7 – SCARCITY, SURPLUS, AND CHOICE
When they began trying to understand trade between individuals in society, economists were strongly influenced by a philosophy called utilitarianism, developed by Jeremy Bentham 1780. He proposed that social arrangements should properly be made to provide the greatest good for greatest number of people. This was a radical idea at that time, a strong challenge to the belief that the lower classes existed for the benefit of the upper classes. Bentham aimed to eliminate such ancient privileges and positions.
A key concept of utilitarianism is Bentham’s utility: the sum of one’s pleasures and pains, broadly defined. Wealth, status, comfort, pleasures, command over others, less penury, toil, oppression, etc. Bentham assumed that rational persons would act to increase their pleasures and decrease their pains, and thus raise their total utility. In achieving the greatest good for the greatest number, some persons would necessarily be brought down and others raised up, but some might be left out entirely. He accepted this as a necessary result of his system. Bentham’s utilitarian philosophy fit perfectly with the newly developing ideas of capitalism. Utilitarianism gradually grew into its dominant way of thinking: the inefficient will be weeded out, creative destruction will make progress, and some will be left on the outside looking in.
Scarcity:
Utilitarianism is all well and good as a philosophy, but its details are hazy. What does it mean in practice? The British economist Lionel Robbins was director of the London School of Economics from the 1930s to the 1960s. He was a free market economist famous for his definition of economics: [1]
“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.”
His definition has been boiled down to the common saying that economic choices arise from scarcity. A thing is scarce when there is too little of it for use; not enough to go around. Gasoline can be scarce if there is not enough for people’s needs. Utilitarianism, capitalism and the free market require that people choose between scarce goods. But if goods are not scarce, such calculations go out the window and we don’t know what to do.
Do you want a pickup truck, a luxury cruise and a down payment on a house? You don’t have the means (money) to afford all of them? You have an economic problem. You’ve got some choices to make. Decisions like these are called microeconomic because they involve only a few individuals and businesses. However the big picture, the entire economy, the millions of decisions made every day, is called macroeconomic. It’s concerned with the general problem, not yours in particular. How do people, on the whole, manage to do it? Are there regularities, patterns, rules, laws? Is it comprehensible at all? How does the economic system allocate things among various producers, their mix of outputs and their distribution? Resources, which economists call factors of production, are used to produce goods and services that humans want. Scarcity of resources can cause scarcity of goods and services. Without scarcity we wouldn’t be making difficult choices between various goods and services. There wouldn’t be markets to distribute goods, and we certainly wouldn’t bother to study economics.
Professor Paul Samuelson’s old reliable college textbook has taught economics to a generation of students. He started with the fundamental assumptions that the supply of desirable goods is limited and that human desires are not satisfied with the goods available: [2]
“If infinite quantities of goods could be produced or if human desires were fully satisfied, people would not worry about stretching their dollars because they could have all they wanted. . . Moreover, since all of us could have as much as we pleased, no one would be concerned about the distribution of incomes. . . Prices and markets would be irrelevant. Economics would not be a useful subject.”
How can we tell when are resources scarce? Ah, that’s easy, one would think. They are scarce when sought after and will take effort, time or money to obtain. Resources available in huge quantities may or may not be scarce; grains of wheat vs. grains of sand, for example. The need for collectible postage stamps is never met so dealers search for old stamps and their prices go higher. Everyone can agree that stamps are scarce even if they don’t care about them. We see scarcity when people line up for tickets or bid at auctions. If people merely believe that something is scarce, it may become so.
