More on scarcity

I am in Colorado for an economic teaching conference and there are fires in a number of places including nearby. The drought here is nothing new, nor the complaints about water rights and usage.
Water is, of course, a scarce resource. However, we are not running out of water, nor will we ever run out of water. This is because the Earth has a closed hydrologic system. The amount of water is constant throughout the ages. Water evaporates and precipitates, but the amount never changes. Fresh water is a very small portion of the total and is not evenly distributed around the globe, so the dilemma is how to care for this necessary resource.
Though water is dear, it is often sold cheap through government utilities. Some municipalities have privatized their utilities with great success.
Water not directly controlled by government may be nominally private, but a mish mash of tradition and regulations makes a mess of that, too. Rainwater collection has been made illegal in many western States. So water that falls on your land is not yours, it belongs to “society”. Also, farmers are not allowed to sell any excess water contained in their land for any non-agricultural use, even if no other farm needs it. These rules are ridiculous and need reform.
Desalinization has been one solution to fresh  water shortage in many areas and improved technologies will continue to increase water supplies.
Several studies over the years have shown that free markets in water can be used to allocate even this very important resource.
See “The Use of Pricing and Markets for Water Allocation” and “Markets for Water”. 



The concept of scarcity is always central to any discussion of economics. The definition of scarcity is pretty much the same in every textbook or on a web site: “The basic economic problem that arises because people have unlimited wants but resources are limited.” This is fine for a start, but it is rarely mentioned that scarcity is often relative. That is, resources are scarce until we find a way to get more of the the resource or more out of the resource.

Thomas Malthus is often cited regarding food production. The doomsayers who cite him both misunderstand his work (see “Malthus Reconsidered” by Ross B. Emmet) and fail to acknowledge that technology has made it possible to feed the world even with fewer people working in and less land devoted to agriculture.

Peak oil has been predicted numerous times, but new deposits are continually being discovered. The president has repeatedly stated that “the US has only 2% of the world’s petroleum reserves.” But that is just wrong. The government defines what “reserves” are, and the definition excludes most of our petroleum resources. Indeed the US has more petroleum, and more of all fossil fuels, than any other country. Even when these fuels get scarce for real, the market will have moved on. After all, we didn’t move on from the stone age because we ran out of stones. See the works of Julian Simon to get a better take on resources.

That is the “land” portion of the resource mix. As for labor, capital, and entrepreneurship, there is plenty of each of those things but they are hindered by restrictions set in place by governments to “protect” domestic industries and labor forces, transfer wealth, or put up barriers to entry (such as educational and/or licensing requirements) to protect existing businesses. With fewer regulations, lower taxes, and freer trade, these resources could be allocated as needed.

So, the bottom line is that while scarcity exists, it is relative to technology, innovation, and regulation.

Where’s my piece of the pie?

One of the most pernicious ideas promulgated by economics textbooks is that the economy is a zero-sum game. That is, that if I win in the free market, then someone else must have lost. But that is not how the free market works. 

Here is how it is often described in most textbooks:

Society faces an important tradeoff: 
     efficiency vs. equality
Efficiency:  when society gets the most from its scarce resources
Equality:  when prosperity is distributed uniformly among society’s members
Tradeoff:  To achieve greater equality, [government] could redistribute income from wealthy to poor.  
But this reduces incentive to work and produce, shrinks the size of the economic “pie.” 

[All quotes in this post are from the premium PowerPoint of Greg Mankiw’s Principle of Economics teacher resource material.]

Again, we have the mention of society, not individuals. Society does not face any tradeoffs, individuals do. And the free market is not about efficiency, although that is a side benefit, it is about liberty. But, worse than that is the concept of “the economic pie”. This is the essence of the zero-sum game – that there is only one pie, and if you have a bigger piece, it is because you stole some from me. 

According to this way of thinking, when this happens, the government must step in.

If the market’s distribution of economic well-being is not desirable, tax or welfare policies can change how the economic “pie” is divided. 

This, it is claimed, is because 
the market fails to allocate society’s resources efficiently
Again we have society, which doesn’t own resources, and again we have efficiency. The two most frequently cited market failures are externalities and monopolies, both of which will be discussed in a later post.
The problem with zero-sum thinking is that it gives rise first to envy, and then to hatred. We have seen it in the Occupy Wall Street (OWS) protests and the so-called anarchists on May Day of this year (I say so-called because real anarchists would not call for more government redistribution of wealth). You can scan through the comments sections of many far left web sites and find the most vile comments about the “rich”. People who are considered rich have been vilified and their lives have been threatened. Private property has been destroyed and businesses shut down, ironically throwing some of the “99%” out of work. Throughout history the idea has been used to justify violence against people perceived to be “the haves”, such as the Reign of Terror in France and the communist atrocities of Stalin, Mao, and Pol Pot. 
Zero-sum thinking is not how the free market works, its how the government works. It is wrongheaded but is taught in the textbooks of our high schools and colleges every day.

A definition

Economics comes from the ancient Greek term oikonomia, meaning the management of a household. In its most basic denotation it is a word that deals with a small unit, the family, not a society.

So what’s the problem? Today many textbooks, especially Advanced Placement textbooks, define economics as: 

the study of how society manages its scarce resources.

Some textbooks add statements such as these:
  • how people decide what to buy, how much to work, save, and spend
  • how firms decide how much to produce, how many workers to hire
  • how society decides how to divide its resources between national defense, consumer goods, protecting the environment, and other needs

The above definition and three bullet points are from the “premium PowerPoint” in the resources for Greg Mankiw’s Principles of Economics.

What’s the problem with the initial textbook definitions? Society doesn’t decide how to manage anything, individuals do. The first two bullet points are fine (a firm being a small group of individuals), but the third one goes back to society again. There aren’t any societies, even socialistic ones, that get together and decide things. That is a pretense, one that implies that some all-knowing entity (the government) can determine which economic choices are best for all or most of the people in a community. 

Bad definitions lead to wrong thinking about the economy, and that leads to trouble.

The best definition I have found is this one from Alfred Marshall’s book Principles of Economics:

a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing. Thus it is on one side a study of wealth; and on the other, and more important side, a part of the study of man.

Sounds very flowery and old-fashioned, I know, but it is from the early 1900s. Two things to know: wealth does not mean money or income, and it does not mention scarcity, which is in all of today’s definitions. I will talk about these ideas in a separate post.

Another good (and simple) definition comes from the Austrian school. This particular definition comes from the article series The Economic Way of Thinking by Dr. Ronald Nash, but is also found in works by Ludwig von Mises: 

Economics is best understood as the study or systematic investigation of the principles of human action.

What kind of trouble comes from wrong thinking? The first and most important, loss of liberty. The second, loss of wealth. Some other problems will be discussed later.

New stuff

I will get back to my original topic of Kirk’s “The Roots of American Order”, but I am going to talk a little about economics. I teach economics second semester each school year and this year we adopted new books. We will get them this fall and use them for 6 years before the adoption cycle comes around again. The books are Keynesian in their bias, with the AP books being the worst. I will be looking at various assumptions and taking them down one by one in preparation for my econ classes in the spring.