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.
READER COMMENTS
Thaomas
Oct 29 2018 at 6:16am
How does “stimulus” shift costs (which ones?) to the future? And what does No. Four have to do with whether unemployed resources may sometimes make it possible to produce more of one thing without producing less of another?
Benjamin Cole
Oct 29 2018 at 8:32am
As a member of “the ruling clique,” I contend free markets work (certainly for me).
nobody.really
Oct 29 2018 at 10:35am
I hadn’t considered how cannabis might be a complementary good to wine. AND cheese. AND crackers. AND Cheetos. AND pizza. AND Girl Scout Cookies.
And weight-loss programs. Legalization may be stimulating in many ways.
Pierre Lemieux
Oct 29 2018 at 4:47pm
I am not sure you understand my point(s), or perhaps I don’t understand yours. If good A and good B are both complements of good C, it does not imply that A and B are complements. If the implication was true, all goods would be complements and none substitutes, and we couldn’t even draw an indifference map in two dimensions.
Moreover, I did not make any argument about the consumption of cannabis or wine or cantaloup being “stimulating” in any way. In fact, I made the opposite argument: that if more of something is produced, less of something else (except for complement goods) can be.
nobody.really
Oct 29 2018 at 1:24pm
I’m trying to make a joke. Cannabis famously makes people hungry–“gives them the munchies“–which makes damn near any consumable a complementary good. Thus, legalizing pot would be “stimulating”–meaning both triggering the senses, and promoting new economic activity on the part of people who produce these consumables.
See? It’s kinda funny. Kinda.
(If it’s any help, my kids respond to this behavior by nodding, smiling, and slowly backing way….)
Pierre Lemieux
Oct 29 2018 at 3:17pm
OK, I wondered if it was a joke. I have now ordered my crew to tie me to the mast to prevent me from ROTF. Keynes would have read your joke as a universal stimulus policy: “Smoke yourself out of the recession!”
BC
Oct 30 2018 at 2:44am
Cannabis will probably also make your joke seem funnier.
nobody.really
Oct 31 2018 at 2:53pm
Ah–good point.
Last night I watched a PBS documentary on pot. This was such a mind-opening experience that I’ve resolved to do all my documentary-viewing that way.
John Alcorn
Oct 29 2018 at 4:25am
Even in eternal life, time would involve choice and scarcity. The inescapable choice problem would be to optimize the sequence of experiences. If I choose the finest wine today, I might spoil my ability to enjoy less-than-the-best wines in the future. More generally, emotions are the stuff of life; and many crucial emotions are triggered by memory, anticipation, counterfactual thoughts about what might have been or what might be, and so on.
In jargon, experiences have inter-temporal externalities. In plain English, sequence matters.
We fantasize about life without scarcity, but not about life without choice. Our fantasy is incoherent.
Pierre Lemieux
Oct 29 2018 at 12:40pm
Interesting points. I agree that in finite time, non-scarcity would require choice, for the reasons you state. There would still be an arrow of time. I am not sure, though, that the arrow of time would matter in infinite time, where everything could happen and would happen. (Presumably, in heaven, only nice things would happen.) Obviously were have problems thinking about infinity.
One thing I don’t understand is when you say, “We fantasize about life without scarcity, but not about life without choice. Our fantasy is incoherent.” Isn’t our fantasy coherent precisely because we want both non-scarcity and choice?
John Alcorn
Oct 30 2018 at 9:40am
If time and space are intrinsic dimensions of experience—think Newton and Kant and also common sense—then both scarcity and choice are inescapable. We can imagine a scenario in which robots produce more wealth than we can consume, but still we would consume and experience in space and time. Perhaps billionaires already approximate this condition. And I imagine that billionaires, too, reckon with choice of location (at a moment in time) and with sequence of experiences as constrained choices. Sure, we daydream about being here and elsewhere at the same time, and about ‘back to the future.’ But a coherent fantasy with choice intrinsically involves also scarcity, if only scarcity of location and sequence.
Robert Baker
Oct 29 2018 at 2:58pm
“First, economic expansions are more frequent than recessions, which is why incomes grow over time.”
Hm. Economic expansions are of longer duration than recessions, but occur at about the same frequency.
Hazel Meade
Nov 8 2018 at 1:02pm
Whats really horrifying to me about that anexdote is how willing politicians are to deny free agency to seasonal agricultural workers in order to keep labor prices down for wine makers. As if they have some sort of right to the exclusive use of agricultural laborers time. Thats uncomforyably close to slavery. Of course workers can easily move to the next county for better wages. But imagine if that was a state wide or nation wide policy. Restrict production of x so that y an have exclusive access to workers. Chilling.
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