Home > Micro > Scarcity is Real (But it’s not What You Should Be Afraid of)

Scarcity is Real (But it’s not What You Should Be Afraid of)

[Note: for some reason, when I post this it always takes out the spaces between paragraphs.  I can’t seem to find a way to fix this and wordpress refuses to respond to my help request….]

I recently came across a WSJ article entitled “The Scarcity Fallacy.”  Since one of my biggest beefs is with people (typically on the left) denying scarcity, it immediately got my dander up.  However, the article ended up being nothing like what I was expecting.  As it turns out, it was a critique of the perpetual doomsday predictions made by environmentalists which I completely agree with.  But I still don’t like the way he frames it as a question of whether “scarcity” is or is not real, with environmentalists on the pro-scarcity side and economists on the anti-scarcity side.  After all, scarcity is the entire foundation of economics.  It’s just that we mean something different by the word that what most people think of.

This is how dictionary.com defines scarcity:

scar·ci·ty: noun, plural scar·ci·ties.

1. insufficiency or shortness of supply; dearth.
2. rarity; infrequency.
This seems to be what most people have in mind.  Alternatively, this is what my intro text has to say about it.

The term scarce means that there are not enough of the items humans find desirable to satisfy everyone’s wants.  If goods were handed out free to all who wanted them in unrestricted quantities, there would simply not be enough to go around. . .
Economics is concerned with this central issue.  Economics is the study of how scarce resources, that have alternative uses, are allocated amongst competing ends. . .
. . . it is impossible to enact laws that eliminate the underlying scarcity of goods and resources.  The horrible truth is that scarcity is a pervasive empirical fact about the world.  It is caused by the demands on the world’s resources by consumers of those resources–mainly humans–in amounts greater than the earth would produce on its own.  We cannot legislate scarcity out of existence any more than we can abolish the law of gravity.
Got that?  So if you are an economist, scarcity is the starting point of any analysis.  If a good weren’t scarce in an economic sense, there would be no reason for concern about running out.  But scarcity doesn’t occur when the quantity available falls below some arbitrary level that causes it to be deemed “rare” or of “insufficient supply.”  From the moment people figured out that you could use oil to make kerosene and burn it to light your house at night, oil was a scarce resource, even when it was basically bubbling up from the ground “Beverly-Hillbilly style.”
The real debate has two components.  On the surface, the question is: is the scarce nature of a good going to become an acute and sever problem on a societal level?  So your peak-oil types would have you believe that at some point we sill suddenly “run out” of oil and then all sorts of catastrophes will follow.  The other side, which Ridley calls “economists” say it’s no big deal because we will think of something else.  But this is really not the fundamental issue either.
The real debate underlying all of this is about the best way of dealing with scarcity.  There are essentially two sides.  One side I will call “marketeers.”  This side thinks that the allocation of scarce resources is generally best left to markets.  This is the side I am on but, sadly, I think it is incorrect to suggest that most economists are on this side.  On the other side are “central planners” who think that if people are left alone, they will collectively wander carelessly into some catastrophe and that the government needs to step in at every turn to make sure they don’t do this.
The really sad thing though is that I don’t think the environmentalist types (ecologists, climatologists, and so on) really understand markets.  They get that we are using resources and that it is possible to use them up and they look at current rates of usage and trends over time and try to extrapolate these into the future in some empirical way and if that leads to the conclusion that we will use everything up by a certain time, they freak out and go all Chicken-Little on us.  In short, they imagine that resources are allocated in an arbitrary way.  And if the way they are being allocated (which they assume is arbitrary) doesn’t seem like the ideal way to them, they naturally want the government to intervene and arbitrarily reallocate them in the way that they think is best.  (And of course, this will require the government to maintain a staff of ecologists, climatologists, etc. to perpetually determine the right allocations.)
But market allocations aren’t arbitrary.  Markets tend to allocate goods to their highest-value use.  And in the case of temporal allocation, they are a mechanism for aggregating estimates about the future.  Take oil for instance.  If we had a free market for oil (we don’t but whether what we have can be approximated by a free market is debatable), then you would have a whole bunch of people making calculations about the current and future supply and demand for oil and the market would aggregate those calculations into a price.  If you thought the market price was too high or too low, you could enter the market and put your thumb on one side of the scale or the other.  If you thought that we were heading recklessly toward “peak oil” you could buy oil, either in barrels or in the ground, or in the form of futures or options or whatever.  If you were right, you would make money.  But you would also push the current price of oil up and save some for future consumption out of current consumption.  The more people felt this way, the higher the price would go and the more would be saved.
This is how markets allocate scarce goods over time.  The difference between this and a group of bureaucrats making estimates and then forcing them on the economy is that the people who make the estimates have a financial interest in getting them right and the process of aggregation is open to anyone who wants to be involved not just an enlightened few who are hand-picked by the political elite.
Now when it comes to innovation, it is true that economists tend to have more faith in this phenomenon saving us from increased scarcity than environmentalists do.  But again, the real issue is what process is best to foster this innovation?  The central planners, again, would like the government to step in and subsidize it in a myriad of ways.  But the marketeers believe the market does this best as well.  The reasoning is fairly simple.  If you have a free market for oil and it becomes increasingly scarce, the price goes up.  When the price of oil goes up, the incentive to find alternatives increases.  This puts people to work trying to find those alternatives because there is a lot of money in it.  And the better the alternative solution, the more money you can make with it.  The better the prospects for alternatives, the less upward pressure there will be on oil prices.  So there are a lot of complicated problems involved but people have incentives to figure them out because if they do they can make money.
So it’s true that oil barons saved the whales and fertilizer and the internal combustion engine saved the rainforests.  But this didn’t just happen automatically because of some natural phenomenon called “innovation” that constantly marches forward as the calendar turns over or because some politician decreed that we need more innovation and diverted funds to it.  The incredible amount of innovation over the last 200 years happened because there were (relatively) free markets, and that meant that there was money in innovation.  There was money in innovation in a free market because goods were/are scarce (and getting “scarcer”).
So don’t be worried about running out of fresh water because of the free market.  It’s perfectly foreseeable that in the future people will demand fresh water.  If we are shaping up to be seriously short on it, you can bet that someone will come up with a way to get the salt out of it because it will become profitable to do so.  And don’t worry about running out of electricity because of the market, it’s just a matter of turning a generator.  We use oil and coal because they are the most efficient way to turn them but if supplies get short and prices go up, people will find ways to make them turn because the economic benefits of turning them are enormous.  But while the market allows nearly limitless potential for people to make improvements on all of these problems, the heavy hand of government offers nearly unlimited potential to screw up the workings of the market.  That is what you should be afraid of.  And yet, I can’t help but suspect that in spite of their constant attempts to manage innovation and the use of scarce resources, that if things ever do go wrong, it will be “the free market” that gets blamed.
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  1. John S
    May 1, 2014 at 7:14 am

