Scarcity and its implications

Scarcity defines the economic way of thinking

Scarcity is a simple idea, yet it has major implications.

If, as individuals or as a society, we have multiple objectives, and if our desires for these goals exceed the time and resources that can be used to attain them, then given that these resources can be used in different ways it matters how we allocate them. It matters because our goals differ in their significance.

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Lionel Robbins, who taught at the London School of Economics, defined economics as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative use” in a book published in 1935.

We have to choose, we have to recognize the terms of the trade-offs between the choices available to us, and we have to do this in a way that gets us as much as we possibly can from the scarce resources available to us.

The economic way of thinking gives us guideposts for making these choices, most notably that we should pursue an objective up to the point that the additional benefit we get from taking an extra step toward it just equals the additional cost in all the things we have to give up in making that step.

Economics certainly should not inform all public policy discussions.

But when it should and doesn’t, the decisions made are usually done from an overly short-term perspective, are not mutually consistent, generally have hidden or unintended consequences, and are not sustainable in the long-term.

In the next two lectures of our course Economics for Everyone we detail the logic of scarcity, the rules it implies for maximizing our social benefit, and the pitfalls that sometimes confound policy makers. Scarcity also takes us toward a discussion of an important policy, “Free Trade,” and our discussion also helps us highlight some of the blind spots of simplistic economic reasoning.

Download the presentation for Lectures 2 and 3, but if you want to prepare in an entertaining way listen to Billy Bragg sing out his thoughts on Free Trade, a 2010 song from Britain foreshadowing many of the debates that have motivated recent American policies.

Here are the lyrics, but I’ve added a quote from another famous economist, David Ricardo, who has a very different view. Our goal is to understand these two competing perspectives on the benefits and costs of Free Trade.

Economics is a science

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(Click on image to enlarge.)

When asked to list the five books that have most influenced his writings, the acclaimed British novelist Ian McEwan put a book called “What Science Offers the Humanities” on the top of his list. He goes on to suggest that science is “a matter of beauty”, to be admired just as we admire our favourite painting, song, or novel. He’s right. Science is beauty, and I would add, economics is a science.

Continue reading “Economics is a science”

Welcome to your first course in economics

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This is an exciting time to be studying economics!

The “Great Recession” of 2007/2008 echoed for almost a full decade in high unemployment in European countries, in lower earnings and wage rates in the United States, and is even more strongly imprinted in excessive debt, low employment, and outright despair in other countries like Greece and Italy. Inflation is low, unemployment is exceptionally high (particularly among young people), and exchange rates keep bouncing around. And now twelve years later in the United States, the unemployment rate has fallen from exceptional highs to an historic low, yet the middle class is full of anxiety as globalization has come to be seen as more of a threat than an opportunity, as the computer revolution continues to fundamentally change the way people in all rich countries work and interact with others, and inequality keeps rising!

Every responsible citizen should have an understanding of the basic principles of economics. Without it how can you possibly understand some of the critical debates in almost every recent election in the rich countries: is a balanced government budget a good thing or a bad? how can governments create more jobs? why are interest rates so low, and should inflation be a worry? Is inequality something we should celebrate, or something to question?

This is the first class of a course that is designed to meet the needs of students interested in public policy who may have had only limited exposure to economics. But almost anyone can follow along. Upon completion of the course successful students will be familiar with the basic principles of economics, and be able to apply them critically to issues dealing with American and international public policy.

Your next steps?

Download the course outline, and get the three required books. Then watch one prominent macro-economist—Joseph Stiglitz—explain his views of what caused the Great Recession and what government should do about it in this presentation given about one year after the meltdown was unleashed in the autumn of 2008. Pay attention to the vocabulary he uses: list words that are not familiar to you, try to discern when he is speaking about “microeconomics” and when he is talking about “macroeconomics”, think about the logic he uses and what this says about the way economists think. Here is a list to help guide you.

Our studies start next week with a discussion of what we mean by “economics,” and what is the essence of the economic approach. To be prepared for our discussions read the readings listed in the course outline for February 4th.

[ Updated February 10th, 2020. ]