Scarcity

What It Means

The world is not like the Garden of Eden, where all desires are always fulfilled. Instead, the earth’s supply of resources is limited. Our desires as individuals and societies always exceed the world’s ability to satisfy those desires. This central truth of life is what economists call scarcity.

The problem of scarcity is plainly visible in poor societies. In drought-prone parts of Africa, for instance, there often is not enough food to go around. But increases in wealth at the individual or the societal level do not solve the problem of scarcity. Middle-class people in the United States may not be in danger of starving, but this does not mean that their desires are fully satisfied. A construction worker might want a nicer car and a larger house than he is currently able to obtain, but if he came into possession of those things, he would likely still have unsatisfied desires. We are all familiar with the phenomenon of celebrities who feel that they need houses the size of palaces equipped with private movie theaters, bowling alleys, and garages capable of housing dozens of luxury vehicles. Rare is the celebrity who, having acquired such things, stops wanting any more possessions. Because the supply of goods and services in the world is limited, even billionaires find it impossible to satisfy every single desire they have.

The problems faced by someone who wants but cannot obtain a private jet clearly pale in comparison with the problems faced by someone who is starving. Economists do not contend that all individuals and societies are equally affected by the problem of scarcity. They do, however, maintain that all individuals and societies are subject to the problem of scarcity and that this causes them to act in particular ways. Economics is the study of the ways in which people and societies respond to the problem of scarcity.

When Did It Begin

Scarcity as defined by economists has always been a fact of life. The ways in which societies have dealt with scarcity, however, have changed a great deal throughout history. Today capitalist systems are the chief means of determining how societies allocate scarce resources. In a capitalist economy businesses are largely owned by private individuals rather than the government, and prices are determined through the unrestricted dealings between buyers and sellers. Up through the Middle Ages (about 500 to about 1500), however, societies responded very differently to the problem of scarcity.

Prior to the rise of capitalism (which developed in Europe after the Middle Ages, during the sixteenth through eighteenth centuries), tradition and central authority figures determined how society’s scarce resources were allocated. In most precapitalist systems only an elite group of people could own land and possess wealth, and these elites (along with the traditions that allowed them to remain in a privileged societal position) limited the production and distribution of goods and services. Farmers, bakers, cobblers, and blacksmiths may have existed in a medieval English village, but they did not own their land or the property they used to produce their goods, and they made only as much as tradition or a nobleman told them to produce. In general, only products left over after these conditions were met found their way to markets (places where buyers and sellers of goods and services come together).

Capitalist systems, by contrast, rely on markets to set the terms for the production and distribution of scarce goods and services. Once capitalism began to take hold in Europe, individuals such as farmers, bakers, cobblers, and blacksmiths could pursue their own self-interest with relative freedom from the dictates of tradition and authority figures. The competition among such tradesmen worked to the benefit of buyers. Because buyers were free to choose one baker’s bread over another’s, for instance, bakers had to produce high-quality bread at reasonable prices. Likewise, competition among buyers for a limited amount of bread meant that the price of bread could not fall too low. Demand (the amount of bread people were willing to buy over a range of prices) affected supply (the amount of bread a baker was willing to produce over a range of prices), and vice versa. Resources were thus more efficiently allocated than in previous systems, but this did not solve the problem of scarcity. According to economists, scarcity is the motor that propels market-based capitalism, and it will always be a fact of life.

More Detailed Information

Although scarcity is a central issue in any economic theory, economists over the years have viewed it in different ways. In his book The Wealth of Nations, considered the foundational text in the field of economists, Adam Smith (1723–90) discussed the relationship between scarcity and value. The value of precious metals, such as gold, Smith wrote, “is greatly enhanced by their scarcity.” He noted, “With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches, which in their eye is never so complete as when they appear to possess those decisive marks of opulence which nobody can possess but themselves.”

Writing not long after Smith, Thomas Malthus (1766-1834) concentrated on a decidedly more grim view of scarcity, one in which even basic needs could not be met. He believed that population would always grow faster than the supply of food, leading to food shortages. Because, Malthus believed, humans had little ability to solve this problem, population would be kept in check by war, famine, disease, abortion, and infanticide.

