Dr. Ehrlich, call your office

Michael Giberson

I ended my semester in “Energy and Environmental Economics” talking about resource optimism and resource pessimism, framed mostly as a big picture debate between Julian Simon and others against Paul Ehrlich and Neo-Malthusians. Simon reports being puzzled at how folks could look at data showing human health and well-being getting better and better and come to the conclusion we were all doomed and it was probably too late to do anything about it.

I’m sure upon reading this New York Times story the pessimists will be as troubled as ever: “Life Expectancy Rises Around the World, Study Finds.”

Simon v. Ehrlich, again

Michael Giberson

Paul Kedrosky gave a short talk at TED 2010 on the Simon/Ehrlich bet on commodities prices, and posts a summary of the content as “Re-litigating the Simon/Ehrlich Bet.” If the Simon-Ehrlich bet is to be re-litigated, and Kedrosky comment is taken as offering a brief in favor of Ehrlich’s position, what can be said in defense of the Simon position?  Alex Tabarrok responds that Kedrosky’s argument misses the whole point.

Here is Kedrosky in excerpt:

By way of refresher, the situation was this: After a decade of soaring commodity prices, plus related worries about resource scarcity, in 1980, Paul Ehrlich, a dour population ecologist, took up Julian Simon, a cornucopian economist, on a bet. Ehrlich (on paper) put equal mounts of money into five commodities (he selected chromium, copper, nickel, tin and tungsten) whose prices would, he thought, be higher a decade later. Higher prices meant Ehrlich won; lower prices meant Simon won. The loser paid the winner the difference.

Ehrlich lost. A decade later, in 1990, all five commodities’ prices were lower than they were in 1980.

Kedrosky reexamines the data to see how frequently a 10-year bet on the selected commodities prices would have produced a win for either Simon or Ehrlich.  From 1980 to 1993, Simon would have won but for two years, then beginning in 1994, largely due to the run up in commodities prices that lasted from 2004 to 2009, Ehrlich would have won subsequent bets.  Kedrosky sums up:

So, what does all this mean? A few things. First, and most importantly, it means Simon was right but fairly lucky. There is nothing wrong with being lucky, of course, but compulsive Simon/Ehrlich-citers need to be reminded that it is no law of nature (let alone of rickety old economics) that commodity prices (inflation-adjusted or otherwise) trend inexorably downward, even over a decade.

Kedrosky then offers a discussion of short term price gyrations in oil markets and effects on the United States, suggesting  that “the market” will “break the largest and most elastic buyer’s back”, either “smoothly or through ugly societal and economic disruption.”  The metaphor got a little twisted there – is it possible to smoothly break someone’s back? Is it possible to break an elastic buyer’s back? – and so I get a little lost.

Essentially Kedrosky suggests that as oil becomes more scarce, prices will become higher and more volatile for a while, and then there will be a transition to lower priced oil (after substitutes emerge), and that transition will be either smooth or ugly.  This is hardly revolutionary analysis.  In fact, except for slight differences in tone, the message here is fairly consistent with the claims made in CERA’s “undulating plateau” analysis.  CERA seems to expect a smooth transition, a conclusion based on how markets usually respond to increasing resource scarcity.

Alex Tabarrok points out, however, the Kedrosky seems to be missing the key point of the Simon-Ehrlich dispute, which was fundamentally about scarcity, not prices:

The bet was never fundamentally about prices, the bet was about scarcity, living standards and whether we were running out of natural resources–remember that at the time Ehrlich was predicting hundreds of millions would die of starvation and even that England would not exist in the year 2000!  Prices were just a convenient but imperfect way to mark the bet to market.The reason prices have risen in the 1990s is not that things are getting worse but that things are getting better–especially in China and India where things have been getting much better.  As China and India have become richer demand has increased tremendously in these countries putting upward pressure on prices.  In other words, prices have risen because the value of resources has risen.  That’s quite different–indeed the opposite–of what Ehrlich was predicting. [Emphasis added.]