement into the third stage.) The application of the sciences
to the search for fish is chiefly a post-war development. An extraordinary
number of ideas from oceanography, meteorology, psychology, and zoology
have been combined with older methods of sounding the depths and have
apparently vastly increased our knowledge of the seas.
But there are still immense risks involved in discovery, and modern methods
are heavily capital-using. It may be theoretically analogous to investment in
new manufacturing capacity, but the inability to predict is still so serious that
development might almost be described as a random process. Consequently,
while there is some capacity to cope with nature's caprice in the quality and
quantity of resources, man is still, in the second stage, at the mercy of nature.
Only by employing huge amounts of capital and energy in both discovery and
extraction can the supply of raw materials be sustained. The hunting and
collecting technology of the second-stage resource industries has an average
productivity of capital much lower than elsewhere, especially when the risk of
failure (of which resource-exploiting firms so often complain) is taken into
account.
VI
If the second stage is one that requires capital, energy, and a mechanical
technology, xvhat are the implications for its e-conomic structure? One impor-
tant implication, I believe, is vertical integration backtvard from user to
source.

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 The Development of the Extractive Industries 77
The product is still a "staple": a transportable, more or less standardized, raw
material with a fairly high value in relation to its bulk. Consequently, it may
be sold on world markets under more or less competitive conditions. Some
metals, pulp, lumber, coal, and some fish are sold on open markets to many
buyers. Where this is the case, feast-or-famine is the rule for the sellers.
Steadily growing demand and depletion of old sources create an incentive to
find new sources of supply. Such is the scarcity of sources and the indivisi-
bility of investments, however, that a single new discovery may have a
pronounced effect on world prices. And b3cause the final market for raw
materials is concentrated in the durable goods industries, which usually
display an unstable demand, the market is unsettled for this reason as well.
This instability of the open markets for raw materials, which I hope to
investigate elsewhere, is often concealed or removed by vertical integration.
The using industries have a variety of reasons for acting. First, they may wish
to avoid instability of price and uncertainty of supplies, even if the market
is fairly competitive. Second, there may be so few using firms that vertical
integration to supplies becomes part of the oligopolistic battle. Third, there
may be so few supplying firms that vertical integration becomes a rational
protection against monopolistic pricing. Fourth, difficulties about the quality
of the raw material may be most cheaply dealt with by assuming control over
a particular source; this would be particularly true if the market were narrow.
Fifth, the using firms may find the supplying industry insufficiently enterpris-
ing, or lacking capital for development, or both. Sixth, tax treatment of
industry may be biased in favour of the primary link in the chain of production.
For all these reasons, we find that in the highly capitalized extractive
industries integration has usually been backward from the user or processor
to the primary producer.8 It is true that the final integrated enterprise has the
same characteristics whether the impetus to merge came from the front or the
rear. Nevertheless, most of the advantages of promoting a merger listed above
are advantages for a using firm; it is obvious that an actual or assumed
"shortage" of raw materials provides the main motive. When the primary
industry is in the secondary, or capitalistic stage, it is still at the mercy of
nature. It cannot guarantee supplies into the future to the whole group of
users. Consequently, the using industry faces not only unstable prices, but also
the risk of either losing available supplies to its competitors or paying scarcity
rents to its suppliers. Why not earn the rents itself? With the security of
guaranteed supplies, it can safely invest in capital-intensive processing plants,
advertising campaigns, product differentiation. and the like. The extra costs
(the inefficiencies) of having to take its supplies from its own sources regard-
less of opportunities elsewhere, are usually thought to be well worth the
advantages of the security they buy. We find, therefore, that petroleum,
natural gas, electricity supply, metals, chemicals, wood, and fish all tend to be
organized from user back to resource. (It will be noted that some of these

SThere is, of course, a large literature on this whole subject. Some useful recent works
are Orris C. Herfindahl,Copper Costs and Prices: 1870-1957 (Baltimore, 1959), esp. chap.
8; 0. WV.Main, CanadianNickel Industry (Toronto, 1955); J. G. McLean and R. WV. Haigh,
Growth of Integrated Oil Companies (New York, 1954).

