3. Economics: the question of scarcity

Every society faces the same question: resources (food, shelter, luxuries, etc) are limited, so they have to distributed in some way to people. Economists call this scarcity: there is not enough stuff for everyone to have everything. Economics is the study of the question: how should people allocate scarce resources? Or, who gets what? There are lots of different answers based on different assumptions about the right answer should look like. "Classical" economists says the right answer is the one which produces the most output, others say the right answer is that which is the "fairest" or the most "sustainable". Economists are good at providing the best answer given the starting points. However, the way a society chooses the right answer is not the job of economists. However, economists are experts in understanding the economic consequences of choices. There is a lot of truth in economics, and societies which ignore these truths fail.

While all resources are scarce, some resources don’t seem scarce to individuals. An example is clean air. It seems to be free and limitless, and our own individual actions make no noticeable difference. However, if we all pollute, we all suffer. Economics also studies this problem.

People who use economics to answer the who gets what question often have firm ideas about what a good answer is. Some people say that a good answer to is share resources as evenly as possible. Some people say we should share resources so that those people who can use them the best should have them. Some people say we should divert more resources into improving the future, and some people what to use resources now. These goals conflict. Young people may want tax money to help make their university education better and cheaper, because that is ahead of them. Older people may want taxes to be cut to they can keep more of their lifetime savings. People buying houses want interest rates to be low: people who have savings want interest rates to be higher so they get more income. Resolving these conflicts can be done through war and force, or through politics, where most people either agree on a compromise or agree to be bound by the majority opinion, even though they will keep trying to change that opinion.

Economics can’t actually give the best answer to solving scarcity, But it does answer the consequences. For example, you may think that the best answer to scarcity is to share everything equally. Economics tells us that a consequence of this approach is that people lose the incentive to think of new ideas and to work hard, and there is less economic growth, meaning that overtime, there is less in total compared to a different answers which allow people to keep some of what they produce. Such a system of sharing also means that the society needs to forcefully take property away from people who have more and give it those who have less, and this means that such a society tends to have a lot of police and little freedom of expression. [Experiments with type of society include the Diggers of 17th century England, or the Soviet Union in the 20th century.]

So, Economics helps people understand the consequences of decisions about allocating resources, which is very important to people who want to make such decisions. Economics helps people make better choices as they think about they type of community they want. A lot of economics is based around maximising wealth, where wealth means ‘more resources’ in total; this is “classic” economics. This is understandable: the increase in human wealth since the invention of agriculture is impressive. The increase since the Industrial Revolution is almost miraculous. One of the most famous economists, Adam Smith, wanted to understand how this happened. His answers were so successful that they are still studied today and largely defined what economics is about. [Adam Smith’s most famous work is The Wealth of Nations, which is an easy read for adults, and written in modern English. It starts with questions about everyday experience, such as “why does the baker bake bread for us?”.]

Other streams of economics have a focus on long term issues (such as the cost of pollution) or make very types of society (communism). Economics also helps businesses and governments makes decisions, and more and more, economics helps us understand what motivates people to make decisions. A book called Freakonomics is example, which looks at how people make decisions when they can’t be certain of outcomes (such as buying a second-hand car which does not come with a guarantee).

Economics is a fascinating mix of politics, mathematics and the way people make decisions. Economics can be quite mathematical and can explain very well what happens to an economy when interest rates go up, for example. However, individual people do not behave as perfectly as economists used to believe, so a lot of economic theory now involves studying human decision making. At a large level economies are impossible to always predict. Economics fails to be a science because while economists can explain what happened they have frequently failed to predict what will happen. In fact this is actually predicted by economics.

However there are areas of strong theory where economics makes very useful predictions. It is worth knowing about some of these. Most classic economic advice is sound and has been proven time and time again to lead to faster economic growth and more wealth. There is always a lot of discussion about how to share wealth, but before wealth can be shared, it needs to be created, and classic economics is an incredibly good tool for making this happen. One of the worst causes of economic injustices is rent seeking (below), which effectively steals money the community, and a good understanding of classic economics is the best way to detect and fight rent seekers.

The most important reason to know economics is to be very clear what trade offs are being made when making decisions. Economics addresses one of the most important questions every human society has faced and there is a lot to learn from it.