By John Weeks.
Take your pick, reality or fantasy.
Economics is the science that studies human behavior as a relationship between ends and scarce means which have alternative uses. Lionel Robbins, Nature and Significance of Economic Science, 1932
…[M]y lack of emancipation from preconceived ideas showed itself in…the outstanding fault of that work [Treatise on Money], that I failed to deal thoroughly with the effects of changes in the level of output.
J M Keynes, The General Theory of Employment, Interest and Money, 1936
A student attends the first class in introductory economics and learns that economics is the study of the allocation of scarce resources to meet unlimited needs. The validity of this definition is so obvious that the student receives no justification or explanation of it. Except for the very rich, the preoccupation of every household is how to use its limited income to meet the unlimited needs of its members. We can borrow in order to consume beyond our current means, but as a result we have less in the future, either for ourselves or our children.
So it is with governments. Because resources are scarce, a country lives beyond its means when its government runs deficits and goes into debt. The debt must be repaid from the scarce resources of the future. This is the euro crisis in a nut shell, populations foolishly allowing their governments to misguide them into believing that a free lunch can be found in budget deficits.
The world would be an easier place if resources were abundant and needs limited, but we must face reality. If we do not, the operations of markets will bring that reality home to us. Markets guide the allocation of those scarce resources to their best use, and going against markets is a mug’s game.
It is quite likely that a very large proportion of the adult population of the United States and western Europe accepts this parable of scarce means and unlimited needs. After all, isn’t that what population growth and a limited earth add up to? Policies of austerity, for households or governments, is no more than the consumption excesses of human coming home to roost.
No. This scarce means, unlimited needs story is not reality, it is ideological rubbish. Resources are not scarce and needs are not unlimited. Economics is about the allocation of scarce resources among unlimited needs to the same extent that astronomy is the study of horoscopes.
The most important resource in any society is the laboring ability of its population. At the end of 2011, one of every nine members of the eurozone labor force was unemployed (www.oecd.org, statistics). With this level of unemployment, we should not be surprised that over twenty percent of European industrial plant was idle in the same year (http://www.bloomberg.com/quote/EUUCEMU:IND). As thousands of households of unemployed workers lived rough or in charity hostels, 700,000 homes were unoccupied in the United Kingdom (about 3 percent of the housing stock), and 800,000 in Spain (5% of stock). In the United States, over 11 percent of homes stood empty, one in every nine (http://money.cnn.com/2011/03/28/real_estate/us_housing_vacancy_rates/index.htm). In Detroit, with 100,000 people homeless, the local authorities dealt with this abundance of housing by bulldozing neighborhoods (see Business Insider, 10 March 2010, “The Mayor of Detroit’s Radical Plan to Bulldoze One Quarter of the City”, http://articles.businessinsider.com)
Idle workers, idle factories and offices, and homes standing empty and abandoned. Resources are scarce? If you believe that, do not visit a used car dealership unaccompanied, because i
t would appear that you are self-destructively credulous. To put the matter simply, when something is in surplus, it is not scarce. The remote possibility that resources could suffer from a shortage in the future or may have occasionally in the past does not make scarcity economics plausible. If you cannot use all of it, there is no danger of running out of it (rocket science). In most countries in most years labor and the machinery to employ that labor are not scarce. The central economic problem in a capitalist society is not how to allocate scarce resources. On the contrary, the central problem of capitalist society is how to use productively the available resources. Markets do not provide the solution to that problem.
Surely, the other half of the definition is true, that people’s desire to consume is unlimited. Marketing shysters all over the world strive to turn this assertion into fact. It should be viewed very skeptically. If a large number of people were stopped randomly on the street and asked if they wanted to improve the quality of their lives, it is highly likely that the vast majority would answer “yes”. To equate or reduce this hope for improvement to an unlimited desire for things that can be bought and sold is absurd and a slander on human nature. A shockingly large proportion of the populations of the most developed countries in the world lives in poverty. Whether or not their “wants are unlimited” is a foolish and reactionary conjecture, because they lack the income or means to the income that would purchase the minimum required for a decent life.
At top of the income and wealth scale, households have the opposite problem. While austerity reigns for the poor, over-indulgence guides the rich. How do you spend $1.3 million dollars a year (average for the those in the top one percent in the United States) or one million pounds (about the UK figure) in a year? The rest of us are left to imagine the angst of those at the top as they come to 31 December and discover, yet again, income unspent. What, then, is economics, in contrast to the alchemy of scarce resources?
Economics is the study of the process by which society brings its available resources into production, and the distribution of that production among its members.
Once we recognize the obvious, that resources are abundant and we most use public policy to make them scarce, almost every cherished parable of mainstream economics is revealed as rubbish. When labor and other resources are idle all of the following are logically false.
1. “reforming the labor market” by making its easier to fire workers will increase employment; 2. public deficits will reduce private investment;
3. “freer” trade among countries brings benefits to all;
4. increases in the money supply cause inflation; and, above all
5. supply and demand determine prices.
When resources are idle, employment is determined by the level of aggregate demand. Deficit spending brings more resources into employment, it does not redistribute them between the public and private sectors. When labor and machinery are idle, increased imports may replace domestic production and reduce employment. Increase in the money supply, if it has any impact, is to stimulate output. And, most fundamental, when resources are idle what a company offers for sale is determined by the sales it anticipates (hopes for). Market “supply” and market “demand” are the same thing, and being the same they cannot interact to determine anything. The economics of scarcity is pernicious foolishness. By contrast. the economics of idle resources addresses reality. It is the same as the difference between alchemy and chemistry, astrology and astronomy, evolution and creationism. Zoology does not investigate unicorns, nor does agronomy analyze the growth of giant bean stalks. The difference between analysis based on scarcity or based on idle resources is, to coin a term, the opposition of alconomics and economics.
It is a scandalous reality that the overwhelming characteristics of most of the history of most capitalist countries has been idleness and waste of resources. That scandal is made all the greater because the periods when capitalist countries were at war with each other. This last reality suggests that the major public policy issue for economics is how to employ all of society’s resources without sending people off to kill each other.