Economic scarcity pertains only to economic goods, that is, those that are bought and sold. In Adam Smith’s time, in the 1770s, economic scarcity was the rule, a condition of life. One had to choose every day between clothing, firewood, bread, or beer. It was the nature of things. Lack of money required choices. The operative word was “required,” not the economist’s mealy-mouthed phrase, “allocate between competing objectives.” Classical economic theory taught that the prices of goods and services were ‘signals’ directing consumers how to allocate their limited purchasing power among their needs and wants. But how did they accomplish this? After all, tastes differed. What one person desired another did not. No one understood how individual preferences and decisions combined to make up the economy. To tackle this problem, economists borrowed Bentham’s concept of a person’s utility to be the bundle of his preferences. They assumed that if every person acted rationally to maximize his own utility then the sum of all utilities, i.e., society’s utility, would be a maximum as well. This seemed to be a reasonable idea. Many theorems of economic behavior sprang from it, though paradoxes were found too. It got very complicated if people could substitute second-choice items for their first choices. The early economists knew their ideas were preliminary and hoped that they would be refined later. Unfortunately, they did not face up to Bentham’s conclusion that some people would be forced out and left with nothing, with no utility at all.
The Italian economist Vilfredo Pareto proposed in the late 1800s what we now call “Pareto Efficiency.” Rather than maximize everyone’s utility, he suggested that the economy could arrive at a state where no one could become better off without making someone else worse off. That was a good idea but it still had problems. A complex economy might have several such optimum points, some with more total utility than others, or perhaps it might have no such balance points at all. Pareto never showed that his efficient states even existed, or would be more than momentary if they ever occurred. We still have no way to work it out.
Dr. Samuelson’s textbook also notes that scarcity still rules today:
“If you add up all the wants, you quickly find that there are not enough goods and services to satisfy even a small fraction of everyone’s consumption desires. . . before everyone could live like a doctor or lawyer. And, outside the U.S., hundreds of millions of people suffer from material deprivation and hunger.”
He’s right – all of these wants can’t be satisfied. His point is that they are far beyond the economy’s capacity to satisfy so that society must figure out ways to produce things most efficiently and to best use its resources. Before the industrial revolution there was not much economic development from one generation to another. Happily, we’re now in a new era. Some goods are indeed scarce, in the sense that choices must be made and dollars kept within budget, yet many other goods are not.
Surplus:
With surplus, there is more than enough to satisfy both needs and wants; there is a surfeit, an overabundance. Economic surplus is an oversupply or glut of goods and services that are bought and sold. It may occur for one or more products in a market or in several markets. An economic surplus means there is excess productive capacity due to overinvestment or inadequate demand. An economy-wide economic surplus, called a “general glut,” where the supply of everything exceeds demand, was inconceivable to the early economists. They published books arguing its impossibility. French economist Jean-Baptiste Say proposed in 1834 that supply would always create sufficient demand since money received from selling goods would always be used to buy other goods. His idea was called “Say’s law” and it persists to this day in other forms. His contemporary Thomas Malthus argued that population would always grow faster than food production so that the masses would live at subsistence levels and demand would always absorb supply. Scarcity was the paradigm of that age. There were no theories that described oversupply, saturated markets, or excessive investment.
The possibilities of a general surplus were glimpsed by Henry George in his book Progress and Poverty, also by Ralph Bellamy in his fantasy Looking Backward, and more clearly by John M. Keynes’s essay Economic Prospects for Our Grandchildren. Each of them predicted that general prosperity would be achieved one day. But surplus actually arrived for the American rich in the Gilded Age of the early 1900s. They reached high prosperity and lived extraordinarily well. Their contemporaries were disgusted with their extravagant lifestyles. Thorstein Veblen in his book The Theory of the Leisure Class used them as examples of what people did when possessed of huge amounts of money. He coined the phrase “pecuniary emulation” as they spent money trying to impress and outdo each other. Anything they desired could be supplied whenever they wished. Allocation of scarce resources? They never gave it a thought. What did govern their choices? Perhaps it was pecuniary emulation as Veblen thought or maybe, as F. Scott Fitzgerald wrote, the rich really are different from you and me.
