Economics, Top Stories

Revisiting the Simon-Ehrlich Wager 40 Years On

It is 1980, and you are getting married. Your parents decide to celebrate your nuptials by inviting 100 guests to a wedding reception. The reception cost them $100 per person or $10,000 in total. Fast forward to 2018. Now it is you who is throwing a wedding reception for your child. The guest list has increased by 72 percent (some of the old folk are no longer around, but the cousins have exploded in number). That means that you are now catering to 172 people. The price per guest remained the same (suspend your disbelief and ignore inflation for now), and you expect to get a bill for $17,200. Instead, the bill comes to $4,816, which is less than half of what your parents paid for you. How is that possible, you ask the caterer? The caterer responds that for every one percent increase in attendance, the bill fell by one percent. And so, while the number of guests rose by 72 percent, your bill declined by 72 percent. Surely, things like that don’t happen in real life, or do they?

In fact, that’s exactly what has happened to the affordability of 50 basic commodities between 1980 and 2018. Over those 38 years, the world’s population rose from 4.458 billion to 7.631 billion or 71.2 percent. Over the same time period, basic commodities, including energy, food, materials, and metals became 71.6 percent more affordable on average. For every one percent increase in population, in other words, resources became slightly more than one percent more abundant. Put differently, the time it took to earn enough money to buy one unit in that basket of 50 commodities in 1980 bought 3.62 units in 2018. The compounded growth rate of abundance came to 3.44 percent per annum. That means that the affordability of our basket of commodities doubled every 20.49 years. This relationship between population growth and resource abundance is deeply counterintuitive, yet it is no less true. The facts surprised us, and they will surprise you too.

Generations of people throughout the world have been taught to believe that there is an inverse relationship between population growth and availability of resources, which is to say that as population grows, resources become more “scarce.” That was, historically speaking, true. In the animal world, a sudden increase in the availability of resources, such as grass after unusually plentiful rain, leads to an animal population explosion. The population explosion then leads to the exhaustion of resources. Finally, the exhaustion of resources leads to population collapse. If you take the Theory of Evolution seriously—and we do—you’ll appreciate that human beings evolved from much humbler beginnings and were, as such, much more exposed to vicissitudes of fortune.

Over time, however, humans have developed sophisticated forms of cooperation that increase their wealth and chances of survival. Consider, for example, trade and exchange. As the British writer Matt Ridley observed in his 2010 book The Rational Optimist: How Prosperity Evolves, “There is strikingly little use of barter in any other animal species. There is sharing within families, and there is food‐for‐sex exchange in many animals including insects and apes, but there are no cases in which one animal gives an unrelated animal one thing in exchange for a different thing.” Trade is particularly important during famines. A country struck by drought, for example, can purchase food from abroad. This is not an option available to other animals.

But the most important difference between people and nonhuman animals is our superior intelligence and the use of that intelligence to invent and to innovate. “In a way, everything is technology,” noted one of the world’s greatest economic historians Fernand Braudel (1902–1985) in his book Civilization and Capitalism. “Not only man’s most strenuous endeavors but also his patient and monotonous efforts to make a mark on the external world; not only the rapid changes… but also the slow improvements in processes and tools, and those innumerable actions which may have no immediate innovative significance but which are the fruit of accumulated knowledge.”

And so, over many millennia of trial and error, we have accumulated a store of knowledge that has allowed us to reach escape velocity—from scarcity to abundance—somewhere toward the end of the 18th century. The Four Horsemen of the Apocalypse (war, famine, pestilence, and death) have not completely disappeared—that would be a miracle, not progress. But the world is incomparably richer than it was just two centuries ago. If you don’t believe us, ponder for a moment the 768 types of breakfast cereal that you can buy at Walmart for just a few minutes of labor on a minimum wage.

We measure abundance in Time Prices. A Time Price is the length of time that a person is required to work in order to earn enough money to buy something. It is the money price divided by hourly income. Money prices are expressed in dollars and cents, while Time Prices are expressed in hours and minutes. For example, if a barrel of oil costs $75 and you earn $15 an hour, the Time Price will come to five hours. If oil falls to $60 a barrel and your income increases to $20 an hour, the Time Price will decrease to three hours. The money price falls by 20 percent, but because your hourly income rose by 33 percent, the Time Price will fall by 40 percent.

