Wednesday, March 12, 2008

The Ehrlich-Simon Bet At 38

The issue of whether natural resources and environmental amenities are depleted or improved over time is vital to the making of sound policy and law. In 1980 three prominent Bay Area academics (Stanford's Paul Ehrlich and Berkeley's Johns Harte and Holdren) bet business economist Julian Simon that the real (inflation-adjusted) price of five commodity metals (that is, chromium, copper, tungsten, tin, and nickel) would rise by the year 1990. Far from being metal-heads, Simon and Ehrlich et al. chose these metals to stand in as representatives of other natural resources.

Over the decade of the bet the price of each metal did, in fact, decline in real terms. Simon, a libertarian and economic optimist, won the bet, receiving almost $600 from Ehrlich et al.. Though losing the bet failed to dampen the highly successful academic careers of Ehrlich, Holdren (now at Harvard's Kennedy School of Government), and Harte, neither did victory raise Simon's profile significantly. There may be mathematical justice to this.

What if the bet had closed today rather than in 1990? Here are the prices of the five metals (per Kg) in 1980 and today (March 11, 2008):

1980 2008 (nominal) 1980 (real) Winner

Chromium $ 8.58 $ 1.69 $22.45 Simon

Copper $ 2.23 $ 8.56 $ 5.83 Ehrlich et al.

Nickel $ 6.74 $32.16 $17.64 Ehrlich et al.

Tin $ 1.92 $19.20 $ 5.02 Ehrlich et al.

Tungsten $32.26 $220.00 $84.41 Ehrlich et al.

Julian may have won the battle of the 1980's, but he is currently losing the longer-term war decisively. If these metals are indeed representative of other natural resources they paint an alarming picture of coming scarcity, a picture that is rapidly coming into focus as consumers around the world pay record high prices for such commodities as gasoline, bread, and milk.


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