10 June 2013

Ehrlich right, Simon wrong, part 3

In a famous bet, Paul Ehrlich had claimed that we would "run out of commodities" while Julian Simon claimed that we would not, because people ("The Ultimate Resource" in his words) would innovate. Ehrlich lost when the price of five commodities (he chose) fell over 10 years. Simon and his supporters claimed not just just some cash, but a permanent moral high ground over the whether we'd have to worry about resources.

Well, I and many others saw the problem with that claim. A few years ago, I wrote that Julian Simon missed the importance of the environment. Humans would damage the environment, I wrote, because it would be affected by our removal and use of resources.

Consider, for example, how we've been clever at discovering more gas and oil and not-so-clever at preventing climate change.

This week's Economist adds more details to this story by summarizing the results in a paper by David Jacks (who went to grad school with me :) in which Jacks finds that:
  • The prices of resources "in the ground" have been rising over the past 160 years (see this post)
  • The prices of resources "that we make" have been falling over that period.*
  • Human ingenuity has lowered the price of in-the-ground resources every so-often, but that fall in prices has increased demand, to the point that prices end up at even higher levels at the end of each 40-year "super cycle" of demand responding to supply responding to demand.
Very cool.

Bottom Line: The basic economics of goods -- private, common pool and public -- are robust, so we'd better manage common pool goods that can be over-exploited, protect rights to private goods that can be used efficiently, and put political effort and public money into preserving public goods we all share. Examples of these are, respectively, water in multi-user aquifers, irrigation water rights, and water in rivers.
* These include crops such as cotton. I wonder what the price trend would look like if we included a value for the intensity of inputs (e.g., fertilizer, capital, etc.) within the cost of production. This is relevant because many inputs are non-renewable and/or subsidized.

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