Sunday, September 08, 2013
Betting on the Apocalypce
ONE day in October 1990, the iconoclastic economist Julian L. Simon walked out to get the mail at his house in the Washington suburb of Chevy Chase, Md. In a small envelope sent from Palo Alto, Calif., he found a sheet of metal prices, along with a check for $576.07 from the biologist Paul R. Ehrlich. There was no note.
Ten years earlier, Mr. Simon and Mr. Ehrlich, joined by two scientific colleagues, had made a wager on the future prices of five metals: chromium, copper, nickel, tin and tungsten. The bet — in which the loser would pay the change in price of a $1,000 bundle of the five metals — was a test of their competing theories of coming prosperity or doom.
For years Mr. Ehrlich, the author of the landmark 1968 book “The Population Bomb,” had warned that rising populations would cause resource scarcity, even famine, with apocalyptic consequences for humanity. Mr. Simon, who died in 1998, optimistically countered that human welfare would flourish thanks to flexible markets and our collective ingenuity.
Mr. Ehrlich believed the metal prices would rise over the decade; Mr. Simon thought the prices would stay stable or even drop. Mr. Simon won: the prices of the five metals in 1990 hovered at around 50 percent of their 1980 levels, even as the world population grew by 800 million.
Conservatives have celebrated Mr. Simon’s victory ever since, using it to denounce environmentalists for alarmism and to criticize environmental regulation. The columnist George Will recently used Mr. Simon’s triumph to illustrate how “ingenuity thwarts doomsday.” In a sign of the bet’s symbolic value, the Competitive Enterprise Institute created the Julian L. Simon Memorial Award in 2001 to celebrate his “vision of Man as the Ultimate Resource.” The award trophy: a statue of a leaf with its veins made from the five metals featured in the bet.
Environmentalists, in contrast, have tended to deny the significance of the Ehrlich-Simon bet, arguing that commodity prices illustrate little about real environmental threats. Also, they say, Mr. Simon just got lucky: indeed, when economists later ran simulations for every 10-year period between 1900 and 2008, they found that Mr. Ehrlich would have won the bet 63 percent of the time. These sweeping declarations of triumph and insignificance miss the point — and the true lessons of the bet for each side.
Environmentalists need to better understand the ways in which markets for natural resources function. There is rarely a simple linear path from abundance to scarcity.
Mr. Ehrlich’s view of looming scarcity was hardly radical in the years after the 1970s oil shocks. Many investors in the late 1970s shared his faith that rising metal prices reflected finite supply and impending shortages. The Hunt brothers, for example, famously gambled billions of their oil fortune on the rising price of silver, and then lost their shirts in 1980 when prices faltered and they failed to corner the market.
During the 1980s, macroeconomic factors, including falling oil prices and economic slowdowns, far outweighed new pressures from population growth and drove down the prices of many metals. Everyday market forces — technological change, price-driven competition and new sources of supply — also helped reduce prices. The international tin cartel collapsed under pressure from new Brazilian mines. Aluminum, plastic, fiber-optic cables and satellites began to replace copper, even as copper production soared in response to 1970s highs; by 1985, the copper industry struggled to create demand.
This dynamic relationship between scarcity and abundance matters for public policy. Exaggerated fears of resource scarcity can lead to stifling price controls, panicked efforts to limit production or consumption, and public investment strategies predicated on high prices that turn out to be ephemeral.
The same thing is true in business. Solyndra, the now-bankrupt solar-panel company, failed in part because its model depended on the price of polysilicon, used by its competitors, remaining high. When prices instead collapsed, so did its competitive strategy and the company.
YET if environmentalists need to better account for human creativity and adaptability, conservatives, in turn, should better understand the limited nature of Mr. Simon’s victory.
Setting aside the vagaries of market forces, can we continue to increase resource production and adapt to unprecedented environmental changes like global warming? Our past experience should give us some hope, but that hope should be greatly tempered by the realization that climate change is an unprecedented threat, and we really might not keep pace.
Mr. Simon liked to argue that new problems prompt solutions that ultimately leave people better off than before. But we cannot surmount our challenges if we simply deny that they exist.
Instead of using science as a resource for human betterment, conservatives who reject the evidence of human-caused global warming prevent the very creative problem-solving that Mr. Simon advocated. And if environmentalists like Mr. Ehrlich hadn’t urged action back in the 1970s, would all that creativity have been channeled into the cleaner air and water that we enjoy today?
We face choices about our future direction. As Mr. Ehrlich and many other environmental scientists have documented, by pouring carbon dioxide into the atmosphere, we put things we value and love in danger, from the coral reefs to the Jersey Shore, from homes threatened by wildfire to farms endangered by drought.
And even if Mr. Simon is right that humans can adapt and prosper on this rapidly changing planet, we have to ask ourselves whether the risks and inequalities of this change are desirable.
Ultimately, humanity’s course will be determined less by iron laws of nature or by unbounded market powers, Mr. Ehrlich and Mr. Simon’s dueling lodestars, and more by the social and political choices that we make. Neither biology nor economics can substitute for the deeper ethical question: what kind of world do we want to live in?