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X8 CanadianJournalof Economicsand Political Science
industries are among the so-called natural monopolies-usually public utilities-
or oligopolies. They then have all the more incentive to integrate backwards.)
Only a very large, purely competitive industry might be free of the motives
sketched above. Under pure competition it is never worth while to take steps
to prevent a shortage of raw materials. Thus a small contracting firm is not
justified in obtaining its own supplies of wood and lumber; and a job printing
firm does not make its own paper. But a large newspaper may make its own
newsprint.
It follows that in the second stage the large amounts of capital required are
frequently invested by the users. The region or the country where the resources
are found is merely the host. If it is an underdeveloped country, the resource
industry may be an "enclave" of the mature countries where the raw materials
are used.9 So fur-trading Canada was an outpost of Europe; Indonesia an
enclave of the Texas oil economy; and many forest-products and mining
industries are financed, manned, and managed by users from abroad.

VII
In the primitive stage, property rights may be minimal or non-existent. In
the second stage of resource development, however, tenure and property
concepts must be very strong. The very capital-intensity sketched in the
preceding sections is impossible without secure rights in raw materials. A firm
will not install a railway, mine, access road, mill, dam, power house, smelter,
or pipeline unless it is sure that supplies will be forthcoming over the economic
life of the asset. Consequently, with one exception to be discussed below, in
the second stage tenure in resources must be guaranteed for at least the life
of the capital goods installed to exploit them. Note that the length of tenure
is set by the life of the invested assets, not by some "reproduction period" of
the resource itself.
The exception mentioned above is the group of industries exploiting fluid
resources, such as the fishery or oil industry. Let us compare these with mining
or logging. The sawmiller needs tenure so that he need fear no encroachment
while removing the logs. He is not prepared to take his chances on a race or a
battle in the woods between his loggers and others. Neither will a miner risk
his capital in sinking a shaft to ore that may be removed by competing enter-
prises. But in the fishing and oil industries, the fluidity of the resource has
long been thought to make it inherently impossible to guarantee anyone rights
to a certain volume of raw material. Hence competing oil wells and fishing
boats not only battle against the unpredictability and niggardliness of nature;
they also battle against each other. Unless forms of tenure are found that are
adapted to this situation where the resource is not "specific" to any user, the
industry tends towards an inefficient equilibrium: too much capital; too rapid
removal of the resource; and possible depletion of a resource that ought to be
perpetual from a social point of view. This inefficiency of common property

9See Hla Myint, "An Interpretation of Economic Backwardness," Oxford Economic

Papers, 1954, 153; and Benjamin Higgins, Economic Dcvelopment (New York, 1959),
chap. xii, for a review of the literature.

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 The Development of the Extractive Industries 79
resources, which has been thoroughly investigated elsewhere, is an exception
to the rule of extractive industries in the second stage, namely, that tenure
tends to be coextensive with the life of the physical assets.

VIII
When we think of today's "extractive industries," we think of those that are
still in the second (or even the first) stage. Many primary industries, however,
have already moved into the third, mature stage, where nature is controlled by
man. Agriculture provides an instructive example. I shall spare the reader my
inexpert gloss on the considerable literature in the history of agriculture. It is
sufficient to note that from the outset the aim in agriculture was plant and
animal husbandry. Man did ncft long confine himself to making machines that
would cut more wild grain or kill more wild animals. Instead he brought the
wild process under his own control. Increase in demand was met not only by
taming resources at the extensive margin, but also by intensifying cultivation,
by inventing new techniques, and by breeding new strains of plants and
animals. Mechanical technology took man into the second stage of the extrac-
tive industries; technology and genetics took him into the third stage in
agriculture.
The characteristics of agriculture flow from its mastery or control of nature.
In this third stage, fixed capital for transportation, extraction, or bulk-breaking
is required in smaller lumps. When natural processes are controlled, transport
costs are reduced by placing primary production closer to the user. The costs
of "extraction" are likewise reduced by breeding products that are cheap to
harvest, and by increasing their grade or density per acre. Finally, bulk-
reduction is made less capital-intensive by breeding plants or animals that have
little waste matter, and that are as close as possible to the form finally
required. In brief, while the extractive industry in its second stage is very
capital-intensive, and is organized most efficiently in large, resource-oriented,
indivisible establishments, the efficient farms of the third stage may be market-
oriented and much smaller in scale.
It is particularly difficult to sum up this contrast in a single generalization,
but something like the following seems to be broadly true: in the second stage,
the efficient establishment is adjusted to the location and scale in which the
resource occurs in nature, but in the third stage the natural resource itself
can be made divisible and "mobile" by inventions and discoveries. Conse-
quently, man may be able to devise least-cost combinations of "natural"
resources, plant, and current inputs which have a wide range of possible sizes
and certainly may be smaller than those dictated by the resource indivisibilities
of the second stage.'0
The example of agriculture shows two changes that come about as an
industry enters the third stage. First, obviously enough, science and technology
'0The opposite view about scale is held by Harrison Brown, The Challenge of Man's
Future (New York, 1956), 218. See also Sir George Thomson, The Foreseeable Future
(Cambridge, 1955), esp. chap. II. An earlier, useful discussion is F. G. Tryon, et al., "The
Mineral Industries,"in NV.F. Ogburn et al., Technological Trends and their Social Implica-
tions (Washington, 1937), 145-76.

