Broback's Blog

Harvard Professor Greg Mankiw wrote about the students who walked out of his introductory econ class because “the biased nature of Economics 10 contributes to and symbolizes the increasing economic inequality in America.”

He hit upon a few points that I’ve been meaning to post about. I’ve wanted to go into detail how those with a fundamentally unconstrained worldview will find most of the foundations of modern economic theory disconcerting.

The one to start off with is scarcity. They hit you with this one in your first Econ class.

From Wikipedia: Scarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society’s goals can be pursued at the same time; trade-offs are made of one good against others. In an influential 1932 essay, Lionel Robbins defined economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

While we have been steadily moving (largely thanks to embracing market-based economies) toward making more and more resources available to more and more people, not everything is available to everyone yet. While the obese now outnumber the hungry worldwide, and hunger is no longer an issue in America, (the Department of Agriculture in 2006 stopped using the word “hunger” in its reports), there’s a lot left to provide. Example? Up to 20 percent of American households defined as “poor” still do not have air conditioning.

Now of course the simple answer is to just have the government buy them air conditioners, but what about the people missing microwaves, cars, personal computers, internet access, or a house to call their own? Dialysis? Can we do it all? Shouldn’t people be able to vacation in Cabo? Don’t people want to go to Cabo? Yes they do. Want? Humans have unlimited wants. If you run the numbers you quickly hit the wall. Wants are greater than resources. Even rich countries who specifically try to satisfy the wants of their people bump up against scarcity.

Can’t the rich just pay for it? Let’s pencil it out. Take all the money Bill Gates has (56 Billion) and divide it up among the population (7 Billion). Everyone will get 8 bucks. A very cheap air conditioner is $400.00. You’ll need to confiscate all the wealth of 13 Bill Gates just to buy everyone one little box for a house of 4. Power it? Do you even have AC power? How many Bill Gates do we need to bring power to your village? Crap, an air conditioner costs a couple hundred dollars a year to power! We’re going to need a lot more rich guys to make all the good stuff happen. We aren’t even close to Cabo yet.

You get the idea.

Even the most unconstrained thinker I know had to finally/reluctantly agree that scarcity was real after he gave it a little thought. If we have scarcity, then we know resources have to be allocated somehow. If we have allocations, and some “get” and some don’t, we’re faced with a challenge we can’t just wish away.

Economics is the study of the allocation of scarce resources. Get over it kids.

Next episode: The inconvenience of gains from trade…