All Commentary
Monday, March 25, 2024

What Is Scarcity, Really?

People often talk about scarcity. But are we all talking about the same thing?

Image Credit: iStock

The most basic concept in economics is scarcity. If you open an economics textbook, the first chapter will undoubtedly mention the concept.

Unfortunately, the concept of scarcity suffers from the problem of multi-sense. In other words, scarcity is used both inside and outside the economics field to mean more than one thing. Not only that, but sometimes the word is used to describe concepts that are at odds with sound economics.

So let’s explore scarcity and what it does and does not mean.

Economic Scarcity

The first definition of scarcity we’ll focus on I call “economic scarcity.” This is the scarcity that sound economics textbooks focus on.

Economic scarcity describes the relationship between people, the ends they seek, and the means they have to achieve those ends.

We live in a world of economic scarcity, where the ends we desire exceed our means of attaining those ends. In short, we want more than we have.

The evidence for that is simple—people act! Every day, you and I take actions because we want something we don’t have. Why do people go to college, start a family, or get a job? They have some end goal they’re trying to achieve. This insight comes primarily from the economist Ludwig von Mises in his magnum opus Human Action. Mises says:

Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.

Conscious action implies economic scarcity. As long as people are intentionally acting, they prove that they have desires which are not yet met.

Consequently, as long as there is human action there will always be scarcity. Even in supposedly post-scarcity utopian stories like Star Trek, scarcity is present. Economic scarcity is even present in the Biblically perfect world of the Garden of Eden. Adam acts in the Garden, which signals his desire to change his state of affairs.

In a certain sense, this type of scarcity is binary. It defies simple measurement in terms of more or less. If there is something (tangible or intangible) that a person desires but does not have, then he or she faces scarcity.

Insofar as we can measure economic scarcity, the best way to do so would be to measure the cost of obtaining some desired end. When we act and use resources, we give up some alternative action and use of those resources. Economists call this lost opportunity of an action its opportunity cost.

If the opportunity cost of something grows, then it probably makes sense to think of that thing as “more scarce.” There are different ways to try to quantify opportunity cost. The economist Julian Simon argued that the best way to quantify economic scarcity was to look at inflation-adjusted prices over time. Gale Pooley and Marian Tupy, in their recent book Superabundance, attempt to put costs in terms of the time it takes the average person to acquire something (they call this measure a time price).

So if your cost of obtaining a good or end falls, it makes sense to think of it as becoming less scarce; but, for the reasons discussed, we shouldn’t mistakenly think that falling scarcity of one good means we will someday eliminate scarcity.

Economics is fundamentally about how humans cooperate under the condition of scarcity. The economic institutions we create to deal with this problem may change as it changes form, but these systems and their study will always be relevant so long as humans act to attain things they desire. In this sense, we will never overcome scarcity.

The Scarcity Mindset

Economic scarcity may be an unavoidable fact, but that doesn’t mean we can’t overcome some of the other “types” of scarcity.

Another way the word scarcity is used is related to the scarcity mindset. The short summary is that the scarcity mindset views one person’s gain as another person’s loss. If you’re doing well, someone else must be doing poorly. If you’re winning, someone else must be losing. Economists call this a zero-sum view of the world.

Viewing the world as a zero-sum game or resources as a fixed pie is the essence of the scarcity mindset. Sometimes when people say, “Resources are scarce,” what they’re really saying is, “All interactions have a winner and a loser.” My colleague Patrick Carroll addresses this fallacy in more detail here, and I owe him for bringing my attention to how this is connected to the scarcity mindset.

This view of scarcity is wrong. It is not true that one person’s gain is always to the detriment of others. Humans have the potential to create new value and new economic resources.

The simplest example of this is exchange. In the morning, my wife and I give our girls vitamins to start their day. My oldest prefers the pink vitamins, and her younger sister prefers purple vitamins. Unfortunately for them, I don’t take time digging through the vitamin bottle for their favorite colors. When it comes to Dad giving vitamins, you get what you get.

But sometimes, something magical happens. My oldest will get a purple vitamin, and her younger sister will get pink. It didn’t take long to figure out the magic of mutually beneficial exchange.

