Julian Simon, Right Again
Back in 1980, the late economist Julian Simon, who believed that shortages of resources would never prove permanent as long as free markets continued to exist, made a famous bet with Paul Ehrlich, who, then as now, predicated that, running out of vital resources, humans faced global economic collapse and mass starvation.
Simon invited Ehrlich to choose five commodities that Ehrlich believed would soon become scarce. Ehrlich chose chromium, copper, nickel, tin and tungsten. The two bought $200 worth of each, for a total of $1,000. If the inflation-adjusted prices rose by 1990, Simon promised, he would pay Ehrlich the amount by which they rose, but if the prices fell, Ehrlich would have to pay Simon.
Between 1980 and 1990, the population of the globe increased by some 800 million--yet the inflation-adjusted prices of all five minerals fell, forcing Ehrlich to write Simon a check for more than $500.
What gave Simon the confidence to engage in such a wildly counter-intuitive bet? Simon himself explained:
More people, and increased income, cause resources to become more scarce in the short run. Heightened scarcity causes prices to rise. The higher prices present opportunity, and prompt inventors and entrepreneurs to search for solutions. Many fail in the search, at cost to themselves. But in a free society, solutions are eventually found. And in the long run the new developments leave us better off than if the problems had not arisen. That is, prices eventually become lower than before the increased scarcity occurred.
In short, "the ultimate resource," to quote the title of Simon's most famous book, is the human mind.
That was then, of course, and this is now--a time of slow growth and limited resources. Now we really are running out of resources, right? Wrong. From a column by Daniel Yergin in today's Wall Street Journal:
Every president since Richard Nixon has called for energy independence. Nevertheless, U.S. reliance on imported oil long seemed to be headed in only one direction—up—and that pointed to inevitably increasing dependence on the huge resources of the Middle East.
No longer. U.S. petroleum imports, on a net basis, reached their peak—60%—of domestic consumption in 2005. Since then, they have been going in the other direction. They are now down to 46%....
The reason is the sudden appearance of a new source, "tight oil," which is extracted from dense rocks. For years, tight oil has been a very marginal business. In 2000, it was only about 200,000 barrels per day, 3% of total output. Today it is about a million barrels per day. By the end of the decade, according to IHS Cambridge Energy Research Associates' estimate, it could reach three million barrels per day, over half of current domestic crude oil production.
The dramatic increase in tight oil has been made possible by the same technology combo, hydraulic fracturing and horizontal drilling, that created the "shale gale"—the explosive growth in natural gas production from shale rock....
[T]he shift in oil sources means the global supply system will become more resilient, our energy supplies will become more secure, and the nation will have more flexibility in dealing with crises.
Somewhere, Julian Simon is smiling.
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Comments :
Dec '10
Re: Julian Simon, Right Again
Don't worry, Obama and the EPA will wipe that smile off his face.
Re: Julian Simon, Right Again
But sometimes the price of commodities is affected by the circumstances affecting currency. If we have a weak dollar and markets fear inflation or some move from the Fed to further undercut the dollar, markets swap cash for things like precious metals. The chart below shows the change in the price of copper in US dollars per metric ton between 1980 and 2010. Very little change between 1980 and 1990, but look at where the price of copper is now!
The scarcity doesn't have much, if anything, to do with the change in population, but nevertheless the skyrocketing price does reflect scarcity. Would Simon see this as a temporary scarcity? And how many years have to transpire before we can define scarcity as permanent or semi-permanent?
May '10
Re: Julian Simon, Right Again
Peter,
I *love* that story. And Wikipedia does a pretty good presentation of it, too:
http://en.wikipedia.org/wiki/Simon–Ehrlich_wager
Re: Julian Simon, Right Again
Don Tillman: Peter,
I *love* that story. And Wikipedia does a pretty good presentation of it, too:
http://en.wikipedia.org/wiki/Simon–Ehrlich_wager · Dec 12 at 3:45pm
Hey, Don, would you do me a favor? I'm in a gigantic hurry just now--kids coming home for Christmas who need to be picked up at the airport--so could I leave it to you to answer Diane Ellis? (See her comment just above yours.)
Diane's ornery today, by the way. First she tells me I'm wrong to suppose Russia is anything other than doomed, and now this. Give her what for, would you?
