A lot of my posts of late have been on economics and related topics. One might ask why I spend so much time on it. It’s a technical field with a lot of complexity and a lot of disagreement even among professionals in the field (try to get Paul Krugman and the late Milton Friedman–both Nobel laureates in the field of economics–to agree on pretty much anything regarding economic policy). Yet despite that, people in the US are asked on a regular basis–through the mechanism of election of representatives–to make decisions on economic policy affecting the nation and the world.
People don’t, as a general rule, decide which candidate to vote for based on their positions on topics in electronics, on neurosurgery, on aerospace engineering (what most people actually mean when they say “rocket science”). Nope. They do, however, make such decisions based on those candidates’ positions on economic policy. This despite the fact that most people really don’t understand even basic economics and so are easily swayed by economic fallacies that sound good but all too often have the exact opposite results of those predicted. (This is my reason for calling economics “the dismal science.”)
And so, here I am, trying in my small way to help correct that. A voice of one crying in the wilderness. (And, hopefully, I’ll get to keep my head.)
That said, let me go into a couple of real basics here. The first is what is economics. People often think it has something to do with money and, while money is part of it, it’s only a small part. A definition that does a reasonably good job of describing economics is:
Economics is the study of cause and effect relationships in the allocation of scarce resources that have alternate uses.
And to that I would add “and for which there are substitutes.”
Let’s look at that. First scarcity. That, really, is the first law of economics. Indeed, without scarcity you don’t have economics. So what is scarcity? Scarcity simply means that there’s never enough of anything for everyone who wants it. Consider what that means. Middle class Americans (of which I am one) are among the most affluent people in all of history. Even poverty in the modern United States would be the wealth of Midas in the past of living memory. And yet people complain about how much they don’t have, about what a struggle it is to get by (with those two cars, and that central air conditioning and heat, and the smart phone individually having more computing power than even existed in the world not all that long ago, and their internet connections and…). Because what they want is more than what they have.
Alternative uses is another important factor. Iron can be used to produce automobiles, the frames of skyscrapers, butter knives, and paper clips. A tree can be left as is or turned into paper, the frame of a house, cabinetry, or toothpicks. Petroleum can be refined into gasoline for cars, fuel oil for producing electricity or heating homes, plastics, or fertilizer and medicines. Even human resources. A person can be occupied digging ditches, growing crops, assembling cars, or performing neurosurgery.
And any one use of a particular resource renders that resource no longer immediately available for the other uses. So any economic system has to determine how much of each of the vast number of resources exist: how much steel is used to make cars, how much to make paper clips; how many people performing neurosurgery, how many digging ditches. And so on.
I can illustrate substitution in a simple way. When I’m hungry I can eat a steak. I like steak. One of my favorite things to eat, steak. But if, for whatever reason, I can’t eat steak this time, I can eat chicken or pork or rattlesnake for that matter (I have got to try rattlesnake). Or, if I must, vegetables. These other items are substitutes for steak. In industry, I might use steel as a structural material, or I might use aluminum. The choice is driven by a number of things, including cost.
There are literally billions of decisions being made every day on how scarce resources with alternative uses and substitutes will be allocated: how much steel here, how much wood there, how much aluminum over there; how many people employed in this mill, how many in that factory, how many in the hospital over there.
But through all of that, one thing remains constant: what people (as a group) want is always more than what is available. Sure, some individuals might be entirely content with what they have and cannot even imagine wanting more, those individuals are rare birds indeed. As a group wants exceeding resources is very much a law of nature. And when you increase the resources and make more available? Wants simply grow to fill and exceed the new level of resources. Few people a hundred years ago might have thought that the wealth of the wealthiest man in the world could fail to satisfy any possible cupidity and yet, we’re there now and have been for a long time and still people’s wants exceed their grasp. And there show no signs that will change in the foreseeable future, or ever.
This law of scarcity is, thus, as firmly fixed and unbreakable a law of economics as are the laws of thermodynamics in physics.
Thus, anyone saying that they can grant you everything you want is either dishonest or deluded. Take your pick. And that a system fails to provide everything everyone wants, that people want things they can’t get, does not mean it’s a failure.
What you need to look at is what systems do the best job of providing the wants that people have–what systems are most efficient at allocating scarce resources with alternative uses and substitutes toward providing the wants of the whole of the people.
As I have pointed out on this blog elsewhere, and no doubt will again, the reigning champion in that respect remains a system of voluntary exchanges controlled by prices determined by market forces as opposed to dictation by some central planners.
In short, free market capitalism.