The scarcity myth

According to page 4 of the Principles of Economics by Mankiw –

economics is the study of how society manages its scarce resources.

or this recent post by Tim Worstall, Senior Fellow at the Adam Smith Institute:

there are unlimited human desires but only scarce resources with which to sate them.

This is easy to understand – there is a big but finite sized cake (the economy) and we all have a share. This raises the distributional question—who gets what share—that some economists are less keen to talk about but fortunately sharing the cake is relatively easy as long as it keeps on growing. As the post-war German Chancellor (1963 -1966) Lugwig Erhard said:

A compromise is the art of cutting the cake such that everyone believes they have the largest piece.

This is obviously easier if all the pieces are getting larger. Thus, arguably one of the greatest human achievement over the last two centuries has been the ability to make the cake grow exponentially such that—at least in principle—everyone should have access to a larger share. This is likely to continue, although we must now pay attention to the fact that any future growth needs to be within the constraints set by the environment, with a fundamental limit set by our ability to utilise resources in a way that is sustainable over the longer term. But the fact that the cake keeps on growing begs the question: What exactly is scarce? Certainly, not money. As Tim writes:

Money’s just the way we count who controls those resources

It’s good that Adam Smith Institute Fellows and Modern Money Theorists agree that it is all about resources because for a long time economists tried to write resources out of the script. As Martin Wolf, asked in the Financial Times in 2010 (July 12th)

Why were resources expunged from neo-classical economics?

At the level of government, money is not a constraint because sovereign governments can create money as and when it is needed. However as Tim says:

...printing more money doesn’t alter the fact that we must still choose which activities we’re to devote what resources to, there is no get-out clause here.

The important word here is `choose’—we get to choose. Money—our system of accounting—is the means by which we chose the relative value of different activities. The impact of these choices is huge. At the level of households, money is not just ‘an accounting tool’, it is often the deciding factor. When we place a wage cap (below the rate of inflation) on say nurses, society—via its elected representatives—is telling nurses that we do not value what you do as much as we used to, and they might be better off doing something else. No magic money tree (no triple lock) for nurses is because `we’—via our democratically elected leaders—chose it to be so.

Coming back to scarcity. If money is not scarce, what is? Not land! In the UK there are 4000 metres squared per person. Plenty for everyone before we even think about multi-storey. The problem with land is not scarcity it is distributional, but that is another story.* If land is not scarce, then may be it’s labour? The answer is a partial yes. But more fundamentally our major scarcity is actually time: the only thing we cannot grow is the amount of time we have available to complete a particular task. This is why productivity is so important, and why productivity roughly equals prosperity. Our ability to have a larger piece of cake is completely dependent on the ability to do more in the same time.

Where do gains in productivity come from? Mostly by getting smarter (investing in education), and by replacing human labour with machines (investing in new technologies). As I blogged a few weeks ago: science and technology are the greatest agents of collective human progress. Investment needs money but we are in luck because now everyone agrees that at the macroscopic level money is not a constraint, just a matter of choice and time.

If money is not the constraint, why are we not using it to increase our productivity? This takes us full circle to Tim Worstall’s point about the relationship between money and who controls the resources. The people that are stopping us are the vested interests whose wealth (or power) will be compromised by progress. Money—democratically owned by us in the form of fiscal policy—directs resource at the microscopic level, and we have the democratic power to chose the direction. We could choose to use our most precious resource—time—to learn, to innovate, to care and to build a better life for everyone.

* Our land distribution is highly skewed with the result that land use is inefficient. In countries with greater land scarcity like Singapore achieving efficient land use is a matter of national importance and controlled by the state.

Comments

  1. Peter May -

    This is fantastic stuff (sorry, Richard Murphy, I think this is a better rebuke!)

    I think of that accountant who was in a Yorkshire board meeting who was told to shut up as “Thou’s nowt but counter”, which is what money really is.

    (Mind you, the fan club might have dissidents when I properly dissect Universal Basic Services….)

  2. Tim Worstall -

    So you do in fact agree with my point then?

