And what are the implications of the recent increase in certain commodity prices? According to Krugman, "It's a sign that we’re living in a finite world, one in which resource constraints are becoming increasingly binding."
"It’s not true that vigorous economic growth necessarily makes resources more scarce. In fact, history shows that, because of human ingenuity, the opposite is not only possible but prevalent. Since the dawn of the industrial revolution in the mid-18th century, available supplies of coal, petroleum, iron ore, and most other resources have increased significantly – and, as a result, their real prices have fallen."
MP: The evidence is working against Krugman and in favor of Boudreaux on this one. The chart above shows the monthly, inflation-adjusted Dow Jones-AIG Commodity Index back to January of 1934 (data from Global Financial Data, paid subscription required). The DJ-AIG index is composed of futures contracts on 19 physical commodities in five categories with the following weights (individual weights are listed here):
1. Agriculture (coffee, corn, cotton, soybeans, soybean oil, sugar, wheat): 34.37%
MP: The evidence is working against Krugman and in favor of Boudreaux on this one. The chart above shows the monthly, inflation-adjusted Dow Jones-AIG Commodity Index back to January of 1934 (data from Global Financial Data, paid subscription required). The DJ-AIG index is composed of futures contracts on 19 physical commodities in five categories with the following weights (individual weights are listed here):
1. Agriculture (coffee, corn, cotton, soybeans, soybean oil, sugar, wheat): 34.37%
2. Energy (crude oil, natural gas, heating oil, unleaded gas): 27.28%
3. Industrial Metals (aluminum, copper, nickel, zinc): 17.65%
4. Precious Metals (gold, silver): 14.60%
5. Livestock (lean hogs, live cattle): 6.10%
(Note: According to Global Financial Data, data in the index from 1933 to 1989 are from the Dow Jones Futures Index, and data from 1990 are from the Dow Jones-AIG Commodity Index.)
Bottom Line: Over a very long period of time (76 years), there has been a significant downward trend in the real prices of commodities (see red trend line in graph), and the decline in commodity prices has taken place during a period when the world population increased by more than three times, from 2 billion in 1934 to the current population of 7 billion in 2010. Don asks the right question:
"If economic growth since the industrial revolution coincided with increasing resource supplies, why should we expect that continued economic growth will suddenly start to have the opposite, dreary effects predicted by Mr. Krugman?"