Free market advocates have an appealing story about how markets work, of how multitudes of consumers, merchants and suppliers cause markets to respond. Adam Smith called it the guidance of an invisible hand. But in this story everything happens under conditions of scarcity. When there is a surplus, it doesn’t go so well. Supply and demand, production and consumption, become unglued and have little to do with each other. This was a puzzle to early economists. Adam Smith, for instance: [3]
“The things which have the greatest value in exchange frequently have little or no value in use. Nothing is more useful than water, but it will scarce purchase anything. . . . A diamond, on the contrary, has scarce any value in use, but a great quantity of goods may be exchanged for it.”
Another example is a missing-market conundrum, the so-called Mother Problem. The mother of the household divides up the milk so that everyone gets a share – some for tea, some for morning cereal, some for grandpa’s dyspepsia, some for making pudding, and some for the cat. How does she do it? Not with price signals, supply and demand, fear and greed. She uses her own judgment and decides day by day, allocating a scarce resource between competing needs. Surely this is economics, but there is no market at all!
Economics teaches that exchange in markets is the fundamental element of its science, its basis. Individuals and businesses come together in the market to buy and sell, to fulfill their needs and wants. But it struck me that “exchange” is not so simple. It includes buying eggs at the farmer’s market but also includes selling the family silver. Each puts different motivations upon buyers and sellers. We have a host of pithy sayings about ordinary economic transactions. They come from real life and don’t refer to free market exchanges at all. Think about these examples:
“It was a steal.” “He had me over a barrel.” “I paid too much but I got it.” “We came out even-steven.” “I had him right where I wanted him.” “He was happy, I was happy.” “Never give a sucker an even break.” “We shook hands on the deal.” “Take it or leave it.” “When I saw it I had to have it.” “Yeah, I bought it, I owed him one.”
Do these maximize economic utility? Only if one defines it to include human feelings. Unless this is done, classical economic theory is seen to be too small and simple because it takes people to be robots. It presumes that people have money with which to make choices, they don’t have enough money to choose everything, will actually choose one of the available alternatives, and that they know their preferences and will choose rationally. If all of this is true, then it’s possible to use supply and demand schedules, consumer utility values, and to calculate the results, which are the consumer’s “choices.” These are not forced, in the sense of being against the consumer’s will; they are determined by equations. The consumer’s will has nothing to do with it. This is a real embarrassment to economic theory, or ought to be. Free consumer choice is not possible in static models like these. Free-will choice can happen only in situations where more than one set of consumer choices is at least possible
Some say that freedom of choice lies in the consumer’s ability to set utility values. But that doesn’t account for the irrational, emotional decisions that consumers make every day: “I don’t care about supply, demand or price, I want that one,” or “I can’t find what I want anywhere!” Economists do know that consumer motivations go well beyond rational maximization. Greed, loss aversion, status, emulation, fashion and habit exist but they have no ways to deal with such complications. Also missing are the differences between free and forced choices, monetary and non-monetary values. Businessmen have left economic theory far behind. They invented advertising, layaway plans, and “buy one, get one free.” Even today, the businessman’s concept of a break-even point is beyond economic theory.
Choice:
There should be a better way to understand choices made under surplus as well as scarcity. New ideas are needed as wealth grows and spreads. Ordinary people today don’t have to choose between bread and cake. New thoughts about economic choice should have begun to stir during the time of Kings and Popes, and certainly after the Gilded Age. But it was hard to imagine. Adam Smith visited a pin factory and saw how dividing tasks among workers increased production. He didn’t foresee that there could be too much pin-making power; that someday a dozen machines could produce more pins than the entire British Empire could use. Today that’s called a buyer’s market, where demand is not sufficient to absorb output capacity at normal prices. If the market is competitive prices will be driven down and excess capacity reduced, though it could be restored if needed.
A surplus, an overcapacity, in nearly all markets at once is a different story. The U.S. has almost reached this point. We have huge surpluses of wheat, corn and milk which require government subsidies to maintain livable prices for farmers. The capacity to produce more burgers, TVs, autos and most consumer products, even buggy whips, could be brought online if asked for.
