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44-451: 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,

88-588: A barrel oil soon?" and with oil trading in the $ 12/barrel range, David South offered $ 1,000 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 $ 1,000 with David South that the inflation-adjusted price of oil would decrease to an inflation-adjusted price of $ 25 by 2010 (down from what

132-451: A commodity bundle tends to change over time. In contrast, by definition, the real value of the commodity bundle in aggregate remains the same over time. The real values of individual goods or commodities may rise or fall against each other, in relative terms, but a representative commodity bundle as a whole retains its real value as a constant from one period to the next. Real values can for example be expressed in constant 1992 dollars , with

176-667: A distinction between "engineering” and "economic" forecasting. Engineering forecasting consists of estimating the amount of known physical amount of resources, extrapolates the rate of use from current use and subtracts one from the other. Simon argues that these simple analyses are often wrong. While focusing only on proven resources is helpful in a business context, it is not appropriate for economy-wide forecasting. There exist undiscovered sources, sources not yet economically feasible to extract, sources not yet technologically feasible to extract, and ignored resources that could prove useful but are not yet worth trying to discover. To counter

220-489: A pound in 1980 (equivalent to $ 14.42 in 2023), was down to $ 3.70 in 1990 (equivalent to $ 8.63 in 2023). Tin, which was $ 8.72 a pound in 1980 (equivalent to $ 32.25 in 2023), was down to $ 3.88 a decade later (equivalent to $ 9.05 in 2023). As a result, in October 1990, Paul Ehrlich mailed Julian Simon a check for $ 576.07 (equivalent to $ 1,343.48 in 2023) to settle the wager in Simon's favor. Julian Simon won because

264-417: A similar way. For example, the total value of a good produced in a region of a country depends on both the amount and the price. To compare the output of different regions, the nominal output in a region can be adjusted by repricing the goods at common or average prices. The Ultimate Resource The Ultimate Resource is a 1981 book written by Julian Lincoln Simon challenging the notion that humanity

308-409: A ten-year future period. The bets were: Simon declined Ehrlich and Schneider's offer to bet, and used the following analogy to explain why he did so: Let me characterize their offer as follows. I predict, and this is for real, that the average performances in the next Olympics will be better than those in the last Olympics. On average, the performances have gotten better, Olympics to Olympics, for

352-542: A variety of reasons. What Ehrlich and others says [ sic ] is that they don't want to bet on athletic performances, they want to bet on the conditions of the track, or the weather, or the officials, or any other such indirect measure. 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

396-493: A way that increases overall wellbeing while acknowledging that any increase in pollution is nevertheless a cost that must be considered in any such calculation . Simon's theory of resource development actually predicts some of the aforementioned trends, which do not in and of themselves even qualify as costs (unlike pollution). 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

440-486: Is a financial asset , g t {\displaystyle g_{t}} is a nominal interest rate and r t {\displaystyle r_{t}} is the corresponding real interest rate ; the first-order approximation r t = g t − i t {\displaystyle r_{t}=g_{t}-i_{t}} is known as the Fisher equation . Looking back into

484-459: Is calculated relative to a base or reference date. P 0 {\displaystyle P_{0}} is the value of the index at the base date. For example, if the base date is (the end of) 1992, P 0 {\displaystyle P_{0}} is the value of the index at (the end of) 1992. The price index is typically normalized to start at 100 at the base date, so P 0 {\displaystyle P_{0}}

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528-407: 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. If Simon had taken

572-636: Is not any particular physical object but the capacity for humans to invent and adapt. The work opens with an explanation of scarcity, noting its relation to price; high prices denote relative scarcity and low prices indicate abundance . Simon usually measures prices in wage-adjusted terms, since this is a measure of how much labor is required to purchase a fixed amount of a particular resource. Since prices for most raw materials (e.g., copper ) have fallen between 1800 and 1990 (adjusting for wages and adjusting for inflation ), Simon argues that this indicates that those materials have become less scarce. Simon makes

616-441: Is set to 100. The length of time between each value of t {\displaystyle t} and the next one, is normally constant regular time interval, such as a calendar year. P t {\displaystyle P_{t}} is the value of the price index at time t {\displaystyle t} after the base date. P t {\displaystyle P_{t}} equals 100 times