A more positive approach to scarcity was taken by John Maynard Keynes (1883–1946), whose ideas during the Great Depression (a worldwide economic downturn that lasted from about 1929 to 1939) revolutionized economic thought. In discussing scarcity, Keynes proposed two types of human needs: absolute needs, such as food and shelter, which are independent of what other people have; and relative needs, those that exist “only if their satisfaction lifts us above, makes us feel superior to, our fellows.”

In modern economic thought, scarcity is viewed more simply as an imbalance between people’s virtually unlimited desires and the limited resources available to satisfy those desires. We can understand unlimited human desire by contemplating our own desires and the impossibility of completely satisfying them. But what, exactly, do we mean by resources? Economists divide resources into three categories: land, labor, and capital. These three kinds of resources are also commonly referred to as the factors of production.

Land

In economic terms, land is not simply the plots of earth upon which people undertake economic activity; it also includes all of the natural resources connected to those plots of earth. A farmer’s fields are land, but so are the trees on his or her property, the wildlife that populates his or her fields and forests, any gold or oil that may be underneath the ground, the rivers and lakes on the property, and even the air above that property. The natural resources included in the definition of land can be divided into two types: nonrenewable resources and renewable resources. Nonrenewable resources are those that, once used, are gone forever. For example, once all of the world’s gold and oil has been extracted from the earth, there will never be any more. Renewable resources are those that, left alone, will naturally replenish themselves; examples include soil, forests, and rivers. But the fact that a resource is renewable does not mean that it is unlimited. For instance, there is a limited amount of forested land in the world. Likewise, even though a river’s waters can eventually be renewed after being polluted, there is a finite amount of clean water on the planet at any given time.

Labor

Labor refers to both the total number of available workers and the mental and physical capacities of those workers. The number of people willing and able to work is always limited, as are the skills that those workers must possess in order to produce various goods and services. The nature of the workforce within a given country greatly affects the kinds of goods and services that can be produced there.

Capital

Capital is all of the man-made items used to produce goods and services. Examples of capital are factories, machines, computers, trucks, warehouses, and office space. Such items are distinguished from those that are meant to satisfy human desires directly. There is always a limited supply of capital in the world, and various types of capital are scarcer in some countries than in others. Capital everywhere is also subject to limitations imposed by technology. Computers and trucks, for instance, are only as productive as current technologies can make them.

Together, the factors of production dictate the amount of various goods and services that can be produced. Because each factor is subject to its own limitations, there can never be a situation in which production could be as unlimited as consumer desire. Given this gap between production and desire (which is the problem of scarcity), choices must be made in any society about what will be produced, how it will be produced, and for whom it will be produced.

In modern-day capitalist countries most of these choices are made through the interaction of buyers and sellers in market settings. Governments, however, also have the power to influence these choices through fiscal policy (which involves raising and lowering taxes and making laws relating to the economy) and monetary policy (which involves increasing and decreasing the amount of money in circulation).

Recent Trends

According to economists, every society must determine how best to allocate its scarce resources. This entails answering the questions of what will be produced, how it will be produced, and for whom. In a perfectly competitive economy, economic theory tells us, these questions would be answered in a way that maximized efficiency and provided for the greatest good. In other words, market mechanisms and competition would ensure that the goods and services that people most want and need would be produced at the lowest prices according to the most efficient methods.

But today there are people (even some who believe that the free market has the potential to allocate scarce resources efficiently) who wonder whether the global economy is competitive enough to make this possible. Many industries in the global marketplace are dominated by a few multinational corporations that are not subject to unfettered competition or national laws and limitations, and the world’s wealth has become increasingly concentrated in the hands of a few rich nations and, within those nations, ever-smaller circles of extremely rich individuals. Thus, substantial numbers of ordinary citizens, government officials, and economists around the world wonder how global capitalism might be altered to allow for a more sustainable allocation of scarce resources and, by extension, a more equitable distribution of income.

Meanwhile, some critics of modern capitalism question whether scarcity truly exists. In economic terms, scarcity implies that the humans desire for goods and services is virtually unlimited. These critics have suggested that the supposedly unlimited desire for goods and services might be cultural rather than innate, artificially created by such phenomena as advertising and status seeking.