Betting on the Wealth of Nature

The Simon-Ehrlich Wager

By David McClintick and Ross B. Emmett

Simon’s claims can now be put to the test for the entire twentieth century. Despite ups and downs in prices over the course of the past century, a wager in 1900 would have been won in 1999 by the person who predicted a decrease in natural resource prices. (Prices are adjusted for inflation using 1998 as the base year.)

Twenty-five years have passed since Paul Ehrlich and Julian Simon agreed to a wager that would test their competing visions of humanity’s future. It is now possible for us to put that wager into perspective. We can decide whether Simon won by mere chance and we can determine what significance the bet has today.

The year 1980 was a time when many people thought that the earth was running out of its precious natural resources. Simon, an economist who died in 1998, contended that human ingenuity would always come up with substitutes if needed. Thus humanity would never run out of key materials. In contrast, Ehrlich, a neo-Malthusian biologist, contended that overpopulation and excessive consumption were already forcing shortages of key materials and that this trend would continue.

Simon and Ehrlich agreed that rising prices would be a sign that raw materials had become scarce. Simon offered to bet that any raw materials selected in one year would be lower in price ten years hence. Convinced that prices would go up over the next decade, Ehrlich and two colleagues responded to Simon’s offer.

So, in October 1980 Ehrlich and his colleagues picked five different metals (chrome, copper, nickel, tin, and tungsten), spending $200 on each metal. The total investment was worth $1,000 in 1980 prices. If, in October 1990, the value of the five metals at their original 1980 quantities, adjusted for inflation, turned out to be greater than $1,000, then Ehrlich would win the bet. If the value were less, Simon would win the bet. Whoever lost would be required to send a check to the winner equal to the difference in value.1

In October 1990, the price of the basket of metals had fallen substantially below its 1980 level. All the metals had experienced a drop in value. Moreover, the drop was so substantial that Simon would have won even if the values hadn’t been adjusted for inflation. Ehrlich and his associates sent Simon a check for $576.07 (Tierney 1990, 81).

Simon’s response to the wager was more humble than that of many of his supporters. Responding to a question from the audience during a debate, for example, he said that he would win “not in every single place, not in every single time span, but on the average” (Myers and Simon 1994, 141). Prices in any short-run period, he recognized, are subject to fluctuations, and he might have lost the bet. Simon’s claim was that the human propensity to take advantage of new opportunities and innovate meant that commodities are likely to become less scarce. The general trend of natural resource prices should be downward sloping, even though individual decades might run counter to that trend.

Simon’s claims can now be put to the test for the entire twentieth century. The U.S. Geological Survey has standardized the price data for all basic metals during the past century, using 1998 as the base year (Kelly et al. 2005). We examined those data to determine the answers to three questions.

First, would the outcome of the Simon-Ehrlich wager be the same if the bet had been extended to the entire twentieth century? The figure provides the twentieth-century price history of a composite of chrome, copper, nickel, tin, and tungsten. Despite ups and downs over the course of the past century, a wager in 1900 would have been won in 1999 by the person who predicted a decrease in natural resource prices. If someone invested $200 at 1900 metals’ prices in each of these five metals the inflationadjusted value of the same bundle of metals in 1999 would have been 53 percent lower.2 The person who took Simon’s position would have won over the entire century.

Second, would Simon have won or lost in other decades? Was he just lucky to have picked the 1980s? The figure shows that the 1980s experienced the second largest drop in prices of the century, so to some extent Simon was lucky. He had said simply that he was more likely to win than to lose in any given decade, and indeed he would have won in only five decades (the 1900s, 1910s, 1940s, 1980s and 1990s). He would have lost by a few dollars in the 1950s, and by more significant amounts in the other four decades. This outcome confirms Simon’s suspicion that prices over short spans of time are as likely to rise as to decline, but the overall trend will be downward.

Finally, did some prices fluctuate more than others? Yes. Within the general downward trend of prices over the century, there was plenty of variation. Tungsten and tin were highly volatile during various decades. The price of tungsten doubled in the 1920s, even though other metals finished the decade at about the same price as they started. Tungsten doubled again in the 1930s, but this time it was joined by a doubling in the price of tin.

In the 1950s, the decade in which Simon would have lost by a few dollars, most of the metals rose in price, with tin leading the way. But tungsten’s price dropped by almost a third, almost outweighing the price increase of the other metals. Over the 1960s and 1970s, all the metals increased in price, with tungsten’s price doubling over the period and tin’s price tripling. These price increases were wiped out in the 1980s and the 1990s. Once again tungsten and tin led the way; their prices in 1999 were about onesixth of what they were in 1980.

Simon always predicted that in any particular decade prices may move up or down. While he thought he might frequently lose, he was always willing to bet because he thought he would more frequently win. As late as 1996, two years before his death, he said, “I’m only offering to bet; I do not guarantee a rosier future in all respects as a sure thing” (Simon 1996, 36). The price history of the twentieth century provides evidence that he would have won five of the ten decades by large margins, and he would have won a bet over the entire century.

Notes

  1. Simon’s offer of the bet is discussed in Simon (1981); Paul Ehrlich indicated his willingness to take the bet in Ehrlich (1981). Ehrlich’s account of what happened can be found in Ehrlich and Ehrlich (1996, 100–104); see also Norman Myers’ account in Myers and Simon (1994, 99–100). Simon’s discussion of the bet’s outcome is in Simon (1996).
  2. One thousand dollars in 1900 is equal to $19,297.03 in 1998, our base year. If that sum were divided equally among the five metals, and the portions of each metal were re-valued in 1999 prices, the bundle of metals would be worth $9,176.34 (in 1998 dollars).

REFERENCES
Ehrlich, Paul R. 1981. An Economist in Wonderland. Social Science Quarterly 62(March): 45–49.

Ehrlich, Paul R., and Anne H. Ehrlich. 1996. Betrayal of Science and Reason: How Anti-Environmental Rhetoric Threatens Our Future. Washington, DC: Island Press.

Kelly, Thomas, et al. 2005. Historical Statistics for Mineral and Material Commodities in the United States. U.S. Geological Survey Open-File Report 01- 006, version 9.2. Online: minerals.usgs.gov/minerals/pubs/of 01–006/.

Myers, Norman, and Julian Simon. 1994. Scarcity or Abundance? A Debate on the Environment. New York: W.W. Norton.

Simon, Julian. 1981. The Ultimate Resource. Princeton: Princeton University Press.

———1996. The Ultimate Resource 2. Princeton: Princeton University Press. Tierney, John. 1990. Betting the Planet. New York Times Magazine, December 2.

David McClintick is a student at James Madison College, Michigan State University, where Ross B. Emmett is an associate professor. Emmett is also a 2005 Julian Simon fellow at PERC.

 

 

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Ross B. Emmett is associate professor of political theory and constitutional democracy at Michigan State University. His teaching focuses on the political economy of constitutional democracies. His research concerns economic thought and the history of economics at the University of Chicago between the 1920s and the 19802. He is co-director of the...
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