660-411: Is the change in the price index divided by the price index value at time t − 1 {\displaystyle t-1} : i t = P t − P t − 1 P t − 1 {\displaystyle i_{t}={\frac {P_{t}-P_{t-1}}{P_{t-1}}}} expressed as a percentage. The nominal value of

704-540: Is the inflation rate. For values of i t {\displaystyle i_{t}} between −1 and 1 (i.e. ±100 percent), we have the Taylor series so Hence as a first-order ( i.e. linear) approximation, The bundle of goods used to measure the Consumer Price Index (CPI) is applicable to consumers. So for wage earners as consumers, an appropriate way to measure real wages (the buying power of wages)

748-453: Is to divide the nominal wage (after-tax) by the growth factor in the CPI. Gross domestic product (GDP) is a measure of aggregate output. Nominal GDP in a particular period reflects prices that were current at the time, whereas real GDP compensates for inflation. Price indices and the U.S. National Income and Product Accounts are constructed from bundles of commodities and their respective prices. In

792-404: The value of an asset in relation to its purchasing power . In macroeconomics, the real gross domestic product compensates for inflation so economists can exclude inflation from growth figures, and see how much an economy actually grows. Nominal GDP would include inflation, and thus be higher. A commodity bundle is a sample of goods , which is used to represent the sum total of goods across

836-423: The 19th century; oil since the 1850s; and various metals since the 1970s. Based on preliminary research for The Ultimate Resource , Simon and Paul Ehrlich made a famous wager in 1980, betting on a mutually agreed upon measure of resource scarcity over the decade leading up to 1990. Ehrlich was the author of a popular book, The Population Bomb , which argued that mankind was facing a demographic catastrophe with

880-413: The base year are respectively: The real wage each year measures the buying power of the hourly wage in common terms. In this example, the real wage rate increased by 20 percent, meaning that an hour's wage would buy 20% more goods in year 2 compared with year 1. As was shown in the section above on the real growth rate, where and as a first-order approximation, In the case where the growing quantity

924-513: The bet had been for a different period, or if the start date had been different. 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 (from 1980 to 2011), then Simon would have lost on four of the five metals. However, economist Mark J. Perry noted that for an even longer period of time, from 1934 to 2013,

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968-529: The bet, he would have lost on 11 out of 15 trends. In 1996, Simon bet $ 1,000 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 (before his death in 1998) based on his expectation that prices would remain above 1996 levels (which they did). In 1999, when The Economist headlined an article entitled, "$ 5

1012-408: The book is that natural resources are infinite. Simon argues not that there is an infinite physical amount of, say, copper, but for human purposes that amount should be treated as infinite because it is not bounded or limited in any economic sense, because: The ever-decreasing prices, in wage-adjusted terms , indicate decreasing scarcity, in that it takes less time for the average worker to earn

1056-445: The case of GDP, a suitable price index is the GDP price index. In the U.S. National Income and Product Accounts, nominal GDP is called GDP in current dollars (that is, in prices current for each designated year), and real GDP is called GDP in [base-year] dollars (that is, in dollars that can purchase the same quantity of commodities as in the base year). then real wages using year 1 as

1100-421: 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

1144-400: The economy to which the goods belong, for the purpose of comparison across different times (or locations). At a single point of time, a commodity bundle consists of a list of goods, and each good in the list has a market price and a quantity. The market value of the good is the market price times the quantity at that point of time. The nominal value of the commodity bundle at a point of time is

1188-587: The end of civilization brought on by a crisis of resources. Simon lists several past unfounded environmental fears in order to back his claim that modern fears are nothing new and will also be disproven. Some of the "crises" he notes are a shortage of tin in the 13th century BCE ; disappearing forests in Greece in 550 BCE and in England in the 16th century to 18th century CE ; food in 1798; coal in Great Britain in

1232-404: The following decade. As a result, in October 1990, Paul Ehrlich mailed Julian Simon a check for US$ 576.07 to settle the wager in Simon's favor. A large section of the book is dedicated to showing how population growth ultimately creates more resources. The basic argument echoes the overarching thesis: as resources become more scarce, the price rises, creating an incentive to adapt. It suggests that

