Carpe Diem

Julian Simon: Still more right than lucky in 2013


I get a lot of requests for permission to reproduce graphs from CD for publication in various books and articles, and I’m always happy to comply – I’m not even sure they really need my permission as long as they credit the source (e.g. my graphs appear on a regular basis as “charticles” in the Washington Examiner without prior permission, and that’s perfectly fine with me), but maybe it’s just to be safe legally.  Last week, I got a request for permission to reproduce a version of the graph above, which originally appeared in the 2010 CD post “Julian Simon: More Right Than Lucky,” and was also featured on Marginal Revolution.  I hadn’t thought about that graph and post for awhile, but the request prompted my memory and motived this update.

My February 2010 post was in response to Paul Kedrosky, who re-visited the famous 1980 Simon-Ehrlich wager on the inflation-adjusted prices of five commodities (nickel, copper, chromium, tin and tungsten) in the decade between 1980-1990.  Paul used updated price data for those five commodities in 2010, and concluded that:

“It will surprise no-one that the bet’s payoff was highly dependent on its start date. Simon famously offered to bet comers on any timeline longer than a year, and on any commodity, but the bet itself was over a decade, from 1980-1990. 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 – 60% of the time. And if we extend the bet into the current decade, taking Simon at his word that he was happy to bet on any period from a year on up, then Ehrlich won every start-year bet in the 2000s. He looks like he’ll be a perfect Simon/Ehrlich ten-for-ten.”

So what does it all mean? Again, according to Paul:

“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 (let alone of rickety old economics) that commodity prices (inflation-adjusted or otherwise) trend inexorably downward, even over a decade.”

My response then was as follows:

It should also surprise no one that a commodity bet’s payoff is not only highly dependent on the starting and ending dates, but also on the specific commodities chosen. In the famous bet, Ehrlich chose the five commodities that he thought would become scarcer, but a more complete analysis of commodity scarcity and prices over time shouldn’t be restricted to only those five commodities, and the time periods evaluated shouldn’t be restricted to just decades.

The chart above shows the monthly, inflation-adjusted Dow Jones-AIG Commodity Index back to January of 1934 (data from Global Financial Data, paid subscription required, adjusted for inflation using BLS data) – originally through February 2010 and now updated with new data through January 2013. The DJ-AIG Commodity Index is composed of futures contracts on 19 physical commodities (e.g. crude oil, natural gas, live cattle, zinc, nickel, copper, silver, cotton, aluminum, silver, etc., see the full list and current weights here).

Not mentioned in my original post was the fact that two of the five metals in the Simon-Ehrlich bet are included in the DJ-AIG Commodity Index: copper and nickel.

The red line in the graph shows the statistically significant (p = .0000) downward trend in inflation-adjusted commodity prices since the 1930s, and I therefore concluded in 2010 that:

I’m not so sure that Simon was just lucky. If Simon’s position was that natural resources and commodities become generally more abundant over long periods time, reflected in falling real prices, I think he was more right than lucky, as the graph above demonstrates.  Stated differently, if Simon was really betting that inflation-adjusted prices of a basket of commodity prices have a significantly negative trend over long periods of time, and Ehrlich was betting that the slope of that line was significantly positive, I think Simon wins the bet.

Now that almost three years have passed since the original post, what’s happened to the commodity prices captured by the DJ-AIG Commodity Index?  Between early 2010 and the summer of 2011, the DJ-AIG index increased by 28.5%, partly because oil prices increased from $80 per barrel to $110, and gasoline prices increased almost 60% from $2.50 per gallon to almost $4.00.  But since the summer of 2011, the commodity index has fallen back to the same level as in early 2010, thanks probably due to falling natural gas prices, and declines in the prices of copper, nickel and aluminum.  As of January 2013, the inflation-adjusted commodity index is at about exactly the same level as January 2003, reflecting a flat price trend over the last decade.

The updated chart also shows that the world population in 1934 was about 2 billion people, and we now live in a world with almost 7 billion people. Therefore, over a period that includes several generations or more, we see an overall significant downward trend in real commodity prices, despite an increase of more than 5 billion people in the world.  Overall, I still conclude that Julian Simon was more right than lucky.

19 thoughts on “Julian Simon: Still more right than lucky in 2013

  1. Doesn’t this chart simply reflect the fact that population and science/technology advancement are both a positive function of elapsed time?

    • Yes, but since population growth often acts to bid prices up, the relative growth rates are what is being charted here, ie the growth in material abundance provided by science divided by the growth in population that demands more resources. I suppose you could argue that most of the population growth was in poor countries like China and India that still have little access to these resources, so the demand didn’t spike as much as 3.5 times. You’d have to look at the raw output to figure that out, as it’s also possible that we started using much more per capita in the rich world. In any case, the fact that both have been “positive functions” is not the determinative issue, it’s what their relative growth rates have been.

