There can be no expectation that the long-term trend in the price of coal (and other minerals) will be anything but upward—and I would be prepared to bet on this with Simon if he were still alive.
Carden steps in and declares himself willing to take up the cudgels on Julian Simon’s behalf, and challenges me to accept a similar bet, as he details in the review. I accept his challenge.
The original wager between Simon and Paul Ehrlich was made in 1980, and turned on the clash between two world views. There was Simon’s belief that endless substitution of one commodity by another would, through the operation of market forces, ensure that commodity prices would decline. Ehrlich’s belief was that population pressures would be so strong that demand for commodities would grow and drive prices up. As we all know, Simon won the bet. But as recent commentators have noted, it all depends on where the start line is taken and over what period the bet is taken. Adam Smith Institute senior fellow Tim Worstall, for example, in a Jan. 13, 2013 column for Forbes.com, demonstrates that Ehrlich would have won the bet on several alternative timelines and choices of commodities baskets, particularly in the decade 2000 to 2010. And as Financial Times writer Henry Sanderson points out in his August 18, 2013 column, commodity prices overall since 1975 hardly seem to favor Simon over Ehrlich.
I want to make it clear why I am accepting this bet. I am not certain as to Carden’s world view, but it seems to be a McCloskeyan view that market forces are powerful instruments that can solve most problems, including problems of growing shortages of commodities as huge countries like China and India proceed with their long-delayed industrialization. My world view is that capitalism is a powerful human innovation that is an unparalleled wealth creator, but that for the first two centuries of industrialization it has benefited only a few “advanced” countries in North America, Europe, and Japan. Now it is the turn of the rest, so in the 21st century we see emerging giants like China and India claiming their share. They are likely to put enormous stresses on commodity and fossil fuel supplies if they continue to grow the traditional “business as usual” economy, or what I call the “black economy.” But because of geopolitical pressures and immediate environmental concerns, these countries are also growing a “green economy” that is based on generation of power from renewable resources and recirculation of resources via a circular economy. Consequently I see these countries as driving the “next” great transformation as they switch away from conventional fuels and commodities to products of manufacturing: renewable power from manufactured devices like solar cells and wind turbines, and resource recirculation (e.g. “urban mining”) via the innovation of a “circular economy.” (For more on this, see my articles with Hao Tan, “Economics: Manufacture Renewables to Build Energy Security,” Nature, Sept. 10, 2014, and “Circular Economy: Lessons from China,” Nature, March 23, 2016.) So there are two kinds of economies bidding for supremacy in these emerging giants: a black and a green economy. Which one wins will be the outcome of a political struggle because the state plays an all-important role in these industrializing economies.
How is this likely to affect commodity and fuel prices? In the medium term there is likely to be a peaking in demand as China, India, et al. scale up, driving up prices. In the longer term, it is likely that the green economy will supersede the black economy, where costs will be falling—and the price of energy is likely to reflect those cost falls. So I judge it likely that there will be a rising trend in prices for industrial commodities over the course of the next decade because of the continued dominance of the black economy, but energy prices will fall as the green economy overtakes the black economy and power generated from manufactured devices becomes more important than power generated from fossil fuels. As previous industrial transitions demonstrate, the lower cost process or product tends to drive the higher-priced product out of the market.
In terms of the bet itself, I see the point of replicating the original Simon–Ehrlich basket of commodities over a 10-year period. I accept this aspect of Carden’s challenge. But the commodities concerned—copper, chromium, nickel, tungsten, and tin—are no longer central to industry. So I agree that we should have a further bet involving fossil fuels—particularly coal, oil, and natural gas—because they are central to the industrializing efforts of both China and India. We could agree to take the NYMEX prices of these three commodities as benchmark, in the way proposed by Carden (but without heating oil and gasoline, which are processed versions of crude oil). We could start the twofold bet on January 1, 2017 and take it up to December 31, 2026, a full decade. We could agree and publicly announce the procedures to govern the bet, including an amendment to Carden’s proposal to the effect that the winner be declared by a neutral arbiter, and that the winnings be paid to a nonprofit institution of the winner’s choice. We could revisit the bet each year to review how we are each traveling. And if circumstances allow, we could create a second round of the bet in the following decade, 2027 to 2036.
I am confident in taking on this bet because I am confident that we are moving toward a world that is greening, where energy, water, and food will become cleaner, safer, more abundant—and cheaper. This is because I view the dominant greening trends as substituting manufactured products for products based on natural resources that are mined, drilled, or otherwise extracted from the earth or grown in the earth. In energy China is clearly moving to a system that prioritizes renewable power (clean, safe, abundant, and cheap) over fossil fuels. (See my most recent discussion, “China’s Continuing Renewable Energy Revolution—Latest Trends in Electric Power Generation,” Asia-Pacific Journal, Vol. 14, Issue 16, No. 6 [Sept. 1, 2016].) In the case of water, desalination processes linked to solar power make it increasingly feasible to source water from the ocean, which is analogous to sourcing electric power from renewable and abundant resources. In the case of food, we see that plants and vegetables will increasingly be grown and harvested in an enclosed environment, utilizing renewable energy and desalinated water (for an example, see my article “Tomatoes Watered by the Sea: Sprouting a New Way of Farming,” TheConversation.com, Feb. 16, 2014), while traditional animal products like meat, eggs, and milk will increasingly be produced through tissue culture on a vast scale (like brewing) without murdering or torturing animals.
There are two kinds of economies bidding for supremacy in China and India: a black one and a green one. Which one wins will be the outcome of a political struggle because of the state’s role in these industrializing economies.
I see China and (eventually) India as driving these greening trends, just as the United States was the dominant power driving the fossil-fueled industrial paradigm in the 20th century. This is the context within which commodity prices will increasingly be set in a shrinking “black economy” with less and less influence being imposed from shortages of natural ores and mineral sources. Capital is likely to flow increasingly to these clean, green, and safe processes rather than traditional fossil-fueled and commodity-driven processes, making their investment costs lower. This is what I am calling the greening of capitalism and I see it as substituting manufactured (artificial) processes and products for “natural” products and processes. That is why I see the long-term cost trend of “natural” commodities (in the black economy) as upward as they become subject to shortages, and the long-term cost trend of renewable power, renewable water, and cultured food as downward in the emerging green economy. The forces driving these cost and price dynamics are very different from those that guided the thinking of both Ehrlich and Simon.
