Innovation Overcomes Scarcity: Nickel Pig Iron Edition

Published: 
Tuesday, December 10, 2013

What does “nickel pig iron” have to do with free market environmentalism? It provides an excellent example of how markets and, in particular, rising commodity prices spur innovation and resource conservation.

This recent article from the Wall Street Journal describes how nickel, a metal used to make stainless steel, became increasingly scarce in recent years. The price peaked in 2007 at $50,000 per metric ton, up from $10,000 just a few years earlier. Responding to the scarcity, Chinese entrepreneurs figured out how to substitute a lower-grade nickel known as “nickel pig iron” in the steel manufacturing process. As a result, the price of nickel plummeted to $14,000 per metric ton, and China became a leading nickel producer.

Nickel pig iron is just one example of how innovation overcomes scarcity. Despite claims to the contrary the world is not running out of resources amid rapid population growth. As a resource become scarcer, the price increase motivates entrepreneurs to use less and find substitutes. This phenomenon, perhaps best demonstrated by the Simon-Ehrlich wager, is worth remembering anytime someone claims China’s demand for natural resources will exhaust supplies.  

But markets only promote resource conservation when prices reflect actual resource scarcity. Government intervention into the marketplace, in the form of taxes and subsidies, distorts market prices and garbles the scarcity message for everything from water to energy.

Reed Watson is the executive director at PERC. He is also the Director of PERC's Enviropreneur Institute, an educational program and launchpad for environmental entrepreneurs. Watson’s research focuses on the implementation of market-based solutions to natural resource conflicts. With Terry Anderson and Brandon Scarborough, he coauthored Tapping...
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