|Ehrlich-Simon wager according to the Wall Street Journal, Jonathan V. Last, August 30, 2013, more less he sam time I started analyzing this wager.|
The fact that Ehrlich "lost" according to the omnipotent neoliberal economists was used broadly as a vindication of the power of economics in predicting what would happen in the physical world. But were the economists mostly spouting nonsense, as is their long-standing tradition?
|Natural copper. Copper is one of the most important metals in the global economy that gravitates towards the "low carbon solutions" (whatever this term may mean to you). Source: Wikipedia.|
In short, Simon challenged Ehrlich to choose any raw material he wanted and a date more than a year away, and he would wager on the inflation-adjusted prices decreasing as opposed to increasing. Ehrlich chose copper (Cu), chromium, nickel (Ni), tin (Sn), and tungsten. The bet was formalized on September 29, 1980, with September 29, 1990, as the payoff date.
Since chromium is a stainless steel additive and tungtsen a rare earth metal, the consistent monthly price data for these two metals are missing in public domain. Consequently, I replaced chromium with zinc (Zn) and tungsten with silver (Ag). Zinc is used as a component of bronze and for metal plating to prevent corrosion. Silver is an essential metal used in electronics, solar cells, but also in coins, jewelry, etc.
Because I started to analyze this wager around September 2013, my starting date was September 29, 1982, not 1980. This is how far back the public domain price data went. Here I will update the wager and question its usefulness in the physical world and in empirical economics.
Let me begin with the "inflation adjusted prices." This term may be well defined when we focus on the USA with our global reserve currency and carefully orchestrated inflation index. As recent work of my brilliant PhD student, Philip Mitchell, shows however, other countries suffer from (a) their own oft erratic inflation rates and (b) the inevitable speculation related to the rate of exchange of their currencies to the US dollar (item (b) feeds into item (a)). Thus, for most countries on the planet, the US inflation adjusted index makes little sense. To put it simply, one day a unit of some currency may buy a different quantity of goods denominated in USD, than next day - while the US dollar price of that good remains constant. The last I checked, most people in the world live outside of the USA.
Let me now focus on inflation in the US. The "observed" inflation is a simple story by definition. The Central Bank here pretty much sets the inflation's pace by political considerations and by manipulating carefully interest rate and printing money. As we will point out in our upcoming paper, as of recent, this printing out has gotten rather out of hand.
After this preamble, let's look now at the metal prices in dollars of the day, and see how they correlate with the WTI price. The portfolio prices have been above the oil price most of the time, and were well correlated with the oil price. After 2008, this correlation became almost prefect. Since you already know about the role crude oil plays in the human economy, you understand why. If you buy metals on the world market, and your currency is not pegged to dollar, you likely pay attention only to the dollar of the day, and constant 1982 dollars mean little to you. This is the first major fallacy of the Simon-Ehrlich wager.
The second major fallacy stems from the abstract way economists think about material goods. A tacit assumption in economics is that if price of something becomes too high this thing can be replaced with another one made from different materials and using a different technology. But this way of thinking is incorrect when your task is to buy a specific metal for specific applications. Copper wires, for example, could be replaced with aluminum ones, but no one in their right mind would volunteer this replacement. I know because my parent's house was built by Germans during WWII, when copper was unavailable for civilian uses. So all the wiring in our house was made of aluminum. When used, the wires would really heat up, because of their higher specific resistance that was not offset by the larger wire cross-sections. Also aluminum flows under the pressure of screws in the outlets and in appliances, so most wire contacts would become loose and would spark and/or overheat. Bad news all around.
|Here is my olive branch to the economists. The question I ask is this: How much of a metal and oil would the constant 1982 dollars buy, if they bought one unit of each in September 1982.|
|A follow up to the previous graph. A slightly different question I ask is this: How much of a metal and oil would dollars of the day buy, if they bought one unit of each in September 1982. Note the incredible impact of the stagnating production rate of conventional oil worldwide. The world to the left of the vertical dotted line is different from that to the right. Some of the conventional pushback is summarized here.|