From: dean@vexcel.com (dean alaska)
Subject: Population Growth and the Bet that Paul Ehrlich Lost
Organization: VEXCEL Corporation, Boulder, CO
Date: Thu, 20 Aug 1992 16:43:48 GMT


[John McCarthy has frequently mentioned this bet that Paul Ehrlich lost 
when population issues have come up.  I thought this analysis of the
issues behind the bet might be interesting to some.  Another post on
a _new_ bet is forthcoming. The italics, indicated by underscores,
are from the original - dingo]

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			Betting on the Future

	or "How Julian Simon Could Win the Bet and Still Be Wrong"

by Virginia Abernathy

from the Carrying Capacity Network Newsletter; posted without permission

Paul Ehrlich needs no introduction as a biologist, but he may become better
known as the life-scientist who lost a bet to economist Julian Simon.  Ehrlich
bet that human population growth would cause progressive deterioration in 
quality of life _as measured by rising prices_ in essential commodities,
deflated to 1980 dollars.

Simon offered Ehrlich the choice of commodities.  Ehrlich chose five base
metals.  Prices in December, 1990 were to be compared with prices from 10 years
earlier.  Since prices actually fell in the interval, Simon won the bet.

Most economists would have bet on Simon from the start, even without the
correction for inflation, but many of them also know that Ehrlich is right.
Quality of life did deteriorate in the ten year interval (Brown, 1990), and
population growth _will_ cause further deterioration.  Through most of this
decline, real prices of essential commodities may change little.

Prices reflect both supply and effective demand.  "Effective" means that demand
is coupled with the ability to buy using either money, credit or barter.
Several developments associated with population can effect both supply and
effective demand, so that prices do not rise and, indeed, may fall.

Consider first the _supply_ side.  Labor is used in the production of
virtually all commodities.  The ratio of labor to capital can often be varied, 
and the producer's choice of labor-intensive or capital-intensive typically
depends on a comparison of costs.  When population grows, the labor supply
increases, workers lose bargaining power, and the cost of labor falls.

The lower and lower value put on human labor manifests itself in many ways.
Low wages are just one way.  Unsafe working conditions are another.  Both
reduce producer costs.

As the costs of labor falls, producers tend to shift toward a labor-intensive
process.  More jobs are created but, with little capital (such as machinery)
behind each worker, the productivity of labor falls and wages are depressed
further.

This cycle of an increasing labor supply, a shift to labor-intensive production
processes, creation of _decreasingly_ productive jobs, and stagnant or
_falling_ prices is found in virtually all Third World countries.  
It also describes some labor-intensive agricultural and service sectors 
in the U.S.  Prices of the output (commodity) can remain low because labor, 
a key factor of production, does not push up costs.  Indeed, cheap labor 
substitutes for capital in some instances, lowering costs.

Input costs and, therefore, prices have remained stable until now for a second
reason.  Many producers _avoid_ some of the _true_ costs of production, and
other producers seem _unaware_ of their true costs.  In competitive markets, 
both kinds of producers tend to underprice their output. 

Pollution of air and water is one example of a true cost that, until recently,
was seldom, or scarcely, borne by the producer.  Such environmental costs were
mostly externalized, i.e., not paid by the producer but spread over society
at large.  Regulation such as the 1990 Clean Air Act (which is projected to
add $25 billion annually to U.S. producer costs) forces businesses to pay for
something that was formerly free, and the added cost could push prices upward.
However, higher prices are by no means certain.

Prices remain low if the regulated activity shifts to a country where the
pollution costs can still be externalized.  In fact, many third world countries
accept environmental hazards in return for jobs.  This tradeoff is likely to
continue so long as countries have population growth and an underemployed
labor force.  Need for foreign exchange also drives Third World governments to
subsidize enterprises, or indeed become the producing entity, without regard
for pollution, labor conditions, or resource depletion.

The more desperate producer-countries become, the lower (for a time) will be
the price.  The effect on commodity prices is worldwide because producers in
regulated environments must meet the lower-cost competition or go out of
business.

_Using up_ slowly (or non)renewable resources is another cost of production.
Producers bear these losses often without recognizing them as true costs.  
Examples include depletion of topsoil and underground fossil water.

Natural capital of this type is disappearing at a great rate.  Iowa, for
example, has lost 50% of its topsoil since the advent of farming in the 19th
century.  Similarly, the drawdown of U.S. aquifers is proceeding quickly,
and has led, for example, to abandonment of over 300,000 formerly-irrigated
acres in Arizona alone.

Substitution for basic inputs will be difficult, Julian Simon nowithstanding.
Moreover there may be an interaction effect: up to now, irrigation and
petroleum-based fertilizers have compensated for the deterioration in the
innate productivity of the land.  But even a temporary rise in the price
of petroleum and decisions to cut back on fertilizer could unmask the
hidden cost of topsoil loss.  Water priced at _true_ cost could also
discourage fertilizer use, because benefits depend on plentiful moisture.

One cannot rule out price increases when the true costs of production are
taken into account.  Changes could be sudden if politically mandated, for
example, or if there is a marked shift in producer thinking about costs.

Markets bring us to _effective demand_.  Growing populations command less
and less for their labor and thus have little to spend.  They do not expand
the market.  They exert negligable effective demand.  _They go without_.
Thus, population growth causes very little _pull_ on commodity prices.

Here, I think is the crux of the matter.  It is commonly assumed that
population growth translates into higher demand; one expects that prices will
rise as more people chase resources.  Wrong.  People do not chase resources.
Money does.

Most of the worlds 5.4 billion people are becoming poorer as they compete 
against each other for jobs.  Most lose purchasing power on a yearly basis.
Increasing numbers drop out of the consumer market altogether, exerting no
effective demand.  Thus, "In December, [1990] oat prices and wheat prices
sank to their lowest levels since 1972" (Ingersoll, 1992. p.C12) while
more people than before starved or lived on the edge of famine (Brown, 1990).

Corrected for inflation, prices may indeed change little in the coming years.
But the reassuring reasons that Simon sees through his rose-tinted glasses -
resource substitution and greater efficiency - are not sufficient to account
for their stability.

Commodities will be stably priced because they are produced by cheaper and
cheaper labor and because fewer and fewer people will be in the market to
buy them.  More poeple will go without.

Price stability is just what the economist predicted.  And human suffering
is just what Ehrlich predicted.

[End of article]
-- 

		dingo in boulder	(dean@vexcel.com)
Xref: sparky talk.environment:3259 talk.politics.misc:39819 alt.politics.clinton:1984