Scarcity

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.

Freedom

It took hundreds of years to develop a government based on natural rights and the freedom of the individual, but only 100 years to destroy it. I am not sure that recounting the history of liberty has any meaning any more. Clearly the only freedom many people want is freedom from responsibility. When you look at the “occupy” crowd, it seems they want to live at someone else’s expense, as do many others in this country. Freedom now just means free stuff. European “socialism” has only worked for as long as it has because of a mostly free market United States. Now that we have fallen into the same trap, former UK PM Margaret Thatcher’s words come to mind: eventually you run out of other people’s money. The new American socialism won’t work at all since there is no large free market country left to prop us up. I only hope there is time to turn things around.

Trying to get back into it…

This semester has been rough. With a new class and a new evaluation system I feel like a first year teacher again. There once was a time that I loved going to work every day to teach my students the great story of the founding of this country. Now the only thing that keeps me going is my dream of opening my own school. It will be a private, not-for-profit classical school based on the Hillsdale Academy curriculum. The social studies classes will be focused on Western Civilization and the American founding, as well as free market capitalism. I hope I can get some support by other lovers of liberty in getting my school started.

This semester went by too quickly in my government class and somehow I did not get to every topic I normally teach. But I did do more on the founding documents, so that was good. I constantly connect the current events to the Constitution and how the limited government our founders set up has been changed in the past 100 or so years.

So this month I will try to get back into it, in between Children’s Choir, Christmas shopping, grading exams and projects, and celebrations with family and friends.

One of the contributions of ancient Greece

The founders for the most part did not like the political ideas of Greece because they felt democracy was a “tyranny of the majority”. There was no higher law, no universal principle to appeal to, so the majority could change laws at a whim and sentence people to death because they didn’t like what they believed. Socrates is the most famous victim of one of those “majoritarian” decisions.

However, the Greeks, or more accurately, the Athenians, are still imp0rtant. The main point I want to make here is their contribution to historical thinking. In the booklet A Student’s Guide to the Study of History, author John Lukacs says this:

As in so many other instances, the Greeks were the creators of many of the fundaments of our entire culture and civilization. Among them we find the first examples of historical thinking (and, therefore, of historical writing)—ndeed, the very word “history,” which in ancient Greek meant something like “re-search.” The three greatest classical Greek historians were Herodotus, Thucydides, and Xenophon. It is interesting to note that all of them wrote something like contemporary, or nearly contemporary, history about events and people that they knew and that they had witnessed. (Xenophon had marched with ten thousand Greek soldiers across Anatolia—today’s Turkey—to the sea and described that in his book Anabasis, that then became near-immortal.) Herodotus was sometimes called the Father of History: he was a man of the world, and perhaps his most lasting achievement was the ease and the clarity of his   style.* But for our purposes here, running through the history of history, perhaps the most telling achievement is that of Thucydides. In the Introduction to his History of the Peloponnesian War he asserts his purpose. This war is not yet over, he writes: but there are already so many false stories of this event or that, of this man or another, that he is compelled to tell what really happened. This search for the truth—which most often consists of the reduction of untruths— is the essence of historical research: a fabulous achievement of the Greek mind. There is also Thucydides’ conviction of the permanent value of history. He hoped, he wrote, that his History would be read “by those who
desire an exact knowledge of the past as a key to the future, which in all probability will repeat or resemble the past.** This work is meant to be a permanent possession, not the rhetorical triumph of an hour.”

This, of course is not their only contribution, but for now it will have to do. School has begun and I will be only posting sporadically. More frequently than the past weeks of silence whilst I was out of town visiting my grandbaby (and left my comuter at home), but not daily as I had hoped.

The second city

There is, of course, much more to be learned by reading about times prior to Athens, but I will leave that to you. I have given you two excellent places to start: Russle Kirk, the main author I am reading, and Thomas Cahill’s excellent ‘hinges of history’ series.

Now to move on to the second of the cities in our journey: ancient Athens. Often the term Greece is used in discussing the foundations of American liberty, but there is actually very little of the American founding that can be traced to Greece, or more properly, Athens, since the Greece of our imaginations was mostly that, imagination. It was not a fantastic place of freedom and democracy, but, as Kirk says in his book and history verifies, one of “class conflict, disunity, internecine violence, private and public arrogance and selfishness, imperial vainglory, and civic collapse.” What is known as the “golden age of Athens” lasted little more than 50 years. While Athens conquered many city-states, they could not work together to sustain the greatness that flowered only briefly. They have the perfect word for their own demise: hubris.

This is not to say the Greeks are not important, they are, and that will be the next discussion.

Ancient Jerusalem, continued

The idea of ordered liberty is something that people take for granted. We think it always was thus. But the world outside of the Jewish covenant was one of capriciousness and injustice. When we read of Abraham’s willingness to sacrifice his son Isaac, we recoil in horror. However, since human sacrifice was a common occurrance in the region it was not that sacrifice that caused his conflicted feelings, it was that the sacrifice contradicted the covenant between God and Abraham. This event forever excluded human sacrifice from . This set the apart from all other tribes in the area.