    Nice framing of the issue. I really enjoyed Ridley’s “The Rational Optimist” (which includes a gleeful evisceration of the organic food/locavore movement).

    The really sad thing though is that I don’t think the environmentalist types (ecologists, climatologists, and so on) really understand markets.

    I think you’re being too kind. Not content to misunderstand basic market principles, they often spew all sorts of pseudo-intellectual, pop-Hippie Econ BS which waaay too many people, esp. millennials, take seriously. For example:

    “In a documentary called Surviving Progress, he [environmentalist David Suzuki] quotes a fictional economist by saying, “who cares whether you keep the forest – cut it down. Put the money somewhere else. When those forests are gone, put it in fish. When those fish are gone, put it in computers.”

    “Dr. Suzuki’s remarks on externalities were clarified in an interview given to the magazine Common Ground: “I won’t go into a long critique, but currently nature and nature’s services – cleansing, filtering water, creating the atmosphere, taking carbon out of the air, putting oxygen back in, preventing erosion, pollinating flowering plants – perform dozens of services to keep the planet happening. But economists call this an ‘externality.’ What that means is “We don’t give a shit.” It’s not economic. Because they’re so impressed with humans, human productivity and human creativity is at the heart of this economic system. Well, you can’t have an economy if you don’t have nature and nature’s services, but economics ignores that. And that’s an unbelievably egregious error.”

    http://www.theglobeandmail.com/report-on-business/economy/economy-lab/david-suzuki-needs-an-economics-refresher-course/article4602350/

    I’m not saying that climate change and other environmental issues aren’t real concerns. But nobody benefits from this kind of “you can’t put a price on Nature, you selfish A-holes” ranting.

    The Left loves to harp on the anti-scientific attitudes of the Right (a legitimate charge, in many cases). But it needs to get its own house in order w.r.t rational discussion on the environment.

    • Free Radical
      May 1, 2014 at 9:35 pm

      I agree with this, lately I’ve been trying to err on the side of being “too kind” haha. There are some environmental cases that involve legitimate “externalities” but not as many as most environmentalists imagine (and obviously that definition of externality is not what economist really mean). For instance, it has been shown that the presumed externality problem with bees is really not so bad. The cutting down forests thing doesn’t even make sense. And in many cases where there is a potential issue, it can be most effectively solved by properly assigning the property rights. This has been shown with fisheries and fresh water and other things.

      There are some cases where assigning property rights is difficult like air pollution and (potential) “climate change” (originally “global cooling” then “global warming”). I personally thing the climate thing is greatly exaggerated for political reasons. My basic sentiment regarding it is pretty much summed up by Richard Feynman’s criticism of (somewhat ironically) social science.

