Was Julian Simon just lucky in the Simon-Ehrlich bet?

You may have heard of the famous bet between University of Maryland professor of business administration Julian Simon and Stanford University biology professor (and author of the influential book The Population Bomb) Paul Ehrlich. Ehrlich had argued that resources were becoming scarcer. Simon pointed out that, if increased scarcity were true, then the price of resources would be increasing. He challenged Ehrlich to choose any raw material, and a date more than a year away, and Simon would bet that the price would decrease over that time rather than increasing.

Ehrlich accepted the bet, choosing copper, chromium, nickel, tin, and tungsten as the raw materials on which the bet would be based. The bet was formalised on 29 September 1980, and was evaluated ten years later. The price of all five materials fell between 1980 and 1990, and Simon won the bet.

However, was he just lucky? This 2010 article by Katherine Kiel, Victor Matheson, and Kevin Golembiewski (all College of the Holy Cross), published in the journal Ecological Economics (ungated earlier version here), argues that he was. Kiel et al. look at all of the possible ten-year periods from 1900 to 2008 (there are 99 decades from 1900-1910, to 1998-2008), and find that Ehrlich would have won the bet in 61.6 percent of decades. Simon was lucky that the decade the bet was placed in, starting in 1980, was one where resource prices generally declined (and having a large recession just at the time when the bet was being evaluated probably helped).

Kiel et al. evaluated the bet using annual data. It would be interesting to see how the bet would fare using higher-frequency data. How sensitive was the outcome of the bet to the recessionary state of the economy at the end of the bet period, for example? By taking such a long time period into account, Kiel et al. ignore the endogeneity - if the bet had been placed in 1900, it's unlikely that Ehrlich would have chosen those five raw materials - he may well have chosen five completely different raw materials.

The Simon-Ehrlich bet was important in demonstrating that the neo-Malthusian view of the world is overly pessimistic. However, we need to be careful not to overstate its significance. Julian Simon got a little bit lucky.