We look also at the commandments of God passed down to the Hebrews through Moses. (There are more than ten by the way, there are over 600 commandments in the Old Testament.) Reading them they seem unbelievably harsh to our modern sensibilities. But the laws were actually far more just than what went on around them. From Kirk:

before the people of Israel experienced thier “leap in being”, by which they learned of the just God and His laws, no confidence prevailed anywhere that an abiding order governed the universe. Everything that happened might be chance, accident; the gods were ferocious or whimsical; those gods laid down no clear principles for the conduct of human life.

In Thomas Cahill’s The Gifts of the Jews, we find the same concept:

But if we make use of what hints remain in the prehistorical and protohistorical “record,” we must come to the unexpected conclusion that their inventions and discoveries, made in aid of their survival and prosperity—tools and fire, then agriculture and beasts of burden, then irrigation and the wheel—did not seem to them innovations. These were gifts from beyond the world, somehow part of the Eternal. All evidence points to there having been, in the earliest religious thought, a vision of the cosmos that was profoundly cyclical. The assumptions that early man made about the world were, in all their essentials, little different from the assumptions that later and more sophisticated societies, like Greece and India, would make in a more elaborate manner. As Henri-Charles Puech says of Greek thought in his seminal Man and Time: “No event is unique, nothing is enacted but once …; every event has been enacted, is enacted, and will be enacted perpetually; the same individuals have appeared, appear, and will appear at every turn of the circle.” The Jews were the first people to break out of this circle, to find a new way of thinking and experiencing, a new way of understanding and feeling the world, so much so that it may be said with some justice that theirs is the only new idea that human beings have ever had. But their worldview has become so much a part of us that at this point it might as well have been written into our cells as a genetic code. We find it so impossible to shed—even for a brief experiment—that it is now the cosmic vision of all other peoples that appears to us exotic and strange.

Cahill, Thomas (2010). The Gifts of the Jews: How a Tribe of Desert Nomads Changed the Way Everyone Thinks and Feels (Hinges of History) (Kindle Locations 94-106). Anchor. Kindle Edition.

Without the idea of a world of reason, order, and justice, there would be no liberty.

The first city

Jerusalem, capital city of ancient Israel, though thousands of years in the past, is with us still. Not just in the modern state, but in the moral foundation upon which the American experiment rests. Russell Kirk says, “We cannot well understand order and disorder in America today, or elsewhere in the world, unless we know something of the beliefs and the experiences of the Hebrew people in a remote land and a remote time.” He further says that while our political history owes only a little to the Israelites, “Nevertheless, the American moral order cold not have come into existence at all, had it not been for the legacy left by Israel.”

John Adams wrote similar sentiments in a letter to F. A Vanderkemp in February of 1809:

The two most powerful, active, and enterprising nations that ever existed are now contending with us. The two nations, to whom mankind are under more obligations for the progress of science and civilization than to any others, except the Hebrews. This consideration affects me more than the danger from either or both. I excepted the Hebrews, for in spite of Bolingbroke and Voltaire, I will insist that the Hebrews have done more to civilize men than any other nation. If I were an atheist, and believed in blind eternal fate, I should still believe that fate had ordained the Jews to be the most essential instrument for civilizing the nations. If I were an atheist of the other sect, who believe or pretend to believe that all is ordered by chance, I should believe that chance had ordered the Jews to preserve and propagate to all mankind the doctrine of a supreme, intelligent, wise, almighty sovereign of the universe, which I believe to be the great essential principle of all morality, and consequently of all civilization.

Kirk tells us that the in the realm of politics, the idea of a check on civil authority is present in the Jewish political order: the prophets were the restraint on the the kings of Israel. The covenant, the social conpact if you will, is between Jehova and the Hebrews. The human authority, whether judges, kings, or priests, were judged against their fidelity to that covenant. That idea survived numerous oppressions and the diaspora and was incorporated into our own social compact.

Many people today try to say that the founders were not religious men. This can only be done by ignoring the written record we have of the founding generation. Anyone can read the letters and speeches of men like George Washington, Sam Adams, John Adams and even Benjamin Franklin and Thomas Jefferson to find the falsness of that claim. The reason the mistake is made is that we think of religiosity in modern terms such as “born again” evangelicalism. But the religion of the colonies was actaually more Old Testament than New. “In Adam’s fall we sinned all” is the first line colonial children learned to read. John Winthrop’s City Upon a Hill sermon of 1630 and Johnathon Edward’s Sinners in the hands of an angry God of 1741two of the most famous examples of this Old Testament worldview. The fall, God’s justice, and God’s grace are all important to the development of the American notion of liberty. We are familiar with some of the ideas of ancient Greece and Rome. But America’s beginnings reach much further into the past, all the way back to God’s chosen people.