Long-Run Commodity Prices: Essential Readings
In chapter 1 of The Selfish Reason to Have More Kids, I’m going to spend a little time discussing the largely imaginary problem of increasing resource scarcity. I knew the general pattern from folks like Julian Simon, but I wanted to locate the best recent scholarly articles about long-run commodity prices. Since this is a hot topic today, I thought I’d share what I found.
The two best recent articles are probably:
1. Cashin, Paul, and C. John McDermott. 2002. “The Long-Run Behavior of Commodity Prices: Small Trends and Big Variability.” IMF Staff Papers 49(2): 175-99.
Main finding: The Economist‘s index of industrial commodity prices fell by about 1% per year in real terms between 1862 and 1999.
2. Pfaffenzeller, Stephan, Paul Newbold, and Anthony Rayner. 2007. “A Short Note on Updating the Grilli and Yang Commodity Price Index.” World Bank Economic Review 21(1): 151-63. (gated, but you can read the abstract)
Main finding: The Grilli-Yang commodity price index, which includes metals, food, and non-food agricultural products, fell by about 0.8% per year in real terms between 1900 and 2003.
Bottom line: Psychologically speaking, it’s hard to accept that current commodity price spikes are just a phase. I find it hard to accept myself. But the historical pattern is amazingly strong: In the long-run, commodity prices keep getting cheaper in real terms (and cheaper still compared to real income!).
Further lesson: During the century-plus of secular commodity price decline, there were multiple spikes that probably looked as scary to the people of the past as the current spikes do today. Spikes don’t last – but pessimism never dies.
P.S. At lunch today, Tyler tried to convince me that a century-plus of data is pure coincidence. Looking forward, we should ignore the data and believe that arbitrage ensures that commodity prices are a trendless random walk. I think this is crazy – transactions costs and storage costs leave plenty of room for price trends that are not profitable to arbitrage away.