Hotelling's rule

Hotelling's rule states that the most socially and economically profitable extraction path of a non-renewable resource is one along which the price of the resource, determined by the marginal net revenue from the sale of the resource, increases at the rate of interest. It describes the time path of natural resource extraction which maximizes the value of the resource stock.

The rule is derived from a 1931 paper by U.S. economist Harold Hotelling, which laid the foundations for further research in the field of non-renewable resource economics.

During the late nineteenth and early twentieth century, conservation in the United States was significantly visible. This conservation movement was concerned about the possible overexploitation of non-renewable natural resources and called for regulation. Harold Hotelling responded to this call with his paper. In fact, he began his paper with an introduction to this problem by stating in 1931 that:

Before the 1970s, serious attention was not given to Hotelling’s views regarding economics of exhaustible resources. This was because when Hotelling came up with this hypothesis, the media’s emphasis was towards issues like the Great Depression and World War II.

After World War II, there were concerns about the sufficiency and adequacy of natural resources, especially in the United States. This led to the establishment of the President’s Materials Policy Commission, called the Paley commission, the report of which was published in 1952. It was an outcome of the Resources of the Future, a part of the Washington think tank. However this did not help in any way in recognizing Hotelling’s work. In 1963, Harold Barnett and Chandler Morse published their paper "Scarcity and Growth", which was one of the first of its kind in analysing the long-run measures of scarcity of a number of natural resources in a systematic fashion. A passing reference to Hotelling’s paper was made in that paper. This leads to the conclusion that a lack of attention and interest to Hotelling’s work cannot be attributed to the lack of public concern for the issues relating natural resources before the 1970s as there is no sufficient evidence to prove this point.

Hotelling’s paper was difficult and given the level of sophistication in economic profession concerning mathematics at that time, it might have been a reason why his contribution went unnoticed. In fact Hotelling himself stated that the Economic Journal had rejected his paper due to high difficulty level of mathematics involved in it.

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