Simon vs. Ehrlich, Round 2

Posted on Thursday, October 13th, 02011 by Alex Mensing
link Categories: Futures, Long Bets, Long Term Thinking   chat 0 Comments

Roger Pielke Jr. made an observation on his blog recently regarding the past decade’s rapid increase in commodity prices and the classic debate between optimistic Cornucopians and pessimistic Malthusians. In 01990 ecologist Paul Ehrlich – who has spoken at The Long Now Foundation’s SALT series – lost a decade-long bet to economist Julian Simon. In 01980, Simon had predicted that prices (of just about everything) would continue to fall as the human population increased. They tracked the price of five metals over the course of the next ten years, and they all became less expensive.

Since the beginning of the millennium, however, prices have risen fairly steadily. In August of 02011, The Economist noted that current prices of the five metals chosen for the Ehrlich – Simon bet exceeded 01980 prices. Had the bet lasted for three decades, rather than one, Ehrlich would have won.

What Pielke points out, however, is that if we zoom out even further and look at The Economist’s records since 1845, the last decade’s spike in prices could be interpreted as one more blip in a long-term trend of Cornucopian price decreases. Or is the global economy showing the first signs of a long-in-coming collapse, as predicted by Malthusians?

Long-term bets such as the $1,000 wager between Simon and Ehrlich can place people’s predictions about the future out in the open for public scrutiny and comment – encouraging those who would speak to think carefully before they do so. One project of The Long Now Foundation, Long Bets, provides a forum for long-term bets and discussion. On the site, you can view current bets, place your own, or challenge someone else’s prediction.

  • Investor Jeremy Grantham in one of his excellent quarterly letters talked about this very topic in the first quarter of this year, and had a similar commodity price graph, but he must use a different composition or weighting for his index than the Economist. The broad uptick from around the turn of this century is the same, though. Grantham talks of a “Great Paradigm Shift” and thinks the price of commodities has basically turned for good now (ever upwards).

  • The most likely reason for the current price spikes is that the industrialized world is growing by leaps and bounds. The OECD consists of not quite one billion people. China alone has more than that and is rapidly building up the infrastructure you need to be an affluent country.  And this consists of a lot of metals like copper or aluminum.

    But this is basically a transitory phenomenon. It takes a lot less such metals to sustain an affluent nation than it takes to build it up in the first place. Recycling is only a great source of metals if you have historically used a lot of metals – China hasn’t.  Nor did South Asia, Southeast Asia or Africa. That’s almost 5 billion people who don’t (yet) have a history of heaping up scrap metal.

    So, don’t worry. Once they’ve got their own heaps of scrap, they’ll be able to reduce their consumption a lot – especially as recycling will become better. (If only because we’ll have to tap ever less concentrated metal ores – which makes recycling more attractive.) But even China will take another couple of decades to make the transition and the over two billion people of South and Southeast Asia are for the most part only at the point where China was in the 1980ies/90ies.

    Just because it is a transitory phenomenon doesn’t mean it can’t last for a century … but what’s a century?

  • Mrzigler

    My biggest objection to this, and correct me if I am wrong, is you are using the fiat inflated “dollar” as the unit of measure.  In any type of market other than total slavery or feudalism, the price of manufactured goods, stay the same or decline as time advances.  If money is based on a specific weight of gold or silver, then the price of commodities will remain stable, as true asset backed money is a commodity.