Simon–Ehrlich wager


The Simon–Ehrlich wager was a 1980 scientific wager between business professor Julian L. Simon and biologist Paul Ehrlich, betting on a mutually agreed-upon measure of resource scarcity over the decade leading up to 1990. The widely-followed contest originated in the pages of Social Science Quarterly, where Simon challenged Ehrlich to put his money where his mouth was. In response to Ehrlich's published claim that "If I were a gambler, I would take even money that England will not exist in the year 2000" Simon offered to take that bet, or, more realistically, "to stake US$10,000... on my belief that the cost of non-government-controlled raw materials will not rise in the long run."
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, chromium, nickel, tin, and tungsten. The bet was formalized on September 29, 1980, with September 29, 1990, as the payoff date. Ehrlich lost the bet, as all five commodities that were bet on declined in price from 1980 through 1990, the wager period.

Background

In 1968, Ehrlich published The Population Bomb, which argued that mankind was facing a demographic catastrophe with the rate of population growth quickly outstripping growth in the supply of food and resources. Simon was highly skeptical of such claims, so proposed a wager, telling Ehrlich to select any raw material he wanted and select "any date more than a year away," and Simon would bet that the commodity's price on that date would be lower than what it was at the time of the wager.
Ehrlich and his colleagues picked five metals that they thought would undergo big price increases: chromium, copper, nickel, tin, and tungsten. Then, on paper, they bought $200 worth of each, for a total bet of $1,000, using the prices on September 29, 1980, as an index. They designated September 29, 1990, 10 years hence, as the payoff date. If the inflation-adjusted prices of the various metals rose in the interim, Simon would pay Ehrlich the combined difference. If the prices fell, Ehrlich et al. would pay Simon.
Between 1980 and 1990, the world's population grew by more than 800 million, the largest increase in one decade in all of history. But by September 1990, the price of each of Ehrlich's selected metals had fallen. Chromium, which had sold for $3.90 a pound in 1980, was down to $3.70 in 1990. Tin, which was $8.72 a pound in 1980, was down to $3.88 a decade later.
As a result, in October 1990, Paul Ehrlich mailed Julian Simon a check for $576.07 to settle the wager in Simon's favor.

Analysis

Julian Simon won because the price of three of the five metals went down in nominal terms and all five of the metals fell in price in inflation-adjusted terms, with both tin and tungsten falling by more than half. In his book Betrayal of Science and Reason, Ehrlich wrote that Simon " that humanity would never run out of anything". Ehrlich added that he and fellow scientists viewed renewable resources as more important indicators of the state of planet Earth, but that he decided to go along with the bet anyway. Afterward, Simon offered to raise the wager to $20,000 and to use any resources at any time that Ehrlich preferred. Ehrlich countered with a challenge to bet that temperatures would increase in the future. The two were unable to reach an agreement on the terms of a second wager before Simon died.
Ehrlich could have won if the bet had been for a different ten-year period. Ehrlich wrote that the five metals in question had increased in price between the years 1950 and 1975. Asset manager Jeremy Grantham wrote that if the Simon–Ehrlich wager had been for a longer period, then Simon would have lost on four of the five metals. He also noted that if the wager had been expanded to "all of the most important commodities," instead of just five metals, over that longer period of 1980 to 2011, then Simon would have lost "by a lot."
Economist Mark J. Perry noted that for an even longer period of time, from 1934 to 2013, the inflation-adjusted price of the Dow Jones-AIG Commodities Index showed "an overall significant downward trend" and concluded that Simon was "more right than lucky". Economist Tim Worstall wrote that "The end result of all of this is that yes, it is true that Ehrlich could have, would have, won the bet depending upon the starting date.... But the long term trend for metals at least is downwards."

The proposed second wager

Understanding that Simon wanted to bet again, Ehrlich and climatologist Stephen Schneider counter-offered, challenging Simon to bet on 15 current trends, betting $1000 that each will get worse over a ten-year future period.
The bets that has mostly no economic effect on people would continue to worsen were:
Simon declined Ehrlich and Schneider's offer to bet, and used the following analogy to explain why he did so:
In his 1981 book The Ultimate Resource, Simon noted that not all decreases in resources or increases in unwanted effects correspond to overall decreases in human wellbeing. Hence there can be an "optimal level of pollution" which accepts some increases in certain kinds of pollution in a way that increases overall wellbeing, while acknowledging that any increase in pollution is nevertheless a cost which must be considered in any such calculation. Some of the trends listed above are actually predicted by Simon's theory of resource development, and do not in themselves even count as costs. E.g., he pointed out that due to increased efficiency, the amount of cropland required and actually used to grow food for each person has decreased over time and is likely to continue to do so. The same might potentially be true of decreased reliance on firewood in developing countries, and per capita use of specific food sources like rice, wheat, and fish, if economic development makes a diverse range of alternative foods available. Some have also proven false, e.g., the amount of ozone in the lower atmosphere has decreased from 1994 to 2004.

Other wagers

In 1996, Simon bet $1000 with David South, professor of the Auburn University School of Forestry, that the inflation-adjusted price of timber would decrease in the following five years. Simon paid out early on the bet in 1997 based on his expectation that prices would remain above 1996 levels.
In 1999, when The Economist headlined an article entitled, "$5 a barrel oil soon?" and with oil trading in the $12/barrel range, David South offered $1000 to any economist who would bet with him that the price of oil would be greater than $12/barrel in 2010. No economist took him up on the offer. However, in October 2000, Zagros Madjd-Sadjadi, an economist with The University of the West Indies, bet $1000 with David South that the inflation-adjusted price of oil would decrease to an inflation-adjusted price of $25 by 2010. Madjd-Sadjadi paid South an inflation-adjusted $1,242 in January 2010. The price of oil at the time was $81/barrel.