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80 CanadianJournalof Economicsand Political Science
must master nature. Second, current inputs are substituted for fixed capital.
I will examine these two changes in turn.

Ix
Whether the factor-saving bias of most inventions is induced (as Hicks was
one of the first to suggest) is still a matter of dispute. It is surprising that
economists have not made more use of the example of agricultural improve-
ments to throw light on this question."1 This is not the place to develop the
analogy fully. But it is clear that technical progress in agriculture has been
inspired by a desire to economize on inputs which were clearly becoming
dearer to the individual enterprise. Man set out to reduce the huge areas of
land that were necessary to yield a certain volume of food or fibre; he set
himself to produce crops in convenient locations instead of in remote or
difficult places; he set himself to grow goods that were close in form to the
ultimate requirements of the market.
The process may be obvious enough for agriculture, but is it typical of the
third stage for all resource industries? Can fishing, mining, or waterpower be
brought under the same control and their products yielded at will?
Take fishing first, since it presents the least difficulty. There is in principle
no insuperable obstacle to domesticating the fishery. The sea is obviously more
difficult to control than the land, both legally and technically. But the diffi-
culties are a matter of degree. Certain nations have already set themselves
this task. In some parts of the world, land is being converted to fish ponds, and
lakes and bays to fish farms. Elsewhere, steps are being taken to bring fisheries
under biological, legal, and economic management.'2 I see no reason why
demand for food should not eventually push the fishing industry well into the
third stage, to take its position beside agriculture.
The mineral industries, however, cannot develop in a parallel manner. The
winning of minerals must be brought "under control" in different ways, at least
until elements can be synthesized from even more elementary particles than
atoms-until, that is, analogies to geological processes can be produced to order
in less than geological time. I shall leave to scientific forecasters the discussion
of this question, noting only that diamonds and other gems are already being
commercially manufactured.
Instead of learning to produce scarce minerals, we now bypass the difficulty
by turning to substitutes.'3 The substitutes to which we turn are those that
are convenient and-usually-abundant. The synthesis of substitutes for certain
chemicals provides good examples, as when saltpetre (for gunpowder) and
potash (for fertilizer and ammonia) were largely displaced by the same
elements obtained from other minerals or from the atmosphere.
But the market does not eagerly desire a specific element or compound for
"See, however, Joan Robinson, The Accumulation of Capital (London, 1958), VI.
12For example, see Sol Sinclair, Licence Limitation, British Columbia (Ottawa, 1960).
laIn connection with the following paragraphs, consult the excellent papers by Earl P.
Stevenson, Frederick T. Moore, and John A. S. Adams in Henry Jarrett, ed., Science and
Resources (Baltimore, 1959). See also Thomas B. Nolan, in The Nation Looks at its
Resources,Report of the Mid-CenturyConference on Resourcesfor the Future (Washington,
DC, 1953), 315.

