Lucky Simon ?

In a nutshell, the basic principle within this bet was that Cornucopian Julian Simon and Paul Ehrlich, an ecologist, had a highly diverging attitude about the relation of resource availability to the price development of such resources. As discussed in class, Cornucopians claim that the more scarce a resource is, the cheaper it gets basically due to innovation (substitutes, advanced production methods, recycling), whereas Ehrlich was convinced about the opposite since the end of resource availability is approaching. The academics bet in 1980 that the price of five metals would increase over a 10 year period (Ehrlich), or decrease (Simon) respectively – Simon won the bet in 1990.

Some explanations suggest that this wager was influenced by the relatively high post-oil crisis commodity prices leading to a disproportionally high price basis in 1980. The period of time was apparently very relevant for the outcome of this bet. Additionally, I see a further significant aspect regarding the time frame in the macro-environment during the 1980s with very high interest and inflation rates which devalued the inflation-adjusted commodity price after 10 years. For all these reasons, I want to establish the hypothesis that Julian Simon would have lost this bet nowadays and will challenge this hypothesis in the following.

In the course of such a limited blog post, I cannot strive for underpinning this hypothesis with scientific accuracy and incontestability. In the following, however, I will have a look at the development of commodity prices of the five chosen metals from 2000 till today and also consider inflation.

I was unable to find an appropriate source for either chromium or tungsten within this particular time frame, whereas the remaining commodity prices were retrieved from indexmundi.

Given the closing date of May 2010 that I chose, the commodity prices do not reflect recent distortions of peaking metal prices anymore which leads to a higher significance. For instance, nickel was traded at more than 51,000 in May 2007, almost 2.5 times higher than the current price level.

In comparison to the 210,4% price upturn of the three metals on average, the inflation rate shows an increase of only 32,8% in the given time frame. The consumer price index (CPI) rates are based on analyses of the US American Bureau of Labor Statistics (I presume that the US American inflation was also considered within the wager).
As a result, Simon would have lost this bet by far. He and his claims benefitted from several external factors such as inflation rate, commodity price distortions, etc. Being an ecologist, Ehrlich should have considered consulting economists or traders in order to get an assessment of the relative market prices back in the day to find out that they were disproportionally high. A longer time frame of the wager would have reduced the exposure to periodical distortion additionally.

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Posted in sustainable development
2 comments on “Lucky Simon ?
  1. reideltj says:

    Depending on which 10 year period you pick for your study you’ll reach completely different conclusions. A long-term view of oil prices (http://upload.wikimedia.org/wikipedia/commons/8/87/Oil_Prices_1861_2007.svg) shows that prices have been up and down for as long as oil has been in use. Interestingly it has been following an up-trend in real terms since the invention of the automobile. Personally I wouldn’t bet on real price decreases over the long term.

  2. jeremy says:

    There is a view Ehrlich bet on the wrong thing, and that price isn’t always the best indicator of the availability of resources because of a whole variety of factors that cause markets to work imperfectly.

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