Friday Notebook: The New Simon-Ehrlich Teaching Story

Paul Kedrosky has cleverly turned the famous 1980 Simon-Ehrlich wager on future commodity prices into a new teaching story, recasting the old lessons from that economist’s tete a tete into a false moral. In his interview here, with Andrew Keen, Paul explains that not only was the original bet limited to a not-very-useful 10 year timeframe, but worse, a generation of economists interpreted the wager’s outcome as law. Both points are worth making. As Kedrosky correctly points out, once you start moving the 10 year bracket forward from 1980 then Ehrlich, who bet on scarcity and lost, starts to win. Indeed, the winner of the wager was the beneficiary of timing, not insight. But leave it to economists to convert ephemeral conditions into permanent ones. While it’s true that both the price signal and technology can bring forth more supply of resources, often at lower costs, this is only true up to a limit. Once those limits are reached, as we have seen in global Copper and also Oil for example, then better technology might be able to create more supply on a nominal basis, but not at a lower price, and not in real terms. Anyone who has studied the chart of declining ore grades of Copper, or accepted the massive cost escalation in simply keeping global oil supply flat, will understand.

Paul Kedrosky calls the Simon-Ehrlich wager The Bet That Ruined the World. As much as I like that phrasing, I am instead more excited with the possibility that Kedrosky’s recasting of Simon-Ehrlich will now supplant the antiquated, false teaching story originally derived from the bet. As the world now faces up to the fact that no cheaper substitute exists for the uber-dense 5.8 million BTU in a barrel of oil, a recasted Simon-Ehrlich is necessary to usher us more quickly to a confrontation with energy facts, and energy limits. Indeed, for Transitionists who dream of moving quadrillions of BTU demand, currently supplied by oil in global transport, over to a new electrified grid it behooves us to think harder about resources such as Copper. Like Kedrosky, and surely some of my readers, I have marveled over the possibilities of material upgrading and other technological wonders of resource substitution–the kinds of methods that often appear in presentations from places like MIT’s Solar Group. That said, we need to confront the fact that in conjunction with new lows in global copper ore grades, the price of copper–just like oil–has entered a new regime. Expecting a miracle of substitution in copper, or a price reversal downward away from the current regime, is certainly not realistic if we are on the threshold of hitting hard global copper resources to electrify world transport. Simon-Ehrlich recasted is another important step, therefore, towards the realism we need to actually solve the challenge of energy-transition.