April 12, 2021

PITY THE POOR MALTHUSIANS:

Resources Are More Abundant Than Ever, and People Are the Reason (Marian L. Tupy and Gale Pooley • April 21, 2021, cato unbound)

Ehrlich and his group lost because they thought like biologists. In 1971, for example, Ehrlich and Holdren wrote that as "a population of organisms grows in a finite environment, sooner or later it will encounter a resource limit. This phenomenon, described by ecologists as reaching the 'carrying capacity' of the environment, applies to bacteria on a culture dish, to fruit flies in a jar of agar, and to buffalo on a prairie. It must also apply to man on this finite planet."

Simon won because he thought like an economist. He 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, Simon 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 freedom of 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's victory would have been even more impressive had he used time prices (TP). The TP denotes the amount of time that a buyer needs to work in order to earn enough money to be able to buy something. That is the relevant price from the individual's vantage point. Unlike money prices, which are measured in dollars and cents, TPs are measured in hours and minutes of labor.

The easiest way to calculate TP is to divide the nominal price by the nominal hourly income. If an item costs you $1 and you earn $10 per hour, then that item will cost you 6 minutes of work. If the price of the same item increases to $1.10 and your hourly income increases to $12, then that item will only cost you 5 minutes and 24 seconds of work. The most important thing to remember is that as long as hourly income is increasing faster than the money price, the TP will decrease.

As we already noted, over the course of the Simon-Ehrlich wager, the nominal price of the five-metal basket rose by 0.4 percent. Over the same period, the average global nominal GDP per hour worked increased by about 67 percent. To calculate the TP of the five-metal basket, we divided the nominal prices of the basket by the average global nominal GDP per hour worked. We found that the average TP of the five-metal basket fell by almost 40 percent. Had Simon and Ehrlich used TPs, Ehrlich would have owed Simon $627.57, or 8.93 percent more than he actually paid.

Remember that the bet between Simon and Ehrlich took into account the nominal prices of the five metals on September 29, 1980 and September 29, 1990. However, if we look at the average annual nominal prices of the five metals between 1980 and 1990, the average TP of the five-metal basket declines by 54.8 percent. So, for the same length of work, the average inhabitant of the globe saw his resource abundance increase from 1 basket of the five metals to 2.21 baskets. That amounts to a 121 percent increase in the average personal resource abundance (pRA). The average compound annual growth rate in personal resource abundance (CAGR-pRA) came to 8.27 percent, thus indicating a doubling of the average pRA every 8.7 years.

Posted by at April 12, 2021 5:57 PM

  

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