Time Prices make much more sense than money prices for at least three reasons. First, Time Prices avoid the contention and subjectivity of commonly-used inflation adjustments. Second, since innovation shows up in both lower prices and higher incomes (more productive people are better-paid people), Time Prices more fully capture the effects of innovation. Third, Time Prices are independent of currency fluctuations. Instead of gauging the standards of living in India and the United States by comparing the purchasing power parity adjusted prices of a gallon of milk in Indian rupees and American dollars, Time Prices provide a universal and standardized way (hours and minutes) to measure changes in well-being.

Our research into Time Prices and resource abundance began when we looked at updating the famous wager between the late University of Maryland economist Julian Simon and the Stanford University biologist Paul Ehrlich. The wager was based on the inflation-adjusted prices of five metals: chromium, copper, nickel, tin, and tungsten, and lasted from October 1980 to October 1990. Ehrlich predicted that because of population growth, metals would become more expensive. Simon argued that because of population growth, metals would become cheaper.

Ehrlich thought like a biologist, who did not seem particularly interested in economics. “Since natural resources are finite, increasing consumption obviously must ‘inevitably lead to depletion and scarcity,’” he wrote. He continued:

Currently there are very large supplies of many mineral resources, including iron and coal. But when they become “depleted” or “scarce” will depend not simply on how much is in the ground but also on the rate at which they can be produced and the amount societies can afford to pay, in standard economic or environmental terms, for their extraction and use. For most resources, economic and environmental constraints will limit consumption while substantial quantities remain… For others, however, global “depletion”—that is, decline to a point where worldwide demand can no longer be met economically—is already on the horizon. Petroleum is a textbook example of such a resource.

Simon, on the other hand, thought like an economist who understood the powers of incentives and the price mechanism to overcome resource shortages. Instead of the quantity of resources, he looked at the prices of resources. He saw resource scarcity as a temporary challenge that can be solved through greater efficiency, increased supply, development of substitutes, and so on. The relationship between prices and innovation, he insisted, is dynamic. Relative scarcity leads to higher prices, higher prices create incentives for innovations, and innovations lead to abundance. Scarcity gets converted to abundance through the price system. The price system functions as long as the economy is based on property rights, the rule of law, and free exchange. In relatively free economies, therefore, resources do not get depleted in the way that Ehrlich feared they would. In fact, resources tend to become more abundant.

Simon, as is well known, won his bet with Ehrlich when the real (which is to say inflation-adjusted) price of the five metals fell by 36 percent between October 1980 and October 1990. Simon’s victory would have been even more impressive had he used, as we do, Time Prices. Those fell by 55 percent between 1980 and 1990. In fact, when we extended the Simon-Ehrlich wager over many decades and greatly expanded the number of commodities analyzed, we found a consistent trend toward greater availability of resources relative to the cost of human labor. It is, consequently, heartening that, in recent years, scholars have started to write about the age of abundance, a state of affairs in which “technology has the potential to significantly raise the basic standards of living for every man, woman, and child on the planet.”

Unfortunately, it will take much more than a single wager between two scholars—or, for that matter, this article—to rid the world of the old and very pernicious idea that population growth and resource depletion go hand in hand. But, we have to start somewhere. And so, as you listen to the purveyors of doom on the television and the radio, and read apocalyptic predictions of humanity’s future on Twitter and in the newspapers, bear in mind that with every hungry mouth comes a pair of hands and a brain capable of thought, planning, and innovation.

 

Marian L. Tupy is editor of HumanProgress and a senior policy analyst at the Center for Global Liberty and Prosperity.

Gale L. Pooley is an associate professor of economics at Brigham Young University, Hawaii.

Photo by Raphael Rychetsky on Unsplash

Comments

  1. Time Price is an excellent measure which should be used more often! Most people, gave half a chance and benign neglect or better from the State, improve their own and others’ lot by their efforts, to a greater extent than they are aware. But misery loves company and good news is no news for the powerful minority with a vested interest in redistributing poverty and jealousy. So the Zero Sum Gain theory raises its ugly head again no matter how often it is disproved.

  2. I’m not so sure about this article’s sunny conclusions. First, determining real wages is tricky. This link explains the complications: https://www.brookings.edu/blog/up-front/2019/09/10/are-wages-rising-falling-or-stagnating/
    The general consensus among most economists, however, is that the real wage has stagnated and that most gains in the real wage exist only for the rich, rather than the middle or lower classes. And, that is in the US, a superpower economy. The writers of the Quillette article seem determined to dismiss concerns as “pernicious”. Yet there are questions it doesn’t even consider. The number of adult children who stay at home for longer and longer periods, for example. The effects of immigration. The impact of the lockdown. The idea that each bawling baby has a set of capable hands to tend to it, or that each hungry mouth will develop the capacity to fend for itself, seems a smidgen optimistic. Human ingenuity (or the ingenuity of a few humans) can be astounding, but to dismiss fears of overpopulation as hysteria (as if overpopulation is only ever a good, one that never gives birth to disease, crime, or poverty) is to be driven by a blind optimism.