    MMT doesn’t solve our problem for us. We still need to be discussing, arguing, over where and how we are to allocate those scarce resources? Printing more money doesn’t change that.

    Excellent, so we do agree then.

    1. Charles Adams -

      We agree that resources (labour, land, etc) are important, and probably we agree that money is the means by which we direct resources. May be we even agree that it is completely within the capability of sovereign governments to influence the allocation of resource, that money is not a constraint, and that politicians are lying to us about this. Where I doubt that we would agree is on whether we think the current allocation of resource is optimal, particularly with respect to healthcare. There are other areas too where I think we could do better.

    2. Lee -

      Creating money can and should pay for public services. Not borrowing or taxation. You seem not to oppose that we can create the funds. You seem to oppose the suggestion that creating the money on its own will solve the problem of what to spend the money on after it is created. That is a valid but different question. We can create the money and then use it to either buy resources that are immediately available and or to produce the resources over a period of time. Your point is not therefore opposite to Charles’, it’s subsequent to it.

  3. Paul Rowntree -

    Money—democratically owned by us in the form of fiscal policy—directs resource at the microscopic level, and we have the democratic power to chose the direction.

    So massive levels of state control, Charles?

    Socialism on that scale — eg collectivised agriculture or industrial investment — doesn’t work, (a) because no-one – including the state – can know all the variables, (b) because state enterprises are prone to producer capture (e.g. enhanced employment rights in the public sector make it difficult to sack incompetents) and (c) so they become grossly inefficient e.g. GPO telecommunications British Leyland, etc

    1. Charles Adams -

      Where there is effective competition which includes agriculture and almost all industry I favour market solutions, where there is not, e.g. healthcare, education, energy and transport infrastructure I favour a collective solution. Not that radical, in fact exactly what Friedman’s mentor Henry Calvert Simons recommended.

      1. Charles Adams -

        On a more flippant note, when I stand in the supermarket aisle and gaze at the wide selection of craft beers on offer I think ‘ain’t capitalism great’, and when I return home after a CT scan I think ‘ain’t the state great’, particularly the NHS!

        They can exist in parallel, no need to swing to one extreme or the other.

        1. Paul Rowntree -

          Indeed, the question is where we draw the line between public and private. Moreover, the choice is not between collectivised healthcare (UK) and privatised healthcare (USA), because there’s a middle way, as in France and much of the EU, where government and insurance cover the costs and service delivery is by a mixture of state, voluntary and private.

          The NHS is world class in parts, but it’s dire in others (e.g. Mid Staffs). Recently, I found myself in Greece without some important medication. I turned up at a provincial health centre, was seen by a GP immediately, was checked over by a specialist, and was out of the door in less than 20 minutes with the prescription I needed. The NHS, which is far better funded than Greek healthcare, would struggle to match such outstanding service….Why? It’s clearly not money: it’s the structure.

      2. Graham -

        You think agriculture is a free market? Try being a dairy farmer, or a beef farmer, or a sheep farmer in the hills. All your input prices are externally determined and all your output prices are externally determined. The farmer has no control. The big buyers set the price, the size, the shape etc etc and if you miss these targets you’re summarily dumped. Look at the number of dairy farmers going out of business because the return is less than cost. There has to be another way, maybe not collectivisation, but certainly regulation. Food is too important to be left to the “market”, one of the reasons we’re down to about 60% self-sufficiency. (eat local & in season)

        British Leyland & gross inefficiency. So Austin, Morris, Wolsley et al were icons of competitiveness and efficiency before they amalgamated into …and finally BL? Just like the British motorbike industry – how’s it doing? And then there’s the rentiers, arbitrageurs and the vultures who strip assets or capture the profits or capital gains and walk away to their “treasure island” paradise with all the loot.

        Private good, public bad is too simple. There is no intrinsic reason why public ownership can’t be efficient given the right management, workforce and regulation & whatever else is necessary. And there are other models, such as worker self-directed enterprises championed by Richard Wolff.

