Revisiting Simon-Ehrlich

Paul Kedrosky revisits the famous Simon-Ehrlich bet:

Without getting into it too deeply, here are some things worth knowing. Given
the above graph of the five commodities’ prices in inflation-adjusted terms, it
will surprise no-one that the bet’s payoff was highly dependent on its start
date. Simon famously offered to bet comers on any timeline longer than a year,
and on any commodity, but the bet itself was over a decade, from 1980-1990. If
you started the bet any year during the 1980s Simon won eight of the ten decadal
start years. During the 1990s things changed, however, with Simon the decadal
winners in four start years and Ehrlich winning six – 60% of the time. And if we
extend the bet into the current decade, taking Simon at his word that he was
happy to bet on any period from a year on up (we don’t have enough data to do a
full 21st century decade), then Ehrlich won every start-year bet in the 2000s.
He looks like he’ll be a perfect Simon/Ehrlich ten-for-ten.


So, what does all this mean? A few things. First, and most importantly, it
means Simon was right but fairly lucky. There is nothing wrong with being lucky,
of course, but compulsive Simon/Ehrlich-citers need to be reminded that it is no
law of nature (let alone of rickety old economics) that commodity prices
(inflation-adjusted or otherwise) trend inexorably downward, even over a

If the conclusion is that prices go up as well as down, even over a 10 year period, then there isn't much to complain about in Paul's analysis.  But I think he misses the key point.  The bet was never fundamentally about prices, the bet was about scarcity, living standards and whether we were running out of natural resources–remember that at the time Ehrlich was predicting hundreds of millions would die of starvation and even that England would not exist in the year 2000!  Prices were just a convenient but imperfect way to mark the bet to market.

The reason prices have risen in the 1990s is not that things are getting worse but that things are getting better–especially in China and India where things have been getting much better.  As China and India have become richer demand has increased tremendously in these countries putting upward pressure on prices.  In other words, prices have risen because the value of resources has risen.  That's quite different–indeed the opposite–of what Ehrlich was predicting.

To see this concretely take a good which is really fixed in supply, Picasso paintings.  Now consider two worlds – in one world the price of a typical Picasso is $50,000; in the other, it's $5 million.  Which world would you guess has a higher standard of living? 


I like the idea of tracking overall economic well-being by tracking inelastic goods. Assuming they don't fall out of favor, if you look at the 100 most valuable paintings in 1900 and then track them (those actual paintings) each decade, I wonder what that graph might look like, adjusted for inflation of course.

The converse could be true too - imagine a dystopian world where the surviving humans are all hunter/gathers. The price of most natural resources is zero or near zero; what use is a barrel of oil when there are no engines? Simon would also have won the bit if the most dire of Ehrlich's predictions came true.

I don't think Paul missed the key point, the key point is broadly about society's adaptability. The part of his post that was reproduced might lead people to think that all he was talking about was the random walk of commodity prices, which was not the focus of the post- he threw that piece in at the end just for perspective.

as far as your world example- i would rather live in the $50,000 Picasso world if the reason the price was lower was because another artist had developed a comparable, better piece that carried less cost to the environment thus negating demand for the big-footprint picasso..

Simon emphasized repeatedly (for those who wish to cite short term price rises as problems) that "we need our problems." And in fact, taken over the appropriate long term view, the real economic cost of securing an unthinkably large number of "resources" has fallen persistently and there is no reason to believe that it will not continue.

The other important point to take away was that Ehrlich was blissfully unaware of the role the market plays in preparing for and averting resource problems. Everyone seems to miss the obvious point that the bet they made corresponds to an off-market Wall Street bet on those commodities. So Simon could have paired his bet with a real market-price options/futures purchase, and thus made a profit no matter what happened (a "Dutch book").

Ehrlich would only have failed to realize this if he completely missed the role that markets play. That is the real lesson.

Now, with that said, these higher commodity prices are not good, and more demand from China is not consolation; it means our ability to provide for ourselves is not keeping up with population, no matter what the phony CPI numbers say.

I can see the higher commodity prices being a sign that things are better for people in India and China, but it seems like as prices go up more and more people living elsewhere (or even within the less developed portions of Indian and China) are going to be priced out of the market for these rather basic commodities. At what point do increasing commodity prices indicate a decline in living standards? or do prices increasing to infinity indicate that worldwide standard of living has increased to an infinitely good level? is Scott Armstrong and Kesten Green's attempt to make a superficially similar bet on global warming.

@Silas Barta
Now, with that said, these higher commodity prices are not good, and more demand from China is not consolation; it means our ability to provide for ourselves is not keeping up with population, no matter what the phony CPI numbers say.

Don't forget that there is less stuff in our stuff now. We use resources more efffiecintly now. Even the old ICE has been getting 1% more efficient per year for the last 20 or so years.

The bet changed economics and the environmental movement.It made the former even more insufferable than usual, convincing many economists of the god-like power of price in bringing new supply and substitutes in commodity markets.

It's too soon to tell, but again look at the chart. It is trending down despite upward spikes.

It would be quite remarkable that we just added a billion or two resource users to the economy and the trend continued down. Now is a time to make a bold bet that the Chinese and Indians are not just free-riders on our resource-using technologies but will add to the ability of humans to innovate.

Waldmann hits it on the head. I've got an adjunct gig teaching forecasting this term, so I've made up a little Excel sheet with a random walk (calculating #heads - #tails from 1, 2, 3 ... 8000 successive coin flips). Every time I hit the recalc button there's a new series.

Since I constructed the sheet, I know exactly what is going on here -- but the illusion of purpose in the random walk is very strong.

BUT, Mr Waldmann, if "economists win so often" one would think we would have avoided the current financial institution meltdown, just by having Greenspan and Bernacke glance at Schiller's famous housing graph.

A more interesting bet would be on the price of commodities divided by global GDP per capita growth. This has the useful feature of eliminating inflation measurement issues, and shows the true cost of commodities to their users.

Ehrlich was wrong and still is.

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