When they receive each other’s favorite, they trade. When they do this, both of them are happier. Notice, the number of vitamins remained the same, but the happiness created by the vitamins increased due to trade. The “pie” of satisfaction is not fixed merely because the resources are countable. Trade increases the size of the economic pie!

This capacity to increase the size of the pie grows when we consider that humans can also behave entrepreneurially and create resources of value. Once upon a time, oil was of no value to human beings. It was just a messy annoyance. Then, some brilliant innovators discovered that it could be converted into usable, cheap energy for generations of humans.

Value creation is all around us. This doesn’t mean that there aren’t any zero-sum games in the world. Sometimes there is a winner and loser—think sports. But the point is that sometimes we have win-win scenarios. Sometimes creative people grow the pie. Insofar as people use scarcity to mean that the pie is fixed and cannot grow, they are wrong.

This also helps us reconcile two ideas that seem at odds but aren’t in fact.

The economist Thomas Sowell famously said: “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

Seemingly in tension with this, Julian Simon makes an interesting claim:

Our supplies of natural resources are not finite in any economic sense. Nor does past experience give reason to expect natural resources to become more scarce. Rather, if history is any guide, natural resources will progressively become less costly, hence less scarce, and will constitute a smaller proportion of our expenses in future years.

How do we square these two quotes? Do they contradict? Not at all.

Thomas Sowell is talking about the realm of politics. In politics, all policies are paid for by someone else. Every dollar spent on the military is a dollar the taxpayer could have spent on something else. Politics is zero-sum.

On the flip side, Simon is talking about how human creativity channeled in markets and voluntary exchange can lead to a decline in scarcity. Notice, Simon claims resources are not finite in an economic sense (more on that later), but he never claims resources are not scarce in an economic sense. Simon agrees with Sowell—resources are scarce. However, he adds that human ingenuity in markets gives us the potential for decreasing scarcity. We can reject the zero-sum scarcity mindset while maintaining that the government is incapable of providing a free lunch.

Physical Scarcity

One last way people talk about scarcity is in a physical sense. People count the resources around them, and they take this counting to be a measure of scarcity. I’ll call this type of scarcity physical scarcity.

It’s important to note that while counting according to some physical metric matters in an engineering sense, it matters much less for understanding economic scarcity. To see why, you just have to notice that something being limited in quantity does not make it something people desire.

Imagine scientists discover an element that emits significant radiation. Now let’s imagine that there is no safe way to handle or convert the element (even as a weapon). How much would people be willing to pay for such an element? My guess is they wouldn’t pay for such an element. In fact, people would probably pay to avoid it. Even if this element is physically rare, it may not help people attain their ends. In that case, it is not scarce.

In contrast, we can imagine something physically plentiful being scarce. There are thousands of tons of gold that exist below the earth’s surface. Does the existence of this physical quantity of gold make it less scarce? No. If it isn’t accessible to use to achieve human ends, it does not alleviate scarcity. Physical scarcity and economic scarcity are not the same thing.

As a last example, we can imagine a natural resource that becomes less scarce without any change in physical quantity. This happens with gasoline. Imagine that suddenly a clever entrepreneur develops a new, more efficient car engine which raises fuel efficiency to 100 miles per gallon. The physical supply of gasoline remains unchanged, but the economic scarcity of gasoline would diminish immediately.

This isn’t to say that there is absolutely zero relationship between physical and economic scarcity. There is some relationship. But the point is that what directly matters to humans is the economic scarcity of the resource, which is diminished by human creativity. To paraphrase Julian Simon, oil comes from the human mind, not the ground.

Abundant Hope

There are likely more ways that the term scarcity is used and misused, but these are the major three senses.

Separating these three different concepts which are described by scarcity helps us reconcile the inevitability of scarcity with an unyielding optimism.

It’s true that people will always have goals they have yet to achieve, but this shouldn’t make us gloomy. In their pursuit of these goals, humans use their creativity and perseverance to grow the pie and alleviate the economic scarcity around us. Doing so does not have to mean that someone else loses. Instead, a world of economic scarcity, natural abundance, and win-win scenarios can exist without contradiction.

  • Peter Jacobsen is a Writing Fellow at the Foundation for Economic Education.