Commodity Prices and the Case for Markets
Amplifying yesterday's post
If over time commodity prices are falling relative to wages, commodities are becoming more abundant relative to human labor (meaning, of course, more affordable by workers). It’s unclear to me why recognition of the vital role of speculators undermines this point.
We are on the same team. Call it the team of market-praising economists, or the team that believes that economic progress is real.
Should our team yell “Touchdown!” and spike the ball because between 1980 and 2018 the price of bananas has fallen relative to wages?
The authors of Superabundance, and its many prominent blurbers (including Boudreaux) seem eager to say yes. I am more cautious. If we are entitled to spike the ball when commodity prices fall relative to wages, then we are giving license to the other team to spike the ball if commodity prices move in the other direction. Given the many factors that can affect commodity prices, and given the way that speculators must try to anticipate those factors and then respond to them, I don’t want to stake my team’s reputation on how those prices behave. If in 2028 the price of bananas relative to wages happens to be higher than it was in 1990, I don’t want to concede that this proves that markets need government intervention or economic progress is a chimera.
Boudreaux also objects to the term “exhaustible resource.” I agree that the connotations of the term “exhaustible” are problematic.
Instead, come up with a term for a resource that can either be extracted now or left where it is to be extracted later. With almost-ripe bananas, leaving them on the tree is not a viable option. With diamonds, oil, or zinc, there is a viable option to leave the resource in the ground.
The choice between leaving a resource where it is and extracting it now necessarily depends on the relationship between its price expected in the future and its price today. Your estimate of the future price can include a forecast for how new discoveries or new recovery methods might emerge. The interest rate also enters into the calculation. If the interest rate is high, you need the expected future price to be high in order to induce you to leave the resource in the ground.
My intuition is that if there were no surprises, prices of such resources will follow an upward path over time, in order for the holders of such resources to earn the rate of interest. If that intuition is correct (and there is a large literature on this subject, not all of which agrees with my intuition), then even if labor productivity generally rises you could still lose your bet that resource prices will rise less rapidly than wages.
In reality, unanticipated events are the most important factor in resource markets. And because unanticipated events can go in either direction, that adds to the risk that you could lose your bet that resource prices will rise less than wages.
Finally, both Don and a commenter on yesterday’s post suggested that “luxury boxes” are a different good than the box seats of 1966. True enough. But for me as a baseball fan, they are actually worse. You are farther from the playing field, and in fact you end up watching the game on television. What you get is a buffet of food and beverages, which are worth nowhere near the cost of ticket. If you take away the status element, there is no reason that I can see to prefer a “luxury box.”
And of course, in 1966 in St. Louis, you could watch Bob Gibson pitch a complete game in 2 hours, doing the same work it takes four pitchers four hours to do in 2022. Give me the 1966 baseball ticket any day!
"I don’t want to concede that this proves that markets need government intervention or economic progress is a chimera."
Seems to me that this is what the whole Tupy-Progress project has been about for years now. The government is always trying to legitimize more intervention by leveraging human instincts about shortages and scarcity and implying a species of market failure that justifies the increased role and exercise of political power, and Tupy's job is to use the history of innovation to push back against such fearful impulses and encourage people to presume that under a dynamic instead of static analysis, we can reasonably extrapolate that trend into the future and expect it to continue, but only insofar as market incentives and mechanisms are allowed to operate without too much encumbrance.
The trouble is that this isn't actually an argument that real progress in certain fields will continue, as trends don't make for physical arguments tethered to empirical measurements and natural laws. There are indeed plenty of examples of exhaustable resources, there is no sense denying it. I'd go much further and say that for physical stuff, there is no such thing as an *inexhaustible* resource because everything is exhaustable in terms of there can only be so much of anything composed of matter which hasn't been reduced to its highest entropy. The universe started with a certain amount of negative entropy - the real "ultimate resource", it is going away, we can't do anything without spending at least a little of it down, and there's nothing anyone will ever be able to do about that. Try to use it wisely or 'effectively', I guess.
It would be better to stick to simple arguments based in straightforward economic reasoning that explains that in a normally functioning market with prices that clear demand and supply there is no such thing as a 'shortage' as a valid concept, that surprises and price swings happen as a normal incident of life, and that problems with prices and supply are much more likely due to various kinds of government failure than market failure.
For those of us that have worked in the exploration and production of minerals, what you call "unanticipated events" we call hard work coming to fruition.