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.