        Finally, I don’t worship at the alter of “efficiency”. What’s efficient about throwing thousands onto the jobless scrap-heap, (does anybody know the real number of unemployed?) when, as Wolff again suggests, you could cut hours, keep the workforce on the same pay. (and Friedman celebrated the increasing worker insecurity – so we have that, but it’s nothing to celebrate in my book)

        The grim reaper of Climate Change is going to exact a terrible toll, sometime, so maybe we have to settle for what we have, or less, but distribute it more fairly.

        1. Charles Adams -

          Lots of good points and I do not disagree, but I did not say ‘free’ market. You cannot have a market without regulation like you cannot have a game without rules.
          And I would vote for rules that redress the unfair advantages of larger players.

          Many of these issues you can look at in two ways: To me efficiency is about giving people more time, to enjoy not working.

          Climate change I will be writing about soon.

          1. Graham -

            Apologies, you didn’t say “free”. Look forward to your take on climate change.

  4. Ms Christine Bergin -

    I wonder if we should consider what our values are in allocating ‘Scarce resources’. Is our first concern for knowledge? if so maybe education should be prioritised. Is our priority money? Then maybe proper regulation should be a concern so that there is adequate distribution for everybody. Do we require a fit and productive workforce? t wont go on as I am sure you get the point. Conversely, if your priority is pleasing/ appeasing multinational companies who can bend the law in their favour then the question is ‘ what is politics and government for?’

    1. Charles Adams -

      We should but this is a big question. What is it that politics/economics should optimise?

      I usually argue for freedom, but you do not need to think long about freedom optimisation before you realise that it is all about how we balance freedom conflicts, and then you either believe there is a market solution (the tyranny of the market) or a democratic solution (the tyranny of the majority).

      As people existed before markets, it is always people first – companies exist to serve people not the other way around.

  5. Richard Murphy -

    My point is that money can be made a constraint, and when it is distributed as at present it is.

    I entirely agree monetary is inherently worthless – it is the promise that matters.

    But if there is no promise to allocate resources to achieve better outcomes for most people – which is what printing more promises can do – then inequality persists. And withholding money from markets – in tax havens, for example, and piles of corporate savings – does just the same thing.

    Printing money – making new promises on how resources to reallocate resources – can actually achieve that goal.

    In that case money printing really does matter, a very great deal. And does change outcomes.

    Worstall is wrong

    1. Peter May -

      “Money can be made a constraint.” Excellent point.
      Worstall’s article seems to be characterised by plausable but specious arguments, and half truths. His idea that we cannot change anything by printing money when we still have £435 billion+ of QE in the system is pretty daft. It may not have changed things as many might have hoped but has certainly changed the prices of assets.
      He might work for an opaquely funded think tank but he writes like a propagandist not a thinker.

    2. Charles Adams -

      Yes, I agree that money can and is made a constraint for political reasons. As we know this is a deceit and the purpose of our healthcare piece was uncover the deceit.

      I do agree with Worstall that resources are a constraint but unless you believe that the current allocation of resource is optimal then why would you not use you ability to redirect resource to better optimise?

      Modern Hayekians are often not faithful to their mentor who in ‘The road to serfdom’ recognised the need for social security and he himself paid into the state social security system (I am planning a piece on Hayek but it might be months away). Everyone knows that we successfully central plan our security (police, army, fire service etc) we need to central plan our energy demands and its impacts, and the evidence is that efficient healthcare is best central planned first because it is a public good and second because the resource constraints (people with knowledge) mean that you do not want to create market duplication of what is already scarce.

  6. Steve J -

    “I do agree with Worstall that resources are a constraint but unless you believe that the current allocation of resource is optimal then why would you not use you ability to redirect resource to better optimise?”

    and

    “It may not have changed things as many might have hoped but has certainly changed the prices of assets.”

    Creating money is distortive, as Peter indicates. It heads for the wrong things. It tends to redistribute from poor to rich. From savers to borrowers. From those with sticky incomes (wage earners, pensioners) to those with flexible incomes (business owners, investors).