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 The Development of the Extractive Industries 81
long. Demand for minerals is derived from demand for certain final goods and
services. Therefore, certain properties must be obtainable from the raw
materials from which such services and types of final goods are produced.
Man's hunt for minerals must properly be viewed as a hunt for economical
sources of these properties (strength, colour, porosity, conductivity, mag-
netism, texture, size, durability, elasticity, flavour, and so on). For example,
there is no demand for "tin," but for something to make copper harder or
iron corrosion-free. No one substitute for tin has been found, but each of the
functions performed by tin can now be performed in other ways. Tin's harden-
ing of copper (as in bronze) has been supplanted by the use of other metals.
Food need no longer be packed in tin cans. Hence the immense capital
investment that society might have been forced to undertake to satisfy its
former needs for tin from the minute, low-grade quantities to be found in
many parts of the world have been replaced by simpler investments in
obtaining other materials. Chief of the replacements for tin is glass, made
from apparently unlimited quantities of sand and with little more energy
than is needed to bring metallic tin to the user. Lead and mercury are being
bypassed in similar fashion; zinc and copper may be next.14
Logging is like mining in the second stage. In the third stage, foresters
expect, it will become like agriculture.15 The industry will begin to do what
it once did in the eighteenth century-grow trees for the market. For some
European forestry was once in the third, controlled stage. Generations of
foresters devoted themselves to the science and economics of sylviculture.
But the combined influence of the long period of production of timber, the
discovery of new trees in the east and west, and the urgent short-run require-
ments for wood during the Napoleonic wars, led to the mining of cultured
forests, and to the steady frustration of trained foresters ever since. As a
world-wide industry, forestry has relapsed to logging, an extractive occupation.
It is too easy to say that in the future wood production will return to culti-
vated forestry. This may be tlhe outcome -in some favoured areas. But one
would expect technology to bypass this expensive way of producing cellulose,
just as it has' bypassed the shortage of tin. The pulp and paper industry is
already well aware of the potentialities of producing suitable substances from
grass, cane, and other plants. In the third stage, logging may scarcely exist.

14This sketch of the manner in which the mineral industries might be brought under
control is quite consistent with the viewvtaken by HarrisonBrown and others. These latter-
day Malthusians have examined the ability of natural resources to sustain the expected
population of the coming centuries. They too have emphasized the functions performed by
minerals rather than the minerals themselves (for example, in their discussion of the pos-
sibility of a shortage of "hard"minerals, or of fuels). They have also taken some care to
extrapolate technology into the future (instead of, as frequently happens, assuming that
only population will increase). It is interesting that, as engineers and scientists, they expect
that although the reaction of the mineral industries to increased demand will be something
like the "third stage" of my scheme, this reaction will be in vain: it will not succeed in
supplying enough energy and raw material for the population increase. It certainly is not
inconsistent with the "stages of development" approach to argue thus. Bringing nature
under control is no auarantee that she will be infinitely bountiful. Personally, I am more
optimistic than these writers, but I have no special competence to defend this attitude (see
HarrisonBrown, Challenge of Man's Futtire, chap. vi).
'5See, for example, Egon Glesinger, The Coming Age of Wood (New York, 1950).

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82 CanadianJoturnalof Economicsand Political Science
x
The second aspect of a movement into the third stage is the substitution of
other inputs for fixed capital. As an industry settles down to produce from
abundant materials in the earth the final products that are needed, trade with
the resource industries will no longer be a "one-way street." In the second
stage, these industries bought only capital goods and energy supplies from
other industries. (On an input-output table, an extractive industry has very
few entries in its columns. It is a buyer only of energy, lubricants, and trans-
portation services. Of course, the larger complex of primary industries, from
land to refinery or mill, is a large purchaser of supplies. But even this linkage
is weaker than that of secondary manufacturing. It is, I believe, a corollary
of the capital intensity of the second stage that the input of "other supplies"
should be relatively minor.) In the third stage the resource industries make
heavy demands on other industries. Even as agriculture needs feeds and
fertilizers, so the third-stage extractive enterprises require not only energy
and capital goods but also chemicals, solvents, containers, and other supplies
drawn from the entire gamut of industrial production. Consequently we
should expect that the national input-output table will fill out; the resource
industries will have many linkages backward as well as forward in supplying
the specific needs of consuming industries and so will acquire large indirect
as well as direct labour and capital requirements.
In my opinion, the ratio of fixed capital to output of these industries will
decline, partly because of the substitution of current inputs and partly because,
with locations closer to the market, the transportation aspect of the trans-
port-extraction-bulk-reduction task of these industries will be reduced (or so
I argue in the next section). However, it must be recognized that abundant
low-grade resources will present special problems. Among these are the
necessity of dealing with huge amounts of waste to obtain concentrations
of the desired final material, and the possibility of obtaining several final
materials at the same time. These problems may well be most easily solved
in particular instances by very capital-intensive installations near the site of
the abundant resources. (The problems of winning oil from shale suggest
the difficulties.) In such instances, the increased use of supplies from other
industries may fail to reduce capital-output ratios much below their second
stage level.