  3. I worked in industrial food ingredient production at a global level. I get that efficiency is constantly pushing the cost of goods sold down, down, down in real terms.

    But Time Price is problematic. Taxes have gone up, not down. Education, health care, housing has all gone up, in real terms, not down.

    Is coal and oil and orange juice concentrate cheaper now? Yes, yes they are.

    But the cost of gasoline at the pump now includes ethanol additives and special vapor catching systems, and most of the world attaches taxes far above what they were in 1980. Gasoline is more expensive today than it was a generation ago. Luckily cars get better milage and car operation per gallon is offsetting. But cars are more expensive. But the cost is offset by lower financing costs. But registration costs are up. But so is traffic, offsetting milage gains.

    For the sake of macro level comparison, Price Time obviously plays a role.

    But dig down a bit and things get very murky. All in all i dont think a 50 year old in California today is doing as well as a 50 year old would have been doing in 1980.

    Here in California a 50 year old with a nice house and two kids pays around 70% of their income in taxes. So no matter how cheap crude oil has gotten, the wedding is going to “cost” more, not less. 1980 as a starting point is also problematic. If the bet had been 1977 to 1987 the outcome would be very different.

  4. The article you linked to explained the complications in analyzing the change in average wages in the United States, which is not necessary for “time prices.” As the article you linked to explains, one of the main difficulties in calculating the change in wages over time is adjusting these wages for inflation. “Time prices” avoid using inflation altogether since it already factors in price relative to income.

    One can easily do a comparison of the time price of a dozen eggs using minimum wage as the baseline income. This avoids the complications of calculating an average wage altogether by focusing on how living standards have changed for the lowest paid workers. This, after all, is the demographic we should be paying the most attention to since the ultimate goal of society is to reduce poverty rather than reduce inequality.

    I know this gets messy and political but my understanding is that real wage has increased consistently across all income levels for generations. The analyses that report wage stagnation typically exclude employer benefits such as healthcare, retirement, and life which have become more common over time and constitute a significant chunk of your real wage. They also typically exclude taxation (which has generally increased over time) and government assistance (which has generally increased over time) from the calculation. This makes little sense since the income taxes one pays are technically part of one’s compensation and sales taxes are technically part of a good’s real price. Once these factors are included it is evident wage stagnation is a myth. It is a lie told through statistical manipulations by carefully excluding any key factors that don’t contribute to the wage stagnation narrative.

    I’m not sure why this narrative is pushed. Maybe people like hearing that they’ve been short changed and politician X is gonna give them the money they are due? It seems rather transparent to me even before digging into the data.

  5. An interesting take on the false narrative of Malthusian predictions. We have to carefully examine such dire predictions to see whether they disguise political objectives. Unfortunately, the wolf-in-sheep’s-clothing motives of such dire predictions are one of the few things which could deprive the world, and most especially the developing world, of an anticipated 300% to 1,000% rise in global wealth by 2100. Even more pertinently, the market is the only mechanism we know of which can raise people out of poverty and stall the population growth which might produce a real Malthusian dilemma…

  6. Far more timely and important than the arguments for or against the potential scarcity of certain physical commodities, is the plain and unassailable evidence of the near extinction of the scarcity of a considerably more valuable and impactful commodity: our access to knowledge.

    For me, one of the lasting images from all the peaceful “protests” over the summer will the ubiquitous smartphones held up night after night by the hopeless, downtrodden citizens of these towns, those with practically zero opportunity to find any semblance of progress or success in life, bless their hearts.

    Just a few centuries ago, knowledge seekers would cross continents, risking their lives to arrive at monasteries built atop jagged peaks that housed the most up to date information known to the world. A little over 100 years ago, school-aged kids across our “fruited plains” would walk miles daily (as many as 7, in the snow, uphill, both ways) to sit in one classroom and grab what learnin’ a single teacher might impart in a few hours’ time.

    As a child of the 70’s & 80’s, my home was often a popular one around the the time of the school year when papers were due - my mom sold World Book encyclopedias as a side hustle, which meant every 4-5 years, she earned a new set. So we had some of the most current information in the neighborhood, short of having to schlep to the downtown Houston library or the dark and cavernous “stacks” at nearby Rice University.