Jul '10
Re: Julian Simon, Right Again
Permanent is an awfully big word. The solar system is lousy with metals, and planet formation models suggest the farther toward the core you go, the more heavier elements you should find. Earth has this very cool mixing property thanks to vulcanism stirring the mix, but between Mars and Jupiter we have what may be the detritus of the disintegration of a Mars sized planet in loose bits no larger than Ceres. If this material includes the core of said planet, there should be some very significant metal rich deposits out there.
For that matter, we have dug very deeply into the lunar surface yet, either.
No, we won't find petroleum products, the mechanisms aren't in place for that, but radioactives could make a fine substitute by that time.
In the interim, either copper will become expensive enough to warrant innovations in finding and harvesting the stuff, or substitutes will have to be found or invented. Not me field, but I would be surprised if somebody weren't throwing money at the problem as I write.
Dec '10
Re: Julian Simon, Right Again
Peter & Diane, I am glad that Julian Simon is getting the credit he deserves. However, I must ask when do the environmentalists finally pay for their madness? When you scream fire in a crowded theater they will arrest you. When do we start to realize just how much is at stake. Trillions of dollars not just misinvested by taxation but completely destroyed by absurd regulations. Translate that into the stunted lives billions of people lived because growth was not an option. It's a crime of cosmic proportion.
Jan '11
Re: Julian Simon, Right Again
Sisyphus:
For that matter, we have dug very deeply into the lunar surface yet, either.
No, we won't find petroleum products, the mechanisms aren't in place for that, but radioactives could make a fine substitute by that time.
He looked up into the night sky and wondered how it will ever be possible to solve problems like energy ...
Re: Julian Simon, Right Again
KC Mulville
Sisyphus:
For that matter, we have dug very deeply into the lunar surface yet, either.
No, we won't find petroleum products, the mechanisms aren't in place for that, but radioactives could make a fine substitute by that time.
He looked up into the night sky and wondered how it will ever be possible to solve problems like energy ... · Dec 12 at 4:19pm
Hey, fellers, didn't you hear Newt during the last debate? Once he's president, we'll be back in space--only this time with back hoes.
Jun '10
Re: Julian Simon, Right Again
Diane,
The direction for copper prices is down at the moment. I think the Chinese created the upward spike and they'll create a corresponding downward spike after they realize that Chile, for one source, will find lots more copper to mine at those prices. That's how it works. The supply largely depends on price. Raise the price of a certain type of old porcelain knick knack, and they'll come flying out of people's attics. Before, it wasn't worth the effort to go up in the attic and dig for them, but now it is.
May '11
Re: Julian Simon, Right Again
All this oil and Obama won't allow the pipeline. Manufactured scarcity.
Mar '11
Re: Julian Simon, Right Again
This post reminds me of Ayn Rand's perpetual belief that the human mind is the fountainhead of all progress. Humans are slow, weak, vulnerable, naturally un-adaptable creatures when compared to most of the animal kingdom. We are the most fragile of lifeforms when we enter this world. Only through the use of our brains--an organ that is infinitely superior to other animals--are we able to turn our survival in our favor. If humans had the brain power of the average animal, we would cease to exist in a generation because we wouldn't be able to outrun, outclimb, and outfight our predators. The average dog wouldn't be a friend; it would be a pursuer. It's just a shame that people like Mr. Ehrlich continue to fill their most valuable possession with information that is so demonstrably false. Not to mention all the people who are damaging their minds with drugs, alcohol abuse, and . . . reality tv.
Jan '11
Re: Julian Simon, Right Again
While thinking about this, I googled "federal regulations space travel." First item on my list was "
New Regulations Govern Private Human Space Flight ...
Check this out: http://edocket.access.gpo.gov/2006/pdf/E6-21193.pdf
Sep '10
Re: Julian Simon, Right Again
I would point you to the USGS website where they have the data I have graphed at left. This is copper prices in constant 1998 dollars from 1900 to 2009. The link is here http://minerals.usgs.gov/ds/2005/140/
So I suspect if you were to take the numbers in Diane's graph and adjust them per the CPI then much of the cause for alarm disappears. Also if you take the longer view you can see that prices are not as far out of whack as it first may seem.
