A note on the Simon-Ehrlich Bet

Yesterday Tyler asked whether "Simon's prediction" of falling resources prices would continue to hold now that an era of catch-up growth is upon us. It's a legitimate question but misleading about what Simon was predicting. Simon's fundamental prediction was about human welfare not prices. Remember that at the time of the famous bet, Paul Ehrlich was predicting increasing resource scarcity, mass starvation, and an end to economic growth. Simon was arguing that human welfare would continue to rise. Resource prices were easy to observe so the famous bet was made in terms of prices. Simon understood, however, that prices are not a measure of welfare or even of scarcity (quantities would have been a better metric but these are much more difficult to observe).

As Tyler notes, catch-up growth may mean that demand will increase faster than supply at least for some periods thereby driving up prices. But here is the key point, increased demand with a non-decreasing supply means an increase in social welfare. If tomorrow we discover that cold fusion actually does work, the price of palladium will increase dramatically, perhaps never to fall again.  Nevertheless, human welfare would dramatically rise not fall.

I don't have strong views on resource prices over the next century (especially when these are framed in terms of specific resources like "oil" rather than with the more fundamental concept of energy) but I would be happy to bet that human welfare will increase dramatically over the next century.