The year was 1980. The players were biologist Paul Ehrlich and business professor Julian Simon. The two had conflicting ideas about where humanity was headed. Ehrlich, the author of the 1968 book The Population Bomb, thought humanity was headed for a Malthusian catastrophe. Simon thought the opposite. Humanity, he argued, was itself The Ultimate Resource. Because humanity’s genius knew no bounds, Simon proclaimed that we could think our way out any problem.
The debate between Ehrlich and Simon was fundamentally about resource scarcity. What’s interesting, though, is that their actual wager wasn’t about any physical measure of resource reserves. Their wager was about prices.
Simon challenged Ehrlich to bet on the price of raw materials. Pick any ‘non-government controlled’ resource, Simon said, and he’d bet that the price would decrease over time. Ehrlich chose five metals — copper, chromium, nickel, tin, and tungsten. If their inflation-adjusted prices went down by 1990, Ehrlich would lose. If metal prices went up, Ehrlich would win.
Ehrlich lost.
Actually, Ehrlich lost the bet the moment he entered it. Ehrlich’s was concerned with the physical exhaustion of resources. Had he bet Simon on any physical measure of resource reserves, Ehrlich would have won. (The Earth isn’t making more metal, so we’ve been exhausting our supply since day one.) Instead, Ehrlich fell for a bait and switch. He allowed Simon to frame scarcity in terms of prices. It was a fateful mistake.
The switch from physical scarcity to prices is one of economists’ favorite tricks for dispelling concerns about sustainability. In this post, I’ll show you how to avoid getting hoodwinked. The key is to realize that resources can get cheaper at the same time that they get less affordable. And when it comes to the price of oil, I think this is exactly what’s in store.
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