Simon–Ehrlich wager Julian L. Simon and Paul Ehrlich entered in a widely followed scientific wager in 1980, betting on a mutually agreed-upon measure of resource scarcity over the decade leading up to 1990. Simon had Ehrlich choose five commodity metals. Copper, chromium, nickel, tin, and tungsten were chosen and Simon bet that their prices would decrease, while Ehrlich bet they would increase. Ehrlich lost the bet, as all five commodities that were bet on declined in price from 1980 through 1990, the wager period. However, economists later showed that Ehrlich would have won in the majority of 10-year-periods over the last century ------------------------------------------------------------------------------ JULIAN L. SIMON BET PAUL EHRLICH IN COMMODITY METALS But Why Did Julian Simon Win The Paul Ehrlich Bet? It’s a famous bet in the ongoing battle to try and get environmentalists to understand economics. The bet between Julian Simon, the economist, and Paul Ehrlich, the environmentalist. Ehrlich insisted that commodities would become more expensive: they were running out in the face of the population explosion. Simon asserted the opposite: more people meant more brains meant better methods of extraction and lower usage per unit of production. Thus prices should fall. Simon won: but that’s not quite the end of the matter. With different commodities, or over different timescales with the same ones, Ehrlich could have. Which is something that Mark Perry notes here: “It will surprise no-one that the bet’s payoff was highly dependent on its start date. Simon famously offered to bet comers on any timeline longer than a year, and on any commodity, but the bet itself was over a decade, from 1980-1990. If you started the bet any year during the 1980s Simon won eight of the ten decadal start years. During the 1990s things changed, however, with Simon the decadal winners in four start years and Ehrlich winning six – 60% of the time. And if we extend the bet into the current decade, taking Simon at his word that he was happy to bet on any period from a year on up, then Ehrlich won every start-year bet in the 2000s. He looks like he’ll be a perfect Simon/Ehrlich ten-for-ten.” For the underlying argument though this is the important point: I’m not so sure that Simon was just lucky. If Simon’s position was that natural resources and commodities become generally more abundant over long periods time, reflected in falling real prices, I think he was more right than lucky, as the graph above demonstrates. Stated differently, if Simon was really betting that inflation-adjusted prices of a basket of commodity prices have a significantly negative trend over long periods of time, and Ehrlich was betting that the slope of that line was significantly positive, I think Simon wins the bet. For Professor Perry shows us the all commodities index over the near century that we have data. And it is indeed declining. Sure, there are periods where the alarmists would win, but the general move over time favours the cornucopians. My interest here though is to explain exactly why it was that Simon won in the 80s, the period of the original bet. And also why Erhlich would have won in the late 90s and 00s. But why he would still lose over substantial time periods (and no, I’m not willing to make a bet on this). The original bet was on the following commodities: nickel, copper, chromium, tin and tungsten. And there were a couple of standout points in that decade of the 80s. Tin, for example, slumped in price. But it wasn’t for any environmental nor even technological reason. It was because the world cartel backing the price went bankrupt. This was the International Tin Council. An organisation set up post-WWII to ensure a “fair” tin price. As anyone at all who has read the works of the late James Buchanan will immediately understand, the people who were really interested in this were the producers. Public choice theory does tell us that consumers won’t worry all that much about the price of only one material, for they use many and the price of just the one isn’t all that important. Producers will worry a great deal about the price of their only product. Thus governmentally determined “fair” prices will end up being high prices. This is indeed what happened and to keep them high the ITC bought in and stored excess production. By 1985 they didn’t have any more money, they went bust and the price collapsed. This was hugely beneficial to Simon’s side of the bet but wasn’t really the point he was arguing on. That is much better represented by what happened to copper. The full story is here. The story is SX-EW (solvent extraction and electro-winning). This is what Simon was talking about: that technology would advance and new stocks of materials would be exploitable. This would happen faster than demand would leading to falls in prices. SX-EW opened up the entire planet to another wave of copper exploration. Roughly, before 1980, we made copper from copper sulfides. If we found a mountain of copper oxide then that’s what it stayed at, copper oxide. Copper oxide wasn’t copper ore, it was simply dirt, for we didn’t know how to extract the copper from it. SX-EW changed that: it’s a process to extract copper from copper oxide. Thus all those mountains of copper oxide out there (and there are many, quite literally, mountains of copper oxide) became copper ore instead of dirt. Thus the price declined. Moving on into the 90s the great event in the non-ferrous and minor metals world (all of these metals are in one of those two groups) was the collapse of the Soviet Union. Firstly, the economy collapsed meaning that there were no consumers there for the metals that were being produced. Thus they flooded onto the world markets, depressing prices. But more than that, there was also the series of stockpiles. One estimate is of $700 billion’s worth. These also flooded out onto world markets. Take, as an example, tungsten. Today’s price is around the $50 a kg level. The price in the 80s was, inflation adjusted, not far off that. But in the 90s it fell to $7 a kg. Just so much was flooding out of the CIS (the ex-Soviet Union by this point) that that price had collapsed. I played my tiny part in this, purchasing a few container loads here and there. And much the same happened to nickel, aluminium and chromium. This explains why taking the prices from the mid 90s onwards would favour the Ehrlich side of the bet. Nothing at all to do with increasing scarcity in the grand sense, just a recovery of prices from their post-Soviet low. Once that $700 billion stockpile had been sold prices would obviously recover. Just to give you an example of what this meant, I’m currently working in the Ore Mountains. On the Czech/German border. There are a number of tin/tungsten mines here, all closed by 1992 at the latest as as result of that ex-Soviet flood. They’re all reopening in the next few years as prices are back to around their long term levels. It was the 90s that was the exception: some of these mines have been going since the 14th century. One more little story about nickel. There was great excitement in the 90s as an Australian company announced that it had a new process, capable of extracting nickel from a new type of ore. An ore of which there was bountiful amounts lying around in Australian deserts. The whole system would make them the lowest cost producers in the world. This, not unnaturally, made everyone else hesitant to invest in new nickel projects. So no new ones were started. Then it turned out this new technology was a bit more complex than first thought and the company went bust. Which led to a vast spike in the nickel price. At which point people scrambled to get nickel projects going again, the new owners of the bust plant got it sorted out and prices came back down again. They’ve more than halved since the peak. The end result of all of this is that yes, it is true that Ehrlich could have, would have, won the bet depending upon the starting date. But note that it would have been either political actions, or teething problems with new technology, that would have allowed that. None of these metals faces an actual shortage as yet. Further, note that over variable time scales Simon is still correct: it really is true that new technologies of extraction are developed and these increase supply and push prices down. Which leaves me trying to point out that Simon really was correct: it’s just the timescale that can be a bit dodgy. We do discover new mineral resources, we do develop new extraction technologies, which make larger amounts of mineral resources available to us. There are other events that happen, certainly, which push prices up for periods of time. But the long term trend for metals at least is downwards.
Posted on: Sun, 03 Nov 2013 06:35:32 +0000
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