Cornucopians vs. Malthusians

Back in 1980, Paul Ehrlich and Julian Simon made their famous bet, recounted by John Tierney at its culmination 10 years later:

In 1980 an ecologist and an economist chose a refreshingly unacademic way to resolve their differences. They bet $1,000. Specifically, the bet was over the future price of five metals, but at stake was much more -- a view of the planet's ultimate limits, a vision of humanity's destiny. It was a bet between the Cassandra and the Dr. Pangloss of our era.

They lead two intellectual schools -- sometimes called the Malthusians and the Cornucopians, sometimes simply the doomsters and the boomsters -- that use the latest in computer-generated graphs and foundation-generated funds to debate whether the world is getting better or going to the dogs. The argument has generally been as fruitless as it is old, since the two sides never seem to be looking at the same part of the world at the same time. Dr. Pangloss sees farm silos brimming with record harvests; Cassandra sees topsoil eroding and pesticide seeping into ground water. Dr. Pangloss sees people living longer; Cassandra sees rain forests being decimated. But in 1980 these opponents managed to agree on one way to chart and test the global future. They promised to abide by the results exactly 10 years later -- in October 1990 -- and to pay up out of their own pockets.

What was the result?  Simon won handily.

But recent goings on with commodity prices have some people asking whether Simon's timing was just lucky and perhaps Ehrlich views will ultimately triumph. In August, The Economist reported that had the famous bet extended to 2011, Ehrich would have won, as shown in the graph below.

In its survey of the global economy from a few weeks ago The Economist presented its entire time series for global commodity prices.  On that graph I have superimposed a red line showing the dates of the Ehrlich-Simon bet.

Note that the original bet covered five commodities, and the graph from 1845 covers a much larger set.  Of course, the original bet was meant to be representative of such broader trends.

In its survey The Economist explains the recent spike in commodity prices as follows:

The Economist’s index of non-oil commodity prices has trebled in the past decade. The recent surge has reversed a downward trend that had lasted a century. Industrial raw-material prices fell by around 80% in real terms between 1845, when The Economist began collecting data, and their low point in 2002 (see chart 3). But much of the ground lost over 150 years has been recovered in the space of just a decade.

This has raised the incomes of commodity-rich countries such as Brazil and Australia as well as parts of Africa. It has also caused even sober analysts to speak of a “new paradigm” in commodity markets. . .

What accounts for this turnaround? The price spikes over the past century were linked to interruptions in supply, notably during the first world war. But recent price rises have been too broad-based and long-lasting to be adequately explained by frost or bad harvests. Nor is it obvious that producers are hoarding supplies. . .

The demand side has been boosted by industrial development unprecedented in its size, speed and breadth, led by China but not confined to it. Growth in emerging markets is both rapid and resource-intensive. The IMF estimates that in a middle-income country a 1% rise in GDP increases demand for energy by the same percentage. Rich economies are far less energy-hungry: the oil intensity of OECD countries has steadily fallen in recent years.

China’s appetite for raw materials is particularly voracious because of the country’s size and its high investment rate. Though it accounts for only about one-eighth of global output, China uses up between a third and half of the world’s annual production of iron ore, aluminium, lead and other non-precious metals (see chart 5). Most of the energy for Chinese industry comes from coal—a dirty fuel that contributes to China’s poor air quality. Its consumption of oil roughly tallies with the economy’s size but is likely to grow faster than GDP as China gets richer and buys more cars.

OK brave forecasters, here is your chance.  Where are commodity prices headed?  Will Simon's optimism continue to win out and demand create new supply, again pushing prices down, as they did through the last century?  Or will Ehrlich's pessimism finally have its day, and are we entering an new era of scarcity?

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