Jeremy Grantham vs. Julian Simon

Here is nineteen pages of Grantham (pdf), very much exaggerated in tone but useful and sometimes startling throughout.  (I’ve linked to this before but I wanted to pull out some particulars this time around.)  Check out the graph on p.5; most of the decline in commodity prices since World War II has been reversed in the last decade.  Excerpt:

The highest percentage of any metal resource that China consumes is iron ore, at a barely comprehensible 47% of world consumption. Exhibit 9 shows the spectacular 100-year-long decline in iron ore prices, which, like so many other commodities, reach their 100-year low in or around 2002. Yet, iron ore hits its 110-year high a mere 8 years later! Now that’s what I call a paradigm shift! Mining is clearly moving out of its easy phase, and no one is trying to
hide it.

Of course China won’t be devoting fifty percent of its gdp to investment for much longer.  Furthermore, a new technological platform will arise and commodity prices will fall once again.  The question is — when?  It doesn’t have to be soon.  Catch-up growth boosts commodity demands and catch-up growth can outrace TFP-based extraction productivity growth for extended periods of time.  That’s why China can grow at ten percent for decades but we have no real chance of doing the same.  Progress is harder at the frontier.  Julian Simon wrote about how high commodity prices create incentives for new discoveries but he never compared those potential TFP gains to the power of catch-up growth to boost demand and thus high prices; keep in mind The Ultimate Resource first came out in 1981.

Reihan Salam and Robin Hanson predict that, on the energy front, solar power will come to the rescue.  Maybe so, but right now the prices of fossil fuels are robust or soaring.  I don’t read many newspaper stories about the new solar power companies bubble, Spain aside, and that bubble seems to have burst.  How many market prices indicate an optimistic prediction about solar power in the next thirty years?  I find it striking that the two most popular and workable alternatives to fossil fuels are water and wind power (nuclear is not popular, though perhaps workable), which in their essence date from medieval times or earlier.

On Grantham, Paul Krugman offers useful comments, with which I largely agree.  Here is Mark Thoma on decreasing crop yields.  And Tim Worstall comments.

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