XI
The consequences of moving into the third stage depend, of course, upon
the nature of the technological changes that have occurred. In general, the
consequences that I will sketch below are analogous to the changes that have
come about in agriculture and in the manufacturing industries. But there are
differences as well.
First, we should expect that extractive industries would no longer be the
mainstay of less developed countries. Using industries consent to the high
transportation costs of hauling fibres and minerals from remote economies
only because they have no convenient substitutes closer to the market. But

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 The Development of the Extractive Industries 83
if nature is to be brought under control, why should Europe, Japan, or North
America bring their supplies from afar? Since it is the users who are doing
the research today, we can be sure that the bias of induced inventions will
be in the direction of saving on transportation costs, towards discoveries that
will wring the substances users need from their own abundant rocks, soils or
waters. Just as cement, bricks, and most other building materials are now
usually locally produced, so it can be expected that the future values of
many substances will be so low as to preclude shipment from a distance. Of
course, whether a material is imported or made locally depends not only
upon technology but also upon costs. Remote countries that have high-grade
deposits may continue to earn a rent over their transportation cost to market;
but low-grade deposits will tend to disappear below the margin.
This technological advance may therefore have two effects on under-
developed countries. Their chance of breaking into world markets on the
strength of some middle-grade resource is likely to be lessened. The world
will no longer beat a path to any country that can find deposits of metals,
fuels, or wood, once substitutes for these materials have been derived from
more abundant, and closer, sources. But, on the other hand, underdeveloped
countries may not have to depend upon expensive imported raw materials
to supply their new industries. They may instead be able to produce from their
own natural environment the products and services they wish. The first of
these effects may work against the remote, sparsely populated countries. The
second may favour the over-populated "resource-hungry" countries.

XII
Another consequence of entry into the third stage will be in the structure
of the market. In the second stage, the shortage of raw materials, instability,
and the rent to be earned on scarce sites, encouraged the "backward" vertical
integration of industry. In the third stage, however, there would be no
standardized raw material to integrate. Rather, all the sources of industrial
materials would be vying to supply the substances specified by consuming
industries. Consider textiles. In the nineteenth century there were a few
staple fibres: silk, linen, cotton, and wool. Although there was competition
between them, each had its own properties, and was bought for appropriate
items of clothing, upholstery, and so forth. Today we have these four still,
and a host of other "synthetics." Though there are a few standard types of
rayon and nylon, the characteristics of these products may be changed at
will. The consumer's purchases may be derived from sheep, cotton, trees, coal,
oil, glass, milk, fish, or metal. He now buys by required properties, not by
requiring "pure viscose," or "pure polyestyrene." The producer of each ele-
mental raw material is now in competition with all other elemental raw
materials as far as the textile market is concerned. The idea of a standardized
staple as an article of commerce has disappeared. Paradoxically, the dis-
appearance of a single standard product is leading to a more competitive,
rather than a less competitive, market. As might be expected from Chamber-
lin's large-group case, the disappearance of the standardized product (staple)

