Are we running out of resources? Many scholars, including Thomas Malthus and Paul Ehrlich, believed that population growth would result in the exhaustion of resources and a global catastrophe. University of Maryland economist Julian Simon rejected their ideas. In his 1981 book The Ultimate Resource, Simon argued that humans were intelligent beings, capable of innovating their way out of shortages through greater efficiency, increased supply, and the development of substitutes. In 1980, Simon and Ehrlich bet on the future price of $1,000 worth of five metals (copper, chromium, nickel, tin and tungsten). If the aggregate price of the five metals rose above $1,000, Simon would pay the inflation-adjusted difference to Ehrlich. If it fell below $1,000, Ehrlich would pay Simon. In spite of a population increase of 873 million over those 10 years, the five metals declined in price by an average of 57.6 percent. In 1990, Ehrlich mailed Simon a check for $576.07 (read more). The Simon Project aims to continue to explore the relationship between population growth and resource availability using four new concepts: Time Price, Price Elasticity of Population, the Simon Abundance Framework and Simon Abundance Index.
Time Price of Resources
“The real price of everything…is the toil and trouble of acquiring it…What is bought with money or with goods is purchased by labor,” Adam Smith (The Wealth of Nations, 1776)
The time price denotes the amount of time that a person has to work in order to earn enough money to buy something. To calculate the time price, the nominal (or current) money price is divided by nominal hourly income. Dollars and cents are thus converted to hours and minutes of labor. The chart below shows the percentage changes in the time price of 50 basic commodities between 1980 and 2017.
It is important to remember that things can become more affordable in two ways. First, the money price can decrease. Second, hourly income can increase. The time price captures both the price fluctuations and the value of labor. In a recent study that looked at the prices of food and beverages, metals, energy, raw materials and precious metals, we found that:
- Between 1980 and 2017, the average time price of a basket of 50 basic commodities fell by 64.7 percent.
- Commodities that took 60 minutes of work to buy in 1980 took only 21 minutes of work to buy in 2017.
- Put differently, the time it took to earn enough money to buy one unit in that basket of commodities in 1980 bought 2.83 units in 2017.
- A 64.7 percent drop in the time price of commodities between 1980 and 2017 translates to an annual compounded rate of decline of 2.77 percent.
- That means that, should the current trends continue, commodities will become 50 percent cheaper every 26 years.
Observing changes in time prices over time provides a superior way of measuring abundance. A major advantage of time prices is that scholars do not have to worry about adjusting nominal prices for inflation, which necessitates a search for appropriate deflators and base years. To learn more about time prices, please watch the video below.
Price Elasticity of Population
“Most people assume that population growth leads to resource depletion. In fact, over the past 37 years, every additional person appears to have made resources proportionately more plentiful for the rest of us.”
According to Julian Simon, commodities grow more plentiful not in spite of population growth, but because of it. With every hungry mouth comes a brain capable of reason and innovation. Was he correct? The Price Elasticity of Population (PEP) can help us answer that question.
In economics, elasticity is a measure of a variable’s sensitivity to a change in another variable. Consider the relationship between price and demand. If the price of X increases by 50 percent and the purchases of X fall by 25 percent, then we can say that for every percentage point increase in the price of X, the demand for X decreased by half a percentage point. The relevant equation here is:
|Price elasticity of X =||
% change in the quantity of X purchased
% change in price of X sold
Why is this concept important? If the PEP value ends up being positive, we will be able to infer that the time price of commodities increased in response to population growth. If the PEP value ends up being negative, we will be able to infer that the time price of commodities declined in response to population growth. The relevant equation here is:
% change in time-price
% change in population
The PEP value of -0.934 indicates that the time price of our basket of 50 commodities declined by 0.934 percent for every 1 percent increase in population. As was already noted, people often assume that population growth leads to resource depletion. We found the opposite. Over the past 37 years, every additional human being born on our planet appears to have made resources proportionately more plentiful for the rest of us. To learn more about Price Elasticity of Population, please watch the video below.
Simon Abundance Framework
"Considering that time price of resources decreased at a faster proportional rate than population increased between 1980 and 2017, we calculate that humanity is experiencing a time of superabundance."
In this section, we use PEP values to propose four zones of resource abundance. These zones are demarcated by lines, which reflect the magnitude of the change in the time price of commodities relative to population growth or PEP. We call this progression from scarcity to greater abundance the Simon Abundance Framework.
- When the PEP is greater than 1, the time price of commodities increases faster than population. PEP > 1 can be referred to as the decreasing abundance zone.
- When the PEP equals 1, the time price of commodities and population change at the same rate. PEP = 1 can be referred to as the sustaining line.
- When the PEP is smaller than 1 but greater than 0, the time price of commodities increases at a slower rate than does population. PEP < 1 and > 0 can be referred to as the emerging abundance zone.
- When the PEP equals 0, the time price of commodities does not change as population increases. PEP = 0 can be referred to as the inversion line.
- When the PEP is less than 0, the time price of commodities decreases while population increases. Note that PEP < 0 can denote two additional zones of abundance: the accelerating abundance zone or the superabundance zone. These two zones are divided by the Nirvana line.
The Nirvana Line separates accelerating abundance (i.e., time price decreases as population increases) from superabundance (i.e., time price decreases at a faster proportional rate than population increases). The Nirvana Line Equation (NLE) specifies the exact amount past which time price must decline for abundance to increase at a faster rate than population growth.
Note that the relationship between time price decline and population growth is nonlinear. For example, if population increases by 50 percent, time price must decline by 33 percent for abundance to continue to increase at a faster rate than population growth. The relevant equation here is:
(1 + % change in population)
(1 + 0.5)
As noted previously, population increased by 69.3 percent between 1980 and 2017. To qualify for superabundance, therefore, the time price of our basket of commodities has to fall by at least 40 percent. The relevant equation here is:
(1 + % change in population)
(1 + 0.693)
Considering that the time price of our basket of commodities declined by 64.7 percent, we can conclude that the world is experiencing superabundance. Should the time price of our basket of commodities fall at a somewhat slower rate than the NLE determines in the future, the economy will revert to accelerating abundance. To learn more about the Simon Abundance Framework, please watch the videos below.
Simon Abundance Index
“Between 1980 and 2017, resource availability increased at a compounded annual growth rate of 4.32 percent. That means that the Earth was 379.6 percent more abundant in 2017 than it was in 1980."
The Simon Abundance Index (SAI) measures the change in abundance of resources over a period of time. The SAI represents the ratio of the change in population over the change in the time price, times 100. It has a base year of 1980 and a base value of 100. According to our calculations, which were published in 2018, the value of the SAI stood at 479.6. Put differently, the Earth was 4.796 times as plentiful in 2017 as it was when Ehrlich and Simon commenced their famous wager. The relevant equation here is:
(1 + % change in population)
(1 + % change in time-price)
(1 + 0.693)
(1 - 0.647)
To learn more about the Simon Abundance Index, please watch the video below.