Guns or Butter, Cannabis or Wine, and Other Choices
By Pierre Lemieux
The fact of scarcity is what makes economics useful. If there were no scarcity including of time—like in eternal life, assuming it was 100% sure that God would not change his mind—the rate of time preference and opportunity costs would be zero, and the very notion of choice would vanish. “No rush: you have all eternity to drive this F-150 truck.” This is not the human condition, at least in our current lives.
The reality of scarcity implies that the more of one thing is produced, the less of something else can be. Many economic students will recall the example used by Paul Samuelson: the more guns, the less butter, and vice versa. I have under my eyes the 9th edition (1973) of his famous introductory text Economics, which, on pages 19 and following, discusses the gun and butter illustration and the related “production-possibility frontier.”
A story in The Economist of October 11, “Cannabis v Wine in California,” provides an illustration. With the legalization of cannabis consumption and the response of supply, California wine producers fear that their sales will decrease. The more cannabis is produced, the less wine: land and capital will be moved from wine growing to cannabis production. This is clearly the case if cannabis and wine are substitutes in consumption. They can be complements for some consumers and substitutes for others, of course, but we are interested in the net impact on market demand.
The Economist observes some supporting facts:
Wine-makers … complain that they can no longer afford seasonal labour to harvest their grapes because workers have better-paid, year-round jobs on cannabis farms. Sonoma County, one of the state’s main wine-producing regions, recently imposed restrictions on who may grow weed, and where.
Scarcity also shows up if cannabis and wine are complements—like, say, wine and cheese. Then, an increased demand for cannabis will call forth more production of both cannabis and wine. But this implies that something else will have to be produce in smaller quantity, because labor and capital will move to cannabis and wine from other sectors, say nuts.
Similarly, the more bolts are manufactured, the less of something else will be. The more manufactured goods are produced, the fewer other things will be–perhaps services such as education, health, or cloud offerings. Although many factors are involved, one could hypothesize that the recent decline of technology stocks (“US Stocks Fall as Tech Worries Drag Down Markets,” Wall Street Journal,” October 26, 2018) is a warning sign. At any rate, it is sure that if more bolts are produced, the production of something else will decrease.
It is not a water-proof objection to claim that, in a recession, the production of both more guns and more butter is possible by using unemployed resources. There are at least three counter-arguments. First, economic expansions are more frequent than recessions, which is why incomes grow over time. Second, even when full employment is not reached, the very institutional factors or temporary shocks that cause this may also require the shifting of resources from certain sectors in order for others to expand. Third, government stimulus often shifts costs to the future and implies lower production then. Fourth, although high unemployment is not difficult to spot, there is no way to be sure when full employment is reached: higher wages can (nearly) always bring more workers on the market, whether it is would-be college students, women at home, retired people, welfare recipients, etc. Many economists would agree that Samuelson did not give due credit to these three last counter-arguments.
The main question remains, who decides what is produced, and in which quantities? At least in the case of private goods (by opposition to public goods or services, which can be consumed by everybody once they are produced, like for example street lighting), the simple answer is that there exist three possible systems for making production decisions: (1) tradition, as in primitive tribes; (2) political rulers representing some collectivity or some faction among the public (it can be simply the ruling clique and its clientele); (3) free enterprises responding to the demands of individual consumers or, in other words, free markets.