Five metals to undergo big price rises, tungsten included
This year marks the 30th anniversary of the famous bet between University of Maryland economist Julian Simon and Stanford biologist Paul Ehrlich involving resource scarcity. Simon, the optimist, was convinced that advances in technology, innovation, and resource substitution would lead to greater resource availability over time, and falling, inflation-adjusted resource prices. Ehrlich, the pessimist, predicted that population growth would increase global demand for natural resources and put upward pressure on their prices over time as they became increasingly more scarce. To help settle their differences, Simon and Ehrlich agreed to a famous bet about the future trend of resource prices. Here’s one account of what happened from Wired Magazine:
Ehrlich and his colleagues picked five metals that they thought would undergo big price rises: chromium, copper, nickel, tin, and tungsten. Then, on paper, they bought $200 worth of each, for a total bet of $1,000, using the prices on September 29, 1980, as an index. They designated September 29, 1990, 10 years hence, as the payoff date. If the inflation-adjusted prices of the various metals rose in the interim, Simon would pay Ehrlich the combined difference; if the prices fell, Ehrlich would pay Simon. Then they sat back and waited.
Between 1980 and 1990, the world’s population grew by more than 800 million, the largest increase in one decade in all of history. But by September 1990, without a single exception, the price of each of Ehrlich’s selected metals had fallen, and in some cases had dropped through the floor. Chrome, which had sold for $3.90 a pound in 1980, was down to $3.70 in 1990. Tin, which was $8.72 a pound in 1980, was down to $3.88 a decade later. Which is how it came to pass that in October 1990, Paul Ehrlich mailed Julian Simon a check for $576.07.
Simon and Ehrlich discussed a second bet but couldn’t agree on the terms, so Simon has gotten credit as the clear winner over Ehrlich in their debate about resource availability. However, the Simon victory has been challenged by Paul Kedrosky, who recently gave a Technology, Entertainment, Design talk about what he calls “the most important bet in history.” Here’s what Paul wrote recently about “Re-Litigating the Simon/Ehrlich Bet“:
It will surprise no-one that the bet’s payoff was highly dependent on its start date. 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. And if we extend the bet into the current decade, then Ehrlich won every start-year bet in the 2000s.
So, what does all this mean? 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 that commodity prices (inflation-adjusted or otherwise) trend inexorably downward, even over a decade.
I responded on Carpe Diem that it should also surprise no one that a commodity bet is also highly dependent on the specific commodities chosen. In the “most important bet in history,” Ehrlich chose only the five commodities that he thought would become scarcer, but a more complete analysis of commodity scarcity over time should include more than just those five commodities, and the time periods evaluated shouldn’t be restricted to just decades the way Kedrosky updates the Simon/Ehrlich wager.
To evaluate and expand the Simon/Ehrlich bet, the chart above shows the monthly, inflation-adjusted Dow Jones-AIG Commodity Index back to January of 1934 (data here). The Dow Jones-AIG Commodity index is based on 19 physical commodities (including natural gas, live cattle, zinc, nickel, copper, silver, and cotton; see the full list here), and therefore represents a much broader basket of commodities than the five metals chosen by Ehrlich. The red line in the graph shows the statistically significant downward trend in inflation-adjusted commodity prices that started in the 1930s and continues to today.
Based on this more comprehensive analysis of a larger basket of commodities over a longer period of time, Simon was obviously more than just lucky, since the graph clearly demonstrates falling real resource prices over the last 75 years, which is exactly what Simon predicted.
Stated differently, Simon was really betting that the inflation-adjusted prices of a basket of commodity prices would have a significantly negative trend over long periods of time due to increased resource availability, and Ehrlich was alternatively suggesting that real resource prices would trend significantly upward due to population increases and demand pressures on resources. For that bet, the optimist Simon emerges as the clear winner over the pessimist Ehrlich, and it has nothing to with luck, and everything to do with the factual record of resource prices over time.
AI
