In my last post I cautioned about the careless use of demographic projections in making investment decisions. I cited one example which committed the error of failing to recognize that demographics is a description of a condition, not a cause of it. I also cited the particularly instructive example of Thomas Malthus himself, whose use of straight-line projections of current trends led him into serious error.

But Malthus is hardly alone. Consider the case of Warren Buffett. Although it has been largely forgotten, back in the 1970s and 1980s the World’s Smartest Investor announced that there were two crises the world faced that had the potential to destroy human civilization. They were human population growth and nuclear proliferation, and Buffett dedicated virtually all his (considerable) charitable resources to these two issues. It seemed obvious to Buffett, as to many other people in those days, that you could simply project out current population and nuclear trends and see clearly that the world would soon end in cataclysm.

Except that it didn’t happen. The collapse of the Soviet Union, completely unforeseen by the World’s Smartest Investor, ended the threat that nuclear war would destroy the planet. At the same time, human population growth slowed so profoundly that in much of the world today the problem isn’t overpopulation but (as Arthur Brooks pointed out in the Times article I cited in my last post) under-population. Buffett, in other words, made the same mistake that Malthus had made nearly two hundred years earlier.

Or consider the outcome of one of the most famous wagers in American history, this one between Paul Ehrlich and Julian Simon. In the 1960s, as the environmental movement took flight in the US, Ehrlich was one of its leading lights. His 1968 book, The Population Bomb, renewed all the Malthusian fears about human population growth (combined this time with rapidly growing economies). The first sentence of the book set the apocalyptic tone:

“The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate…”

In fact, even as Ehrlich wrote, human population growth had peaked (in the mid-1960s at about 2.2%) and the rate of growth has continued to slow dramatically ever since. Recently, it was barely above 1% – an astonishing change in barely two generations.

In 1980 Ehrlich stated that, “If I were a gambler, I would take even money that England will not exist in the year 2000.” Seriously annoyed by the silliness of Ehlich and his fellow doomsayers, Simon offered to bet Ehrlich that, contrary to the beliefs of virtually all environmentalists, the costs of raw materials would not rise in the future, but would in fact fall. Simon let Ehrlich pick any five commodities he wished,(1) and the two men bet on whether they would be more or less expensive by 1990.

As everyone knows, Ehrlich not only lost the bet, he lost badly – by 1990 every single commodity was cheaper than it had been in 1980, despite the fact that the human population had grown by roughly 800 million over the decade. As Simon had foreseen, and as Ehrlich (and Malthus) had not, human ingenuity proved to be much more powerful than simple demand.(2)

In the long run, Ehrlich and the early leaders of the environmental movement were, shall we say, less wrong than their critics. But the arrogance with which they asserted their case, based on flawed demographic projections, undermined their reputations.

This happens over and over again. Most recently, for example, doomsayer Jeremy Grantham has gotten into the act, asserting that:

“[T]he inevitable mismatch between finite resources and exponential population growth [has] finally shown its true face after many false alarms. This was made manifest through a remarkably bubble-like explosion of prices for raw materials.”(3)

But as noted above, raw materials prices were already headed down as Grantham was writing.

In sum, demographic projections are far more likely to lead people in general and investors in particular into serious error than they are to prove useful. Before you make an investment bet based on demography, remember the Curtis Rule: All demographic projections are wrong.(4)

(1) Ehrlich and his environmental colleagues selected chromium, copper, nickel, tin, and tungsten. Ten years later, every one was cheaper in inflation-adjusted terms and some were vastly cheaper even in nominal terms. Tin, for example, sold for $8.72 a pound in 1980 but cost only $3.88/pound by 1990.

(2) Part of Ehrlich’s problem was the relatively short time frame of the bet. If it had gone on for another twenty years he would have won, although not for the reasons he expected. The rise of the Chinese economy, which switched to a partly capitalistic model in the 1980s, led to a “commodity supercycle” that raised the prices of most raw materials. On the other hand, that cycle is now over and commodity prices are dropping again.* The point is that straight-line projections almost never work out.

* (I’ve made this point before, in case you’re wondering: yes, footnotes can have footnotes.) Another amusing misuse of demographic projections involves the assertion that the Chinese economy would soon surpass that of the US as the world’s largest. Just a few years ago, when China was growing at well north of 10% per year, you couldn’t pick up a newspaper or magazine (or click on a web site) without hearing that China would surpass the US by 2020, or by 2025 at the latest. But, suddenly (as predicted on numerous occasions by your humble blogger), the country’s growth rate has plummeted. Even official statistics now put it at less than 7.5%, and the real number is probably closer to 5%. China will continue to slow because it has to slow. China’s rapid growth was associated with its industrial economy, and China now has a surplus of industrial capital that is acting like a deadweight on its growth. China badly needs to transition to a consumer economy, but it can’t because the Chinese Communist Party won’t tolerate the kinds of human freedom that would entail. It’s possible that China will one day surpass the US in economic might, but it’s more likely that China will cease to be China before that happens. You heard it here first.

(3) “Resource Limitations 2: Separating the Dangerous from the Merely Serious”, GMO Quarterly Letter (July 2011), available at

(4) The Curtis Rule won’t always hold, any more than the laws of thermodynamics will always hold,* but following it will keep you out of a lot of trouble.

* For example, under conditions of quantum mechanics, where the number of particles is not infinite, or under conditions of time reversal symmetry where (for example) either entropy can be seen to decrease or time reversal symmetry is violated.

Next up: A Dark Harbinger?

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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