Ordinary people’s motivations change as our economy moves from scarcity toward general abundance and the privileges of aristocrats and the rich become commonplace. Economic choices become less necessary. Needs and wants blur together. There are real needs of course; people must have water but wine will do as well. Preferences become what really matter in everyday life. Dilemmas and forced choices fade under economic surplus because people can be indifferent. They can take beer or wine, or both, or neither. No matter. Only free choice, including the freedom to choose nothing, is viable under economic surplus. Forced choices couldn’t exist.
Free choice is thought to be part of both Adam Smith’s and current market theories. But things are different when bad choices are the only ones available. If there are only awful choices, market participants are damned if you do and damned if you don’t – caught on the horns of a dilemma. Consider the proverbial little old lady whose rent has been doubled and now must decide between bread and heat for her apartment. It is better to starve or to freeze? Marie Antoinette might say, “She has no bread? Let her eat cat food.” No one believes the old lady could go to the market and freely choose to buy cat food for her dinner. This classic example is supposed to put an economist on the spot but he replies that, after all, her choice is a choice; she has allocated her scarce assets between competing objectives.
In our time, in our part of the world, we can choose among what were once luxuries, like ice cream and pecan pie. In some places production is approaching the ‘general glut’ economic theorists had declared impossible. How can this be? It is because capital has been accumulating and productivity rising. With technology accelerating and a population transition underway, a revolution in expectations is pushing us forward. If there are no major wars or disasters the day of a general surplus, not scarcity, may actually arrive. Many items in the market are not quite free goods but are getting close to it. “Chips with your burger?” As prices fall compared to incomes, decisions based upon scarcity fade away. “While you’re at the store get bread, and get some cake too.”
Economics would still be a useful subject and Dr. Samuelson would keep his job if human desires were never satisfied. Are people’s demands for economic goods limited or unlimited? Economists tend to restrict their responses to this question to what seems conceivable in our current economy. I think they confuse a long sequence with an unending one – they confuse huge with infinite – because their imaginations run only so far. They have claimed that people’s wants are unlimited in that they are open-ended. If some wants are satiated others will arise in an unending chain. A man once properly fed wants flavor and variety. When housed he aspires to a grander house, then a McMansion, then a palace. Once a world traveler, he eyes the moon. Imelda Marcos, onetime First Lady of the Philippine Islands, created a demand for shoes. She had over 2000 pairs. How many more did she desire? How many could she possibly have accumulated in her lifetime? Could her insatiable desire for shoes absorb the entire world’s productive capacity?
Many believed Malthus but let’s forgive 18th century England. It was inconceivable that everyone, not just the gentry, could ever become well fed and secure. But times have changed. It is conceivable today because it has happened to a good part of the Earth’s population. And also, in the rich countries people have smaller families when they’re better off. They do it on their own without guidance from the state, from religion, or economic theory. It just seems sensible to them. As with family size, so too with other supposedly unending, insatiable wants. One description of the real state of human desires I’ve found is in Henry George’s book Progress and Poverty: [4]
“Give more food, open fuller conditions of life, and the vegetable or animal can but multiply; the man will develop. . . . In other words, the law of population is in accord with and subordinate to the law of intellectual development, and any danger that human beings may be brought into a world where they cannot be provided for arises not from the ordinances of nature, but from social maladjustments that in the midst of wealth condemn men to want.”
We are arriving in a new era. Today’s real study should be about the allocation of ample, not scarce, resources. Psychology, history, politics and government are in the picture. This is beyond the purview of economics as it’s now conceived. If people didn’t have to make hard decisions, to scrimp, save and postpone satisfaction, there would be no economic problems. I’m afraid that bigger problems would arise instead. Quoting Aldous Huxley: [5]
“They will eagerly make themselves acquainted with ‘the best that been thought or said’ about everything; they will listen to concerts of the classiest music; they will practise the arts and handicrafts; they will study science, philosophy, mathematics, and meditate on the lovely mystery of the world in which they live. In a word, these leisured masses of the future. . . will do all the things which our leisured classes of the present time so conspicuously fail to do.”