15 Aug 2011

Julian Simon loses the bet

In 1980, Julian Simon and Paul Ehrlich made a bet. Erhlich claimed that humanity was going to hell in a handbasket (a billion people would starve before 2000); Simon claimed that more people were better (we needed more of "the ultimate resource"). Both of their positions have faults (I am researching Simon's thoughts now), but they were able to find common ground for disagreement (population).

Simon challenged Erhlich to put his money where his mouth was, and they decided -- by some mysterious process -- that the change in the price of five metals would clarify who was right and who was wrong.

(The idea was that greater resource scarcity -- thus declining quality of life -- would be reflected in the the prices of resources. In this 2008 post, I argue that Simon won a sucker bet against Ehrlich because resources are priced and the environment -- something Erhlich cared about and we are still depleting -- is not.)

The prices of these metals in 1990 were lower, so Simon won. Many have since taken this single datapoint as "proof" that environmentalists are some combination of crazy and wrong.

But now those metals are more expensive (in real terms) than they were in 1980. Simon died in 1998, but he said this in 1996 [p. 67]:
I suggest that the possibilities of the world are sufficiently great so that with the present state of knowledge... we and our descendents can manipulate the elements in such a fashion that we can have all the raw materials that we desire at prices ever smaller relative to other goods and to our total incomes.
I agree with most things that Simon said (he spent a lot of time in his last years on political mismanagement of resources), but I think he sometimes took his own ideas too seriously (probably because he was so aggravated by eco-doomsayers), and that led him to stake his reputation a bit too far into thin air.

Bottom Line: The price of natural resources will rise when our demand for those goods outpaces our ability to innovate more efficient ways of using them. Higher prices will reduce our standard of living, but that's the "price" we pay for want.

This process cannot be applied to goods that are not in markets or for which there are missing markets, so we have to be doubly careful about how environmental goods (for example) are managed if we are going to protect and extend our standard of living.


Jay said...

James Grant of "Grant's Interest Rate Observer" made the observation
many years ago that commodities tend to decrease in price in real terms.

I think the fact that some commodities are at price levels not seen since the Carter Administration tells us more about the mismanagement of the ecomomy the the current fascination with Keynesian economics than it does about scarcity and supply and demand functions. This is not just a U.S. condition.

Bottom Line: Many politicians and macroeconomists worry about the lack of aggregate demand even as they advocate policies to keep prices high or increase prices of their favored products (e.g. housing, cars, government jobs).

Jay said...

Sorry for the sloppy editing of my comment yesterday.

I do not mean to imply that the policies of President Obama caused the recession, any more than FDR's caused the recession that lead to The Great Depression. President Carter did not cause stagflation. The policies of Presidents Johnson and Nixon set the stage for President Carter's continued mis-management of the economy. I've read a number of credible books and articles that conclude that Roosevelt's policies deepened and prolonged The Great Depression. I think we are experiencing Deja Vu all over again. Anti-business and class warefare rhetoric do not appear correlated to robust economic growth.

Milton Friedman once observed (I'm paraphrasing) that politicians use Keynesian theory to justify the actions that they are inclined to take anyway.

Mr. Kurtz said...

"When you are buying commodities, you are selling human ingenuity" --Dylan Grice, senior economist, Socite Generale.

Fred L. Smith, Jr. said...

I knew Julian well and would agree that his "optimism" was unbounded. He (as earlier commenters) recognized that politicians would often enact policies that would slow or block commodity-price lowering innovations but was optimistic that somehow entrepreneurs would always find a way around them. Not always, I fear.

On David's point about "priced" and "unpriced" resources: Here is a critical difference between those who view the "market" as "complete" - the institutions that allow voluntary transactions (private property, enforceable contracts, rule of law, reasonably honest culture) are already in place wherever they are feasible. This seems to be wrong: the institutional framework for exchange can and should expand to bring critical resources into the ambit of voluntary exchange. An obvious case would be to enact enabling legislation that would permit landowners (if a suitable number overlying an aquifer would agree) to gain ownership of the underlying aquifer. That is the way that another liquid, Oil, is managed. Why can't Oil and Water POlicies mix?

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