1276-492: The growth factor of the price index. Real values can be found by dividing the nominal value by the growth factor of a price index. Using the price index growth factor as a divisor for converting a nominal value into a real value, the real value at time t relative to the base date is: The real growth rate r t {\displaystyle r_{t}} is the change in a nominal quantity Q t {\displaystyle Q_{t}} in real terms since

1320-473: 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". Understanding that Simon wanted to bet again, Ehrlich and climatologist Stephen Schneider counter-offered, challenging Simon to bet on 15 current trends, betting $ 1,000 that each will get worse (as in the previous wager) over

1364-461: The money required to purchase a set amount of some commodity. This suggests, Simon claims, an enduring trend of increased availability that will not cease in the foreseeable future, despite continued population growth. A plurality of the book consists of chapters showcasing the economics of one resource or another and proposing why this resource is, for human purposes, infinite. Simon argues that for thousands of years, people have always worried about

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1408-417: The past, the ex post real interest rate is approximately the historical nominal interest rate minus inflation. Looking forward into the future, the expected real interest rate is approximately the nominal interest rate minus the expected inflation rate. Not only time-series data, as above, but also cross-sectional data which depends on prices which may vary geographically for example, can be adjusted in

1452-443: 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

1496-399: The previous date t − 1 {\displaystyle t-1} . It measures by how much the buying power of the quantity has changed over a single period. where g t {\displaystyle g_{t}} is the nominal growth rate of Q t {\displaystyle Q_{t}} , and i t {\displaystyle i_{t}}

1540-459: The price level fixed 100 at the base date. The price index is applied to adjust the nominal value Q {\displaystyle Q} of a quantity, such as wages or total production, to obtain its real value. The real value is the value expressed in terms of purchasing power in the base year. The index price divided by its base-year value P t / P 0 {\displaystyle P_{t}/P_{0}} gives

1584-422: 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 asserted "that humanity would never run out of anything". Ehrlich added that he and fellow scientists viewed renewable resources as more important indicators of

1628-410: The problems of engineering forecasting, Simon proposes economic forecasting, which proceeds in three steps in order to capture, in part, the unknowns the engineering method leaves out (p 27): # Ask whether there is any convincing reason to think that the period for which you are forecasting will be different from the past, going back as far as the data will allow Perhaps the most controversial claim in

1672-430: The rate of population growth quickly outstripping growth in the supply of food and resources. Simon was highly skeptical of such claims. Simon had Ehrlich choose five of several commodity metals. Ehrlich chose five metals: copper, chromium, nickel, tin, and tungsten. Simon bet that their prices would go down. Ehrlich bet they would go up. The basket of goods, costing US$ 1,000 in 1980, fell in price by over 57 percent over

1716-437: 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. Some observers have argued that Ehrlich could have won if

1760-509: The total market value of the commodity bundle, depending on the market price, and the quantity, of each good in the commodity bundle which are current at the time. A price index is the relative price of a commodity bundle. A price index can be measured over time, or at different locations or markets. If it is measured over time, it is a series of values P t {\displaystyle P_{t}} over time t {\displaystyle t} . A time series price index

1804-493: The value of the commodity bundle at time t {\displaystyle t} , divided by the value of the commodity bundle at the base date. If the price of the commodity bundle has increased by one percent over the first period after the base date, then P 1 = 101. The inflation rate i t {\displaystyle i_{t}} between time t − 1 {\displaystyle t-1} and time t {\displaystyle t}

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1848-424: The wager period. 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 he 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

1892-399: Was running out of natural resources . It was updated in 1996 as The Ultimate Resource 2 . The overarching thesis on why there is no resource crisis is that as a particular resource becomes more scarce , its price rises. This price rise creates an incentive for people to discover more of the resource, ration and recycle it, and eventually, develop substitutes. The "ultimate resource"

1936-493: Was then $ 30/barrel). Madjd-Sadjadi paid South an inflation-adjusted $ 1,242 in January 2010. The price of oil at the time was $ 81/barrel. Inflation-adjusted In economics , nominal value refers to value measured in terms of absolute money amounts, whereas real value is considered and measured against the actual goods or services for which it can be exchanged at a given time. Real value takes into account inflation and

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