      • But the trendline is supported far into the future by the simple fact that in developed countries per capita use of over 30 different commodities has declined over the past 40 years and per capita energy use has remained constant since about 1965. While energy use has remained constant per capita for an extended period we have shifted for what we use energy, think air conditioning as one shift. If the developing world follows the same path Julian Simon will still be correct at the end of this century. At some point scrap input into China’s metal industries will increase and their demand for ores will lessen.

  2. Mr. Ehrich should have bet Mr. Simon on Iowa farm acreage prices instead. Iowa farmland prices have gone from $1488 per acre in 1950 to $8296 in 2012, adjusted for inflation in 2005 $.

    Those that wanted to buy farmland cheaply could have bought in 1986 at $787, when acres were a commodity in Iowa.

    • The value of farmland has increased as yield per acre has increased. Remember that 1986 was the tail end bursting of the farmland speculation bubble. And that was at the end of an inflationary period that saw interest rates in the double digits and made refinancing for small farmers difficult. Throw in the years from 1970 to 1980 which saw energy input costs soar for farmers and you have a perfect storm for cheap farmland. But over an extended period the value of farmland will increase as yields per acre increase.

  3. Commodities and manufactured goods (except military hardware in the United States) will become cheaper over time…the private sector does more for less every year….

    the picture is even better than indexes allow. Why? While the price of some commodities in an index may go up, consumers will use less of that commodity…..

    A guy might buy gasoline at $4.50 a gallon…and drive a car that gets 45 mpg…..instead of 12….

  4. Ford is now producing a car that gets 100 mpg. For profit.

    But your USDA and Department of defsne are still steaming up to take your tax dollars to produce get fuel at about $100 a gallon….

    “Ford Fusion Energi plug-in hybrid sedan EPA-rated at 108 MPGe city, 92 MPGe highway and 100 MPGe combined; Ford projects best hybrid sales quarter ever
    29 December 2012
    The US Environmental Protection Agency has rated the new Fusion Energi plug-in hybrid (earlier post) at up to 108 MPGe city, 92 MPGe highway and 100 MPGe combined (2.2, 2.6 and 2.4 l/100km-equivalent, respectively).

  5. As of January 2013, the inflation-adjusted commodity index is at about exactly the same level as January 2003, reflecting a flat price trend over the last decade.

    Maybe for that index. But not for other indices, for instance, the IMF Indices of Primary Commodity Prices, 2002-2012, which is up 82% in nominal and 58% in real terms.

    • Ooops, my bad; computational error.

      Since 2002, the IMF index is up 180% in nominal and 135% in real terms.

      The original computation was 2005-2012.

  6. Last I heard, Ehrlich can still be seen walking around the Stanford campus. Simon didn’t live long enough to collect on his bet; Ehrlich paid-up and Simon’s widow collected.

    The broad and deep application of technology and massive productivity enhancements was totally missed by Ehrlich. Thomas Malthus beat Ehrlich by a few hundred years with the very same dire predictions and he too was wrong. Today, the USA feeds the world with 2% working on our farms, not 50% as was the case a little over 100-years ago.

    Unfortunately, Stanford has replaced the Coming Ice Age and mass global starvation due to a population explosion with the latest trendy hoax from the loonie left–Global Warming.

    Bottom Line: The only thing that has been successfully recycled over the past few hundred years is bullshlt.

  7. Simon’s point was that the Malthusians and the greenies are simply wrong, reflexively pessimistic. The truth is that the ultimate resource (people) continuously create a better world. The proof is all around us.

    “This is my long-run forecast in brief. The material conditions of life will continue to get better for most people, in most countries, most of the time, indefinitely. Within a century or two, all nations and most of humanity will be at or above today’s Western living standards. I also speculate, however, that many people will continue to think and say that the conditions of life are getting worse.” – Julian Lincoln Simon

  8. Mark – How does Ehrlich’s prediction stand wrt zinc, given that today the Treasury earning negative signiorage on nickels and pennies due to rising zinc prices and is preparing to issue those coins with different metals?

  9. Interesting – we can plausibly attribute the spike in the 1950′s to post-WW2 economic recovery & rebuilding of Europe; as supply expands, costs steadily decline. Then, we see the disatrous inflationary effects of Nixon’s closing of the gold window, followed by Volker’s monetary tightening in the early 1980′s; then the 1980-1990′s great mderation and supply expansion. The next two upticks – the easy money 1990′s ( bubble) followed by the equally easy-money 2000′s (housing bubble) followed by Helicopter Ben’s money printing efforts…

  10. The only way commodity prices can be seen as declining is to not factor in their consumption causing CO2 to increase with untold loss of habitat for all species. If the environmental costs from the consumption of these commodities was factored in we would see huge price increases for all commodities.

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