      “See, I have the advantage of having found out how hard it is to get to really know something, how careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something and therefore, I see how they get their information and I can’t believe that they know it.”

  2. John S
    May 6, 2014 at 9:44 am

    Any links on the bee issue? There are so many scary FB links, I’m just curious what the real deal is.

    Here’s a funny one: to the extent that they have any economic views at all, most of the hard-core environmentalists I know are also crude Keynesians (i.e. “duh, consumption makes the economy grow”).

    This seems like a tricky intellectual tightrope to navigate.

    • Free Radical
      May 6, 2014 at 9:19 pm

      This is the paper I have in mind regarding the bees but you might have to look for it elsewhere if you want to read it because it is behind a pay wall.

      http://heinonline.org/HOL/LandingPage?handle=hein.journals/jlecono16&div=6&id=&page=

      In addition to being born and raised in “the apple capital of the world” (Wenatchee WA) my advisor is the last remnant of a once thriving sect of Chicago-school, property rights/transaction cost economists in the line of Coase, Stigler, etc. at the University of Washington and this paper has been a sort of classic in around here. Here’s the punchline if you don’t want to pay for it:

      “It will be shown that the observed pricing and contractual arrangements governing nectar and pollination services are consistent with efficient allocation of resources.”

      There is, of course, a separate issue with honey bees related to their apparently mysterious reduction in numbers over recent years but since nobody seems to know why that is happening, I don’t think you can chalk it up to some kind of “market failure.” I don’t know much about that issue except that as I sit here writing this, I can see several of them buzzing around the yard and they are a frequent nuisance, so the problem doesn’t seem to be that catastrophic at this point.

      Regarding the Keynesian/environmentalist tightrope, I agree entirely. But I think that most environmentalists and “crude Keynesians” are also basically closet Marxists in the sense that they imagine the possibility of a “post scarcity” world in which “technology” somehow provides everyone with all of their “needs” without “harming” the environment and that the only thing preventing this state of nature is the “capitalist” system. So if they can just get the right mix of central planning, they can solve every supposed problem simultaneously and we will all live happily ever after. If you just believe that, you can dance around all sorts of contradictions which seem obvious to those of us who believe that scarcity is a law of nature.

  3. Nathanael
    June 29, 2014 at 6:16 pm

    “Markets tend to allocate goods to their highest-value use. ”

    See, here’s the thing. They really don’t.

    They allocate goods to those most willing & able to make high bids. This is not necessarily the highest value. For instance, if we have a billionaire and a million starving bankrupt people, and we have enough food to feed the million starving people, the market will allocate the food to the billionaire, who may decide to burn it in a show of wealth. This is something you should be afraid of.

    (Now, if you *equalize everyone’s purchasing power*, socialist-style, *then* markets tend to allocate goods to their highest-value use. But if you didn’t do that, then they don’t. This is just mathematics.)

    And we haven’t even gotten into negative externalities, which are the main problem environmentally: they’re all about the allocation of *bads*, which are not allocated by a market mechanism most of the time. (“Yeah, I’m dumping toxic waste in your backyard and your air. How you gonna stop me?”) This is something you should be afraid of. We benefit greatly when “bads” are allocated by markets, but require very rigid and aggressive systems of law enforcement to make sure they are allocated by market; it is not scarcity which is the problem here, it is excess.

    Nor have we discussed the creation and distribution of non-scarce resources, like information. This is a very, very important issue, and maldistribution of information is something you should be very, very afraid of.

    Many important issues in economics are completely unrelated to the allocation of scarce resources. The claim that economics is the study of the allocation of scarce resources is, in fact, false. It’s one of the sillier claims made in early economics courses.

    Economics is, in practice, the study of money. Allocation of scarce resources is one of the many things money is used for. Scarcity is not what you should be afraid of, because it’s not that common or that important.

    • Free Radical
      June 29, 2014 at 8:46 pm

      You are confusing “value” with something like “utility” (which is a useless concept in the context you are using it). This is a common and understandable mistake since I recently have been trying to help a friend of mine properly learn economics from the ground up (without textbooks) and I discovered that the internet is very confusing about this. If you are an Austrian or a Marxist or basically any kind of heterodox school, my experience tells me the chances of sorting it out for you are pretty slim but just in case: “value” means what someone is willing to give up.

    • Free Radical
      June 29, 2014 at 8:48 pm

      P.S.

      “Scarcity is not what you should be afraid of, because it’s not that common or that important.”

      This is way, way, waaaaaaaay off base. Scarcity is the entire foundation of economics. If a resource is not scarce, there is no tradeoff necessary. It is not right to say that information is not scarce. I have a feeling I won’t be able to change your thinking on this either so for now I will save my breath.

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