Explaining the Ehrlich Simon bet once again and why Limits to Growth was wrong

Most of us are familiar with the story of the Ehrlich Simon bet (for those who aren't, details here.) Essentially, are minerals going to get ever more expensive as they run out or are we going to become ever more ingenious in our methods of finding them and extracting them so that they become cheaper? Bet on how prices move over a decade and see: Simon, taking the ever cheaper stance, wins and wins handily.

Don Boudreaux points us to a good review of a book on the subject and it contains all of the usual arguments about why Simon won. It's worth however looking at the details of exactly why Simon won.

The three metals that declined substantially in price over the decade were copper, tin and tungsten. Why?

The 80s saw the introduction of SX-EW for copper oxide ores. Before this we, as a species, had only extracted copper from sulphide ores. The alteration of an already known technique to work with copper oxide ores meant that large mountains of that material became usable to us. This is very much Simon's point about increasing ingenuity.

It also saw the collapse of the ITC, the commodity board keeping the tin price well above market clearing levels. And for tungsten the end of Maoist insanity in China led to increased mining and export from that country.

Simon did not, by any means, predict these three events. Rather, at heart, his bet was that enough of these sorts of things would happen over a decade that a basket of minerals would fall in price. It's not about the specifics at all: it's about the general trend driven by ever advancing technology.

Then there's this:

The state had to intervene massively to control population and save mankind. Commenting on the 1972 The Limits to Growth by the Club of Rome, a catastrophist monument by itself, zoology professor Bertram Murray said that “collapse is inevitable,” and that a new economic system was needed, “highly regulated,” and “managed by an international team of planners.”

To someone actually in the minerals business that Limits to Growth report is very strange. For there's an obvious mistake made in one of the basic assumptions. One that invalidates everything that comes after it. At least as far as minerals are concerned it is, quite simply, entirely wrong.

The assumption is this: total mineral availability will be ten times mineral reserves.

Seems simple enough but that's the horrible, glaring, error at the heart of the entire report.

Mineral reserves are the working stock of mines currently in production and those just about to go into production. It costs a lot of money to "prove" a reserve to the required legal and technical standard. We tend to therefore do so only for those minerals that we're going to dig up in the next 20-50 years. The time value of money is such that it's much cheaper to leave stuff we're not going to use in that timescale over in mineral resources (what we're pretty sure we can use but haven't "proven") or just in stuff we've not really looked at very closely.

And there is no relationship, no relationship at all, between the amount of stock we have in reserves and what there is in resources or total resources. Simply none: there are no reserves of gallium, germanium or indium, total resources are so vast we'll never use them. There are 30-60 years reserves of potassium and phosphorous, 1,500 and 13,000 year resources of them and total resources amounting to 0.2 and 2.5% of the entire surface of the planet.

There is simply no relationship at all between mineral reserves and the amount available for us to use in the future.

But note what happens if we assume that total resources are 10 times mineral reserves. Our reserves are, for those financial reasons, 30-50 years' worth of usage. We assume that there's only 10 times that available in total. Add in a bit of compound growth of usage and suddenly we're predicting that everything will run out in 150-200 years' time. What did the Club of Rome predict in Limits to Growth? That everything would run out in 150-200 years' time. Why? Because they assumed that total availability is only 10 times reserves.

It's all entirely horse puckey. And we really shouldn't be planning the future of the world or of the economy on such ordure. But somehow we are: more's the pity.