    My first sales job was in 1995 and I called on a company in Lufkin, Tx, that sold truck trailers. Even then, in order to learn anything about the company ahead of a sales call, about their products, their industry, their financials, their executives, would’ve cost me an easy half-day in the library, assuming I knew which 3-4 resources might hold the answers. Now, I collect all of that data in 5-10 minutes’ time from my laptop on my back patio, often including the names of 2-3 common acquaintances I may share with the decision maker.

    Fast forward to those hopeless, downtrodden protesters in Minny, D.C., Portland and Chicago. In their ignorant, spoiled-rotten right hands they hold access to a fair share of every bit of knowledge ever amassed since someone first hunched over and drew a line in the dirt, and still they scream and holler and wail and break things and steal other people’s property because they’ve got it so rough. And since the government cannot possibly give them anything, because the government doesn’t create anything, but rather takes from those who do, these ingrates are essentially demanding from me and my wife, that we work for ourselves and our three boys for ~6 hours of day so they can NOT make use of the world’s knowledge at their fingertips and instead have us work 3 additional hours to feed them and their kids. It truly beggars belief.

    I’m a product of public schools, K thru business school. (For what it’s worth, some of my undergrad and most of my MBA was paid for by me.) So my education didn’t come with the $300k tab that my private school friends may have rung up, a tab that likely approaches $1mm today. But I still overpaid - all that information was there for the taking without ever setting foot in a classroom. Because we’re either scared or lazy, or both, we see it as perfectly acceptable to let others educate us. As good Will Hunting so elegantly laid it out, so many of us waste “$150,000 on an education you coulda got for $1.50 in late fees at the public library.”

    So quit worrying about who’s got how much and when we’re gonna run out of what and go educate yourself and make your own mark on the world. And when you’re successful, be plenty thankful, but don’t be afraid to take some pride in what you’ve accomplished. Cause whether it was a business or just a solid career, no matter what Obama would have you believe, you DID build that.

  7. No, it’s quite sensible. That’s why the note contained in the article specifies finding a used first generation iPhone. Comparing that to an iPhone 11 is apples and oranges, he only used that to estimate what might be the cost of the original iPhone now, if someone was producing such.

    That’s why it’s better to grasp the method first in terms of commodities, they don’t change much in terms of their utility.

    FWIW, I do find the notion that this is somehow new rather strange, as I was taught as a kid to think of my purchases in terms of the number of hours of labour required to make them. It tends to make one rather frugal. :penny_pinching_cheap_skate:

  8. Yes - that’s it exactly. That is exactly the point (or one of them) that they are trying to make, as I understand it. And I would agree completely with that point. The innovation and trade of the last 200 years or so has produced a prosperity for the vast majority of the globe that our ancestors could hardly have dreamed of. It sounds like you are saying the sultan was “rich” because he had more than those around him. While true on the most superficial level - the more interesting thought is “who cares about those relativities between the people of a particular time”? What does it matter if you, today, are “poor” compared to your richest neighbor, but have material prosperity - abundant food, much leisure time, access to entertainment and knowledge than were once available to only a rarefied few - far greater than those that came before you? The differences between the sultan and his meanest beggar are almost insignificant compared to the differences between the both of them on the one hand and you on the other. This is one of the reasons that all the supposed fretting over “rising inequality” is so pointless, and to me nothing more than the ancient “deadly sin” of envy. The bottom quintile in American income today lives A life of plenty and ease beyond the imagining of their counterparts in the bottom income quartile of America 1850. What else really matters? Life is improving ( from a material point of view - we can’t address the spirit in this context) for all.

  9. But that’s sort of true. The sultan, of course, may have had access to a virtually infinite amount of resources that were available to him at the time, such as whatever food there was, and human resources (sexual companions, servants). He may have had court musicians who could play him whatever music they knew at whatever level of ability they had, but he did not have access to play music from virtually any part of the world by a virtually unlimited variety of musicians of enormous talent, past and present. He could have personal couriers who carried his messages to any part of the realm, but he could not communicate instantaneously with his subjects, nor could he get instantaneous reports from them. He may have had the best doctors his realm could provide, but he was still in trouble if he got virtually any infectious disease, because they didn’t have any idea how to deal with it.

  10. At some point, of course, resources can get used up. But the real short-term thinking is to assume that we’re anywhere near that point now. People have been predicting the imminent exhaustion of resources for two centuries, and they keep being wrong. At one point, it seemed that we were likely to run out of oil for our lamps, until we discovered petroleum that was much more plentiful than whale oil. People thought oil was going to run out, but fracking has exposed vast new resources of natural gas. Who knows what we will be able to use in the future instead of fossil fuels? Don’t assume that we’re close to running out, and don’t assume that when we do get close to running out, we won’t find a substitute.

