The interaction between firms, consumers, and the interest rate goes far in explaining how individuals allocate consumption over their lifetimes. It wouldn't make any sense for individuals to use up all of their resources when they were young and then have nothing left for old age.¹ In general, people will save for themselves on their own. They will plan for their futures. But don't the members of society have a built-in incentive to use up all of society's resources during their own lifetimes? After all, what's keeping them from engaging in a happy orgy of consumption now and forgetting the welfare of future generations? An easy answer would be that people often save for their children. But that still leaves the question of future generations unresolved. How can we be sure that we are not consuming too many resources right now, and that not enough will be left for future generations to enjoy?

We will start by assuming that the human race has about the same concern for its future generations as hamsters have for theirs (recall that hamsters are famous for eating their young). That is, let's assume that if people had the chance, they would throw themselves into greed, debauchery, and binge consumption on a scale that would make Nero blush. They would live solely for themselves, with nary a thought for the well-being of future generations.

Let's try to imagine how this hypothetical world--peopled with greedy, thoughtless consumers--would work. Suppose one day, these consumers got together and decided to consume all the natural gas they could. "To heck with the kids," they say, "let's eat, drink, and consume some non-renewable resources, for tomorrow we may die!" (Note how utterly despicable it is for these consumers to deplete non-renewable resources, since these are physically finite and cannot be replenished.) Accordingly, in dead of winter, these consumers leave their doors wide open, take out their energy-conserving windows, remove insulation, and crank up the thermostat to about 105 degrees. They convert their homes into luxury saunas. In short, they commit themselves to using up as much natural gas as possible.

What would happen in a world like this? Would the children of these consumers be left with a planet having little or no natural gas? At first glance, the answer would appear to be yes. After all, if the current generation wants to consume all of the world's natural gas supply, who's going to stop them? Before you conclude that all is hopeless and the fate of the world's grandchildren rests on the dubious goodness of the current generation, think a moment about our old hero--the firm.

Any rapid increase in consumption would certainly cause an increase in the price of natural gas. As prices rose, deposits which previously were too costly to exploit (perhaps too deep in the ground or under arctic ice) would suddenly become profitable. As a result, firms would take resources away from other activities and commit them to natural gas production. The supply of natural gas would increase. And these new reserves would serve to accommodate the current generation's lust for natural gas, leaving adequate supplies for the future. Thus, we see that profit-maximizing firms will serve as a buffer to protect future consumers from the rapaciousness of current consumers.

"Okay," you say, "but what if there were absolutely no extra deposits of natural gas? What if firms couldn't expand the supply of natural gas?" In that case, the prices of other, substitute energy sources could be expected to rise dramatically. Consequently, the supply of conventional energy sources--like oil, coal, and nuclear energy--would increase. Unconventional energy sources--like wind power, solar power, and geothermal energy--would also become more profitable, and their supply would likewise increase. There would be a great scramble among firms as each struggled to supply alternative energy in order to profit by the depletion of natural gas. As they served their own interests, these energy firms would also be serving future generations of consumers by insuring that energy was as plentiful as possible.

There is yet another reason to be sure that firms will protect the wellbeing of future generations. As the current generation binges on natural gas consumption, driving up its price, firms will have a strong incentive to preserve current supplies of natural gas so that they can sell them at even higher prices in the future. To see why, imagine that you are convinced that--at present rates of consumption--the world will run out of natural gas in ten years. If you really believed this, then you'd want to purchase as much gas as possible now so that you could store it and sell in the future. Imagine what a price natural gas will fetch ten years from now when almost none is left! You could make a fortune!

You don't think firms can figure this out? Rather than passively accommodating consumer's rabid appetites for natural gas, firms would withhold some supplies from today's consumers. They would voluntarily save some of their supplies so that they will have them to sell in the future, when the coming scarcity of natural gas will guarantee a corresponding high price. And so it is. Entrepreneurs and firms will act to counter consumers' rabid consumption of non-renewable resources today, motivated by their desire to make even more money tomorrow.²

Usually, when some shortage causes fears of a resource crisis, policy makers are quick to appeal for conservation on the part of consumers and firms. You will notice that up to this point, we've said relatively little about conservation. Of course, many consumers and firms will voluntarily choose to refrain from consuming a good whose price has risen, and this is certainly desirable.

Nevertheless, it is important to remember (recall our discussion of recycling in Chapter 17) that it takes resources to save resources. Consumers have to buy insulation to save on the consumption of natural gas for home heating. Firms have to employ new machines that can run off of alternative sources of energy. But insulation and machines have alternative uses. These alternative uses may be even more important than preserving natural gas. Without the guidance of prices (including the interest rate) it is impossible to know where these resources have their highest valued use. The beauty of unregulated markets is that firms have all the right incentives to employ resources to conserve natural gas whenever conservation is the highest valued use of those resources. Nobody has to tell consumers or firms to conserve, or make impassioned appeals to their patriotism. When conservation is the right way to increase society's happiness, consumers and firms will choose this way voluntarily.

In conclusion, we can rest assured that firms will be on the lookout for any future decrease in the supply of a resource. While we sit at home enjoying yet another exciting episode of Baywatch, commodities brokers in Chicago, Tokyo, and London are researching available stocks of energy, predicting future prices and future resource availability. While we snuggle comfortably in our warm beds at night, firms are tirelessly searching for new ways to preserve and expand resources for future generations. The beauty of free-market capitalism is that even in a cold, cruel world, we can sleep soundly. The wellbeing of our children's children is being watched over by those profit-seeking, money-grubbing firms. Our view of the world may sound a bit rosy, and it is. Admittedly, we are incurable optimists. And if history is any guide, we are right.