    Charles’ suggestion (if I have understood him – not clear) is that creating money somehow leads to ‘optimal resource allocation’ (whatever that means – do you mean ‘creation’ which fits into the point Worstall is making or ‘distribution’ which is not a point he is making). Peter is suggesting it doesn’t. Just heads off into increasing asset prices.

    Peter is right.

    1. Charles Adams -

      The confusion here is about ‘creating money’. I am referring to government spending which creates money (taxation destroys it again). If the government spends money on healthcare and we have progressive taxation there is not necessarily a negative distributional effect. Yes government spending might head for the wrong things but that’s the point of democracy – if we are not happy we can elect better stewards.

      In terms of optimal resource allocation, either you believe that the market solves all problems or there are some areas where we need to take a more active role, like addressing climate change and healthcare.

    2. Peter May -

      I wasn’t suggesting money creation necessarily heads for the wrong things! It is depends on government decisions of where/how to create it. But I was suggesting that QE – ie government spending to buy bonds held in the City – leads to rising asset prices whereas government spending on healthcare, as Charles suggests, would go largely into the ‘real’ economy, not the City, as the extra nurses say or social workers would be taxed on their income and spend most if not all their remaining income on living expenses. QE doesn’t achieve any of that!
      The money is unlimited. Resources clearly are not. We need to decide where to spend the money to employ the available resources as effectively as possible.

      1. Steve J -

        “It is depends on government decisions of where/how to create it.”

        It is naïve to think that government (elected or, mostly, bureaucracy) has the altruism, interest, or even sufficient knowledge or information to make ‘wise’ decisions.

        “We need to decide where to spend the money to employ the available resources as effectively as possible”

        Who is ‘we’? Please disabuse yourself of the delusion that it includes ‘you’. Commissioners in the NHS don’t give a flying monkeys what you think. Really, they don’t.

        I work closely with social care commissioning (I’m a procurement lawyer in local govt, work closely with the NHS) so I see it from the inside.

        1. Peter May -

          Of course you’re right to be realistic – particularly about this government. But if the Commissioners in the NHS really do not give a flying monkeys what I or anyone else in the electorate thinks they should be careful – for that way revolution lies…

        2. Daniel -

          And yet private enterprises are so wise and altruistic that we can trust them fully!

          It amazes me that free market fanatics like you are so utterly convinced that Governments are foolish and blind, yet the business elite and big banks are blameless! After all, a handcuffed executive and powerless electorate are so good for society as a whole, so long as your idea of society is just the powerful who currently pull the strings…

  7. Lee -

    Charles pointing out the truth that the government (via the BoE) can create as much money as we need to fund public services is not the opposite of Tim’s point about needing to allocate that money according to priority and with respect to available resources.

    Tim’s point is not the opposite of Charles’s either. They are not mutually exclusive, in spite of appearances.

    In fact, both points are part of the problem and solution.

    We need money to pay for public services and we need to decide which services to prioritise. Priority should pay respect to our values, our democratic process and the availability of resources.

    Creating the money – instead of needlessly borrowing it from the private sector and paying interest or trying to collect it via taxation – does not instantly create resources to buy.

    The suggestion it does is ludicrous and a diversion from Charles’s point.

    Money doesn’t create resources, it creates opportunity for trade.

    Creating the money we need won’t solve our problems overnight, but it will enable us, facilitate us and empower us to invest in the production and or procurement of the resources we need.

    If the resources we need don’t yet exist, we can, and must, use the power to create money to bring them into existence.

    And that is certainly possible.

    1. Charles Adams -

      Exactly! Thanks.

  8. Graham -

    I have just read Worstall’s original article. I am struck by it banality and the way his argument proceeds by assertion unencumbered by reasoning or evidence. I don’t think it contributes to the discussion in any way.

    He also seems to be annoyed that some non-economists dare to have an opinion on economics, which as it’s practised among conventional economists is possibly the least scientific of disciplines. I refer him to a book by Geoff Davies: Sack the Economists – And disband their departments. Oh, dear, another scientist writing about economics.

    1. Peter May -

      My sentiments entirely!

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