  11. Their bottom line is: be positive, bro.

    No, their bottom line is that the people who keep predicting the imminent collapse of the world economy because of overpopulation are consistently wrong.

  12. The concept of thinking in Time Price instead of a specific amount of money makes sense to me. In fact I have been doing this for quite some time, although not exactly in the same way as the authors do.

    When I consider doing something myself instead of outsourcing it (and paying for it), I always estimate how much time it would it cost me, if I did this myself compared to how much money, if somebody else does it for me. Or, if I do this, how much money would I safe or get back as a result for how much time wasted doing it?

    I guess it is all a question of your individual situation in life. If you are at the peak of your career, you might make a lot of money per hour spend on the job. So spare time is relatively precious (as it is rather limited). Once you loose your job or you retire, this ratio may shift.

  13. So why have some prices gone down, while others have gone up, way up?

    Food may be cheap, but housing and healthcare costs are outrageous and even a decent Ford F150 pickup (America’s most produced vehicle) costs upward from $50,000 – soaring toward $100,000.

    Why?

    I blame women.

    Specifically, working mothers, ie, the two income family. With two bread winners in the house, you don’t buy more bread, but you do buy more house and more car(s) and more expensive appliances and TV’s and TV dinners.

    This is because two incomes increase disposable income, especially when you don’t have a lot of kids.

    So when politicians complain about the lack of a living wage, are they talking about one person’s wage or two?

    And therein is our greatest driver of poverty, while the entire economy is geared toward two income families, social mores accelerate single parenthood.

  14. Please provide an example of a country that has had a severe drop in living as of today compared to 150 years ago. Or even a country that has less access to water and cheap and plentiful sources of energy/power (electricity not being a fair request vis a vis 150 years ago). If there is one, I would be shocked.

    And as to your question about retirement - here are two answers. First, that we are even discussing “retirement” in the sense that I assume you mean in is itself a sign of great prosperity. The sort of retirement that exists in the American mind of today (and I presume similarly exists in Canada, UK, Australia, etc.) was never available to the general population of any society in history until the 20th Century. Prior to the 20th Century, 90%+ plus of the population were farmers, and did not ever “retire”. They continued to work until death or complete incapacitation - even old grandmas and grandpas helped raise the small children, cook, perform less physical (but sometimes more skilled) tasks - and did so largely living with their descendants. (The elderly who did not live with descendants and could no longer do enough work to support themselves usually became paupers and beggars and starved or lived on the sufferance of the community) The idea that the average person should be able to forego all economically productive activity while still having 20 or so years to live and spend those 20 years on an extended vacation was never even imagined prior to the 20th Century.

    Second, it is true that in the US at least, retirement of the type aspired to is a bit harder to reach for Gen X and younger than Baby Boomers and Greatest Generation. But that, I think, is because of a historical anomaly. As many have observed, the US post-WWII benefited from an artificial situation of being the only large industrial society left standing (metaphorically speaking) after the War. Therefore, there was such an excess of prosperity and little competition from abroad that we could afford things like employer guaranteed defined benefit pensions available to workers after only 20-25 years on the job (for many - in their mid 50s). But once the post-war playing field leveled out, this was not sustainable at the present level of global prosperity. But recognize that it was an anamoly - but we can hope overall global prosperity continues to rise, so retirements like this can be an achievable societal goal again!

  15. They also tend to repeat that humans ingenuity will save the day.

    I wouldn’t say we should expand population as much as possible, but that’s not what the article says. The point is that those people who keep saying the world is about to end because of overpopulation are not only wrong, but dead wrong. People are better off today than at any time in history. Wages may or may not have gained in purchasing power in the U.S., but around the world, there is no doubt that people are substantially better off than they were 50 years ago, in spite of doubling population.

    Again, you can keep repeating that eventually this innovation has to stop, it has to run out of resources. Maybe so, but until there is solid evidence that we are reaching that point, the mere fact that resources are ultimately limited says nothing about the state we are in. People keep pointing to the logic of limited resources, and keep being wrong. Look at Paul Ehrlich’s Wikipedia entry: “Ehrlich has acknowledged that some of what he predicted has not occurred, but maintains that his predictions about disease and climate change were essentially correct and that human overpopulation is a major problem.” Some of what he has predicted has not occurred? He literally wrote that hundreds of millions of people would starve – in the 1970’s, when population was half what it is now. If optimists were half as wrong as Ehrlich about actual events, they would be laughed out of society. Somehow, though, people continue to think that doomsday predictions about overpopulation will come true any day now.

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