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How robust are Julian Simon's predictions?
Not the ones about population, the ones about falling real resource prices.
Here is a simple model: it is easier to transfer technologies of resource extraction than it is to transfer most other technologies. In other words, Nigeria has low TFP but still their oil rigs work pretty well.
If that's true, when the wealthiest economies are opening up a commanding lead in terms of living standards, real resource prices should be falling. Nigeria can supply a lot of oil without demanding very much.
When most of the growth is catch-up growth, the poor countries demand more resources but supply technologies are not racing so quickly ahead. Real resource prices are more likely to rise.
There is a long history of falling real resource prices, but is this simply reflecting the fact that the last three hundred years don't offer many periods of catch-up growth? Now, an era catch-up growth seems to be upon us. So why should we be so confident that Simon's predictions will continue to hold?
Posted by Tyler Cowen on December 23, 2010 at 02:31 PM in Economics | Permalink
Comments
This is a plausible hypothesis. Why not see what the data has to say?
Posted by: Andrew Fischer Lees at Dec 23, 2010 2:35:56 PM
Here's the data from the USGS, in constant 1998 dollars, for the Simon-Erlich bet:
((% change between time periods))
CHROMIUM COPPER NICKEL TIN TUNGSTEN
time series (1900-2008) 142% -24% -27% 47% 142%
bet period (1980-1990) -12% -24% -10% -71% -71%
post-bet to present (1990-2009) 138% 58% 44% 78% 151%
((returns from $1000 dollars invested at beginning of time period))
-total-
time series $484.40 $152.29 $145.45 $293.02 $483.64 $1558.8
bet period $176.19 $152.94 $180.49 $57.45 $57.92 $624.9
post bet-2008 $475.68 $315.38 $288.29 $356.60 $501.89 $1937.8
Note that I don't have the bet period exactly right, as these go Jan 1 - Jan 1 and I think the bet was different. Anyway, Simon picked the right decade to make the bet.
Posted by: Joe_Beer at Dec 23, 2010 3:03:47 PM
Simon also pointed out that we use resources more efficiently. For example he preferred to say concerning gasoline that a hour of work will take you further a given level of comfort in the future even if it gasoline cost you more per gallon.
Posted by: Floccina at Dec 23, 2010 3:57:48 PM
@Joe_Beer - "Simon picked the right decade to make the bet"
The timing of Simon's bet was not fortuitous, he made it at the time of recent high rises in resources, his bet was basically that the prices were rising because of short term issues not long term factors such as scarcity. He was right.
In 1990's there were price rises from a very low level. No-one was worried about resource shortages, the concern (especially in the extractive industry) was about gluts (remember the famous economist cover "Drowning in Oil"?). Simon wouldn't have been able to get anyone to take his bet in that decade, everyone would have been convinced that further price falls were inevitable.
In terms of future price drops in commodities, there will be temporary rises as demand temporarily overwhelms supply (perhaps as Tyler says due to unexpected growth in developing countries). Because it takes years to add capacity in a resource industry these price swings can last decades. But don't mistake these prices rises for signals that resources are running out.
Posted by: ChrisA at Dec 23, 2010 4:31:54 PM
Land prices per acre have risen dramatically for the average American homebuyer since Simon made his bet.
Posted by: Steve Sailer at Dec 23, 2010 5:29:27 PM
property prices are perfect example of how market regulation does more to limit supply than any other factor. As to land I don't think anyone thinks that has a completely elastic supply, but when you forbid using some land the value of other land will rise.
The same is actually also true of commodity prices, the cost of extracting commodities has lots of externalities As a society gets wealthier the cost increases. Sometimes the public decides that the benefit of raising the resource is not worth the external cost. ANWR or the seemingly permanent closure of many productive mining districts in the Basin and Range. These are often rational decisions.
Also mining and oil production have substantial sunk costs and huge infrastructure requirements. A lack of political stability will make almost all plays not worth attempting except for extremely valuable easy to extract, very fungible things like gold and diamonds.
Extracting elements such as copper, tin, chromium, etc... is going to involve huge capital outlays and time to develop. Once all the deposits that are in politically secure areas are either consumed, or more to the point regulated out existence, only the politically dangerous places remain.
Then the question is: Is anyone going to get enough metal out of the ground fast enough to pay off capital suppliers before the whole operation is either lotted or destroyed by political instability.
If the cost is high enough to make that equation pay then you get your mine, if not only an idiot will build it. At some point however that price point will be realized and mining will occur. If the US economy started being destroyed by a lack of oil or mineral resource the political will would exist to extract the cut off supplies, but no way have we reached that point.
Posted by: Roy at Dec 23, 2010 6:04:13 PM
"It is easier to transfer technologies of resource extraction than it is to transfer most other technologies..."
Could someone point out for me some articles / book chapters which discuss this in greater detail? Because this is the first time I've ever heard this.
Posted by: Lars at Dec 23, 2010 7:01:16 PM
Tyler, what exactly do you mean by "robust" here? Resistant to outliers? "Not perturbed by or attending to subtleties or difficulties"?
Posted by: Andy McKenzie at Dec 23, 2010 7:22:22 PM
Do natural gas and coal and other commodities that are generally available domestically have a significantly different cost history than oil? Also, if the us allowed less limited drilling, oil supply would also be less dependent on 3rd world countries, and the effect would seemingly be lower prices.
Posted by: kebko at Dec 23, 2010 8:16:22 PM
@Lars:
Not an academic citation and I forget the exact quote, but they used to say the Soviets were good at making giant machines to extract ore to make giant machines.
Posted by: OneEyedMan at Dec 23, 2010 8:33:40 PM
Seems like resources can rise long term only if technology and liberty stagnate or regress. That doesn't seem likely.
We are unleashing a few billion extra workers which lowers the relative value of the man-hour, then they will start consuming, but eventually they'll participate in a real division of labor.
Uncertainty and inflation are fueling assets relative to productive risk investments, so while bets require timelines, recent price increases seem like a short-term cyclical affect. So, my opinion is that Simon's bet is as robust as the time horizon.
Posted by: Andrew at Dec 24, 2010 5:01:25 AM
I understand the attractiveness of looking at Simon's bet, but might I suggest that this approach simplifies what Simon was arguing. In addition to material scarcity, I understand Simon as implying that economic resources are the "services derived" from various commodities over time. For example, we don't really think copper wire is the resource (when we discuss telephony) we actually understand the resource as, "an ability to conduct EV waves." And in that sense, the real cost of obtaining such services has and will continue to decline.
Nordhaus's work on light is a good example of how to demonstrate this.
Posted by: wintercow20 at Dec 24, 2010 8:03:15 AM
Remember, Simon never argued that there wouldn't be short term (which could be several years worth) spikes in prices. In fact, he counted on them both as a signal to develop more sources of existing resources and to spur innovation that would lead to substitutes, efficiencies, or other matters.
Posted by: Aaron M. Renn at Dec 24, 2010 1:00:19 PM