Edited on Dec 13, 2011 at 8:02amNov '10
Re: Julian Simon, Right Again
Sisyphus: Permanent is an awfully big word. The solar system is lousy with metals, and planet formation models suggest the farther toward the core you go, the more heavier elements you should find. Earth has this very cool mixing property thanks to vulcanism stirring the mix, but between Mars and Jupiter we have what may be the detritus of the disintegration of a Mars sized planet in loose bits no larger than Ceres. If this material includes the core of said planet, there should be some very significant metal rich deposits out there.
For that matter, we have dug very deeply into the lunar surface yet, either.
What you have between Mars and Jupiter is not the remnant of a smashed planet, but leftover planetesimals from the formation of the solar system.
And I am still waiting to meet someone who can crunch the numbers to show how spaceflight could ever be made to pay, even if the Moon were paved with gold, radioactives or the mystical helium3.
May '10
Re: Julian Simon, Right Again
Any commodity is priced by the underlying value due to its uses and the availability of substitutes, with short term spikes caused by speculation.
Most non-decorative uses of copper are declining- water pipes are now PVC and CPVC, electrical circ uitry grows more and more integrated and/or uses optical fiber. Structural uses are better served by ceramics.
The most common current high volume uses I see are as exterior cladding for certain architectural applications. That fad will die down, and copper will revert back to its usual price range- because the commodity speculators will have to maker good on their trumped-up futures contracts.
Jan '11
Re: Julian Simon, Right Again
Diane Ellis, Ed.:
The scarcity doesn't have much, if anything, to do with the change in population, but nevertheless the skyrocketing price does reflect scarcity. Would Simon see this as a temporary scarcity? And how many years have to transpire before we can define scarcity as permanent or semi-permanent?
The price reflects supply AND demand. If you wish to call the suppliers holding out for higher prices "scarcity", go ahead; there's plenty of copper in the world but much of it is being utilized as conductors in electrical circuits and plumbing distribution.
Anyway, Julian Simon's point was that this will only encourage more exploration for whatever it [copper, in this case] is or that an entirely new and alternative resource will emerge to take the old one's place. This is a result of people taking action and figuring things out in order to profit from market demand while simultaneously creating better technology, more efficiency, and/or consumer surplus. That's why Dr. Simon celebrated people, did not denounce immigrants, and was such a wise economist that many free market advocates still espouse his ideas.
Edited on Dec 12, 2011 at 9:01pmApr '11
Re: Julian Simon, Right Again
As much as I like to see doomsayers be proven wrong, even the ingenuousness of the market must eventually run into the hard realities of a finite planet. At some point we will use up all oil and carbon fuels on the planet. We simply must. It is just presumptuous to assume that that point is very close. We need energy and lost of it to keep ourselves running if we wish to have a population of 7+ billion all living at the same standard as America today.
It seems foolish to assume markets will always find a way. One day we will not have enough energy to maintain what we have. That day may be far away (100, 1000, 1000000, or more years away), but it is coming. The laws of thermodynamics tell us it is coming... " The Cold Death of the Universe"
not to ruin anybodies fun....boo to overpopulation doomsayers!...yay to free markets!
May '10
Re: Julian Simon, Right Again
Sure Peter, not a problem. I'll just grind up her argument...
Hey Diane,
Yah sure, that can happen. (In the sense that it's happening right now, yeah.)
The basket of commodities is not a perfect metric. It's a great metric in that it's delightfully simple and elegant, and it has a charming narrative, but it is sensitive to influences outside of the mission of experimentally testing Ehrlich's claims.
The 10 year time span was arbitrary, the starting point was arbitrary, other events could have taken place near the endpoints that would have caused Simon to lose.
In addition, the enormous unexpected industrial growth of China and India have also increased the demand for, and prices of, commodity metals. Of course that enormous industrial growth wasn't possible by Ehrlich's theory.
Feb '11
Re: Julian Simon, Right Again
Sep '10
Re: Julian Simon, Right Again
How long does it take to develop a new mine? About 3 years from the time of filing permits according to Orvana Minerals (see slide 19) who is developing a copper mine in Michigan. According to the presentation it will take Orvana 14 years to produce the copper from the development area after starting production in 2014. So, if copper prices started to spike in 2006 and it takes a while to figure out whether to risk your capital on a copper mine, and where to put the copper mine, and it takes 3 years to get the permit and start mining, and another 14 years to complete your investment. You can see that the timing for the market to respond to new demand is not out the realm of what we are seeing here.
This is just another example (I think Simon would say) of high prices and a free market being the answer to scarcity.