Everyone has a theory of the way the world works, a way of connecting cause and effect. Without it, we wouldn’t know how to start the day: “If I wake up at 7:00 a.m. tomorrow, I should make it to work on time. And then…”
Our theories, the rules and principles by which we interpret the world, help us to think and plan, but they also constrain our thinking and planning to some degree. That can be a good thing, as long as our theories conform reasonably well to the real world. We understand, for example, that the best way to exit the 10th floor of a building is not necessarily to step out of the nearest window.
For economists who study human action in the real world, one of the principles we cannot ignore is that scarcity exists—to get more of one valuable thing, you will have to give up some of another valuable thing. In fact, you could say that not understanding the nature and significance of scarcity is the hallmark of someone who isn’t an economist, or is a very bad one.
In everyday life, it’s usually impossible to ignore the existence of scarcity. For most of us, it’s pretty obvious that time and money aren’t unlimited, and that if we want a bigger house we’ll probably need to earn more by giving up some leisure time and working more. In a free market, one without arbitrary political power and aggression, the economic reality of scarcity is a “hard constraint” that’s always good to keep firmly in mind when making plans.
Economics versus Politics
But tracing out the more subtle and far-reaching implications of scarcity in a given set of circumstances is a skill that takes a lot of training and practice, which of course not everyone has done or, really, needs to do.
As Murray Rothbard puts it,
It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in the state of ignorance.
Unfortunately, politics sorely tempts us to act irresponsibly. Politics is essentially about acquiring and using political power—the initiation of physical violence. If the first principle of economics is that “scarcity exists,” then far too often the first principle of politics is, “ignore the first principle of economics!”
In the absence of legal privilege or persecution, people in a free market have to deal with scarcity’s hard budget constraint. But in the world of politics, people can try to immunize themselves against scarcity by making others pay for the things they want for themselves or for their cronies. Politics is the realm of the “soft budget constraint,” which may have prompted Margaret Thatcher to say, “The problem with socialism is that you eventually run out of other people’s money.”
Unfortunately, the same could easily be said for garden-variety politics almost everywhere today.
Principles versus Consequences
This suggests perhaps another way of differentiating libertarians from the progressives of the left. For libertarians, economic principles constrain our thinking. For progressives, economic reality constrains their outcomes.
What I mean is that when progressives, for instance, demand that people pay ever-higher minimum wages to those who work for them, they ignore the hard reality that someone, often unseen, must bear the cost of their “compassion,” and that those others are mostly young and unskilled workers that employers will now find too costly to employ. Or, an employer may cut back on nonwage payments they previously used to compensate their employees, making the employees worse off.
But because libertarians from the outset tend to be more mindful of economic principles, they are better able to shape their proposals, at a minimum, so as not to harm the very people that progressives aim to help. Libertarians are less likely to be disappointed when their policies confront economic reality. As someone once said, “Economics is the art of putting parameters on our utopias.” Scarcity is one of those parameters.
(Some may be reminded of Thomas Sowell’s distinction between “constrained vision” and “unconstrained vision,” which, however, I believe focuses more on one’s view of human nature: whether it is perfectible or not perfectible.)
Innovating within Constraints
Faced with poverty, unhealthy working conditions, criminal violence, and a host of other persistent socioeconomic problems, we’re often admonished by the left to think beyond capitalism, to think creatively “outside the box.” Why not try to change those parameters or remove some of them altogether?
Well, even musical geniuses from traditions as different as classical, jazz, and rock must learn the rules of their genre before they can break through and go beyond them. Before he pioneered bebop, Charlie Parker had first to master the saxophone and the musical conventions of his day. Only then could he push outside mainstream jazz. To color outside the lines, you need to know where the lines are.
Moreover, scarcity is not a man-made thing that can be unmade purely by human willpower or by wishing it away. We have to account for it when we confront the real world. Otherwise, we risk personal failure or perhaps much worse. None of this means, though, that we can’t dramatically reduce scarcity and address those problems.
Sometimes there are free lunches. It’s possible to push that constraint outward and reduce scarcity through efficiency (getting more out of less) or, more importantly, through innovation (creating something of value that didn’t exist before). Henry Ford, Estee Lauder, and Norman Borlag significantly reduced the scarcity of cars, cosmetics, and food—to a world of ordinary people within the constraints of physics, chemistry, and economics.
We can get to where we want to go faster when we can see the road.
You can read a Portuguese version of this article here