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84 Canadian Journal of Economics and Political Science
is producing a chain of technically differentiated substitutes. Each seller can
now appeal to a wider group of buyers. In this sense, the market is becoming
more rather than less competitive. Another example is provided by the in-
credible number of sources from which the users of fats and oils may now
draw. No longer is each manufacturer limited to a particular raw material
(tung oil for paint; castor oil for lubricants; whale oil for lighting; coconut
oil for soap; olive oil for cooking, etc.); nearly any animal or vegetable oil
can be refined or processed for nearly any final specification.
As more of the resource industries enter the third stage, we may expect
this easy substitution and slight differentiation to become the rule. The
refinery, smelter, or mill will be faced with stiff competition from products
from other sources. There will be little point then in collusive action among
the refineries of a particular raw material, except in market battles with the
raw material producers themselves.
As in the second stage, one would expect these battles to be resolved by
vertical integration. Now, however, the shoe is on the other foot. In the second
stage, the buyers feared a shortage of raw material. In the third stage, the
owners of natural resources mostly fear monopsonistic exploitation by refiners
and the instability of the demand for their products in the face of new sub-
stitutes which seem to be constantly appearing. It now appears to be logical
to buy their way into firms closer to final consumption in order to assure
their raw material a share of the market.
I can cite a few examples of this tendency, though they are not clear
evidence of my explanation. However, if we assume that producers of materials
now in surplus supply at existing prices are behaving in much the same way
as they would if their product were permanently "under control," so that
there is a permanent battle for markets, we may learn a great deal. The
aluminum companies are now buying their way forward to the production
of finished goods, whereas a few years ago steel companies bought their
way backward to the iron ore mines (ore still being in short supply). Some
new integrated oil companies are being formed by the oil producers, whereas
the great integrated companies were formed earlier bv the marketing and
transport firms. New pulp and paper mills and fine paper establishments are
now frequently being built by the timber holders, whereas a few years ago
most of the extensive vertical integration arose from the final users (in rayon,
publishing, or chemicals) reaching back to the wood supply.
The factors I am stressing can also be illustrated by the shifting market
structure in uranium and titanium mining. The sample is, of course, too small
to prove either that most raw material vertical integration is now going
forward, or that my reasons are correct. But trade discussions of recent
mergers and purchasers are certainly consistent with these views.16
Another way of reducing insecurity in the final market is to invest in
applied research. In the nineteenth century laboratories were the responsibility
161tis true that some of the examples in these industries are also consistent with a theory
that primary producers have integrated forward to get access to markets which are oligo-
polistically supplied. In any given situation, of course, more than one motive may be present.
However, I believe these examples are at least free of another possible motive, that the
primaryproducerswere threatened with new backwardintegrationby using industries.

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 The Development of the Extractive Inclusties 85
of the using industries: chemistry, steel, pharmacy, electrical manufacturing,
photography, and so on. Part of their task was to find methods bv which
the imperfectly suitable, standardized staples from the resource industries
might be adapted to the demands of the using industry. Rarely did the raw
material industry maintain elaborate research facilities. The shortage of raw
materials meant that their users had to 'do the research homework. As in-
dustries enter into the third stage, however, the firms that must enlist science
are in the raw materials camp. Knowing the products or specifications of the
using industries, they must work not only to obtain a product which meets
those specifications but also to suggest to old and new users how they might
gain from making further use of their materials. Further, they must advise their
own industry of specifications in final markets and of ways of exploiting those
possibilities. Consequently, we expect to see in the third stage a relative
increase in the proportion of applied research undertaken by primary industries,
their trade associations, and their govemments. The world's coal industries
are already good examples of this tendency, as are the wood-products and
fish industries. But they are decades behind agriculture. The best-known work
of agricultural laboratories is directed to more efficient farm production. But
probably their most valuable work is now in the fields of market testing,
packaging, preservation, and consumer research.
The new direction of vertical integration and the new emphasis on primary-
products research, therefore, both indicate that while in the second stage
capital, marketing, and research might be provided by final users, in the next
stage the owner of natural resources is on his own. This too is a disquieting
matter for remote, underdeveloped countries. Many such countries are today
restless under the influence of foreign, second-stage, resource-exploiting com-
panies. "Foreign ownership," and "enclaves of foreign society" are becoming
terms of abuse. But when these industries enter the third stage, the under-
developed countries may be embarrassed by the absence of these enclaves.
Unless they develop their own products, and assist in developing markets, they
may find themselves left severely alone.17
One implication of the argument is the increasing need for active govemment
exploration of its own territories. As the using firms withdraw from their
avid exploration of remote territories, the primary industry must take on the
task. In some countries there are no "landowners" except the government
itself. Unless it is willing to acquiesce in the bypassing of its potential re-
sources, it will have to assume the surveying and exploration role much more
vigorously than it has in the past. It may also have to undertake some initial
development. I have made this point elsewhere with particular reference to
I7One application is in the oil industry. Many writers have commented on the new
surpluses of oil, and their effects on the willingness of the industry to take on the develop-
ment of new fields wherever they are found. There are signs that the industry is becoming
increasingly unhappy about oil discoveries that are far afield. Only oligopolistic jockeying
for strengrth,it seems to me, keeps them seeking to maintain their relative shares of the
world's reserves. But this inter-firmjealousy is dyin0, as the industry begins to realize that
energy resources are widespread, and that the ability of geological science to spot likely
deposits is increasing at least as rapidly as old fields are wasting. Indeed, the chief factor
that keeps some companies exploring is the desire to satisfy local governments who are
unwilling to allow these firmsto market oil unless they also explore for it.

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86 Canadian Journal of Economics and Political Science
the Canadian provinces, which up to now depended on large American user-
dominated firms for the development of their Crown lands.'3

XIV
In section VII the point was made that in the second stage the tenure of
the resource site must be sufficient to cover the useful life of the invested
capital asset. In the third stage, the industry has nature under control. By
processes analogous to those of agriculture, we may expect the forestry and
fishing industries to grow wood (or cellulose) and fish, rather than merely
to collect them; and we may expect mineral industries to settle down to the
synthesis of "substances with desirable properties" near the sites of abundant
materials. It follows that the investment of a resource industry in the third
stage will be embodied as much in the resource itself as in the capital goods
used to work it.
It follows further that third-stage resource tenure must be similar to that
in agriculture: at least as long as is required to amortize all improvements,
including those which are embodied in fish, trees, or beds of minerals. In
many cases we would expect that the present short-term timber or mineral
leases would be far too short for this kind of operation. We should therefore
expect the present tendency to give timber users longer-term tenure to be
continued, and similar tendencies to appear in fishing and in mining.
Indeed, I cannot see that the present common-property resources (fisheries,
oilfields, water) can enter the third stage unless their tenure is changed to
bring their exploitation under single management. In some places this change
might take the form of sole ownership; elsewhere, unitization, sale of permits,
or even taxes might serve the purpose. This matter has been dealt with
extensively in the fisheries-economics literature, and needs no summary here.'9
In the mineral industries, because of the shift from scarce, remote, capital-
intensive exploitation to the processing of abundant raw materials there may
be no new demands for property similar to those in the biological resource
industries. If, for example, it became feasible and economic to process common
granite or sea-water, their abundance may lead to less fuss about tenure and
property than was the case in the second stage. In the biological resources,
third-stage industry will have wealth tied up in the living population of plants
or animals. But the ubiquity of gravel and sea-water may cause their pro-
cessors to return to the casual attitudes of the days when rights in common
land and riparian rights in water gave protection enough.

XV
Our "stages," though they may not be fully applicable to all resource
industries nor distinct phases in any one industry, attempt to convey some
18I have discussed these applications of the problems of stage three in "Policy for Crude
Oil," this JOURNAL, May, 1961, and in "GovernmentPolicy and the Public Lands," in R. M.
Clark,ed., CanadianIssues: Essays in Honour of Henry Angus (Toronto, 1961), 166-8.
'9See the forthcoming Proceedings of the FAO Expert Mleetingon the Economic Effects
of Fishery Regulation, Ottawa, 1961, where the management of six different types of
fisheryis discussed.

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 The Development of the Extractive Industries 87
sense of development, of realization of potentialities, in modern primary in-
dustries. The following points are p'articularly worthy of emphasis:
1. The first stage comes first, but the second and third are not necessarily
consecutive. It is quite possible to imagine the utilization of resources moving
directly to the full control of the third stage. Similarly, it is possible to imagine
society's losing control of a resource, and its slipping "back" into the second
stage-a useful way of envisioning man's struggle to obtain adequate supplies
of water.
2. Underdeveloped and remote regions have a stake in the perpetuation of
the second stage. Otherwise, they are apt to slip into a small-scale, more or
less self-sufficient, but inefficient third stage-just as their agriculture is in the
third stage of development, but uses local manpower and capital in a back-
ward way.
3. Property concepts fit well with the stages. In the first stage, property is
economically necessary only for the efficient allocation of labour, and the
distribution of the product. Frequently, it scarcely exists at all. In the second
stage, property rights are necessary to justify and protect heavy fixed in-
vestment. In the third stage, they are necessary to protect investments em-
bodied in the resource itself. (If the resource is abundant, property concepts
may be less important than in the second stage.)
4. Vertical integration back to the resource, and the concept of the standard-
ized staple, seem to belong chiefly to the second stage. Vertical integration
forward towards the consumer, and the concept of specified substance, seem
to belong to the third stage.

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