Economics is the science of allocating the scarce resources to satisfy peoples unlimited want.
This science would be impossible to understand if the person in question did not have a grasp of the problem of there not being enough goods and services to go around. For example, a few months ago I was asked the following question.
‘ Why doesn’t the government solve all the hunger in Ethiopia by just printing loads of money then give it to the poor people so they can buy themselves food?’
At first hearing this suggestion I thought it was a brilliant solution to this ancient problem. After some careful thinking I realised my initial judgement was not entirely correct. We had failed to fully understand the economics because we had not taken into account the problem of scarcity.
The answer to this question is the people of Ethiopia are not hungry because they are poor it is because there is extremely scarce amounts of resources available. There isn’t enough food to go around regardless of how much money they have. If each starving Ethiopian was given 1000 Ethiopian shillings to buy food with they would not be relieved of there hunger at all. The people would be bidding against each other for what little food there was forcing the prices through the roof. Once again nobody would be able to afford food. Below is a number of economic models illustrating this point.
This diagram shows that the quantity of food being demanded by the Ethiopian people is quite low therefore the price of food is also low.
This diagram shows that as the people are given money to spend on food the demand shoots up the supply curve forcing the price to a much higher level than what it was at previously.
This would have been a very poor economic decision due to them not taking into account the problem of scarcity.
Economics is the study of this allocation of resources and the choices by each of the decision-makers. The best choices made are those that are going to yield the most amount of benefits from allocating the scarce resources.
It would be impossible to understand any of the macroeconomic processors or decisions involving the country without being aware of the problem of scarcity.
- Unemployment
- Inflation
- Balance of payments
- Economic growth
- Interest rates.
Above are the five big areas of macroeconomics and only after taking into consideration the problem of scarcity would one be able to fully understand them.
Unemployment is an issue that regularly appears in the media and in the House of Commons. It is regarded as one of the most important performance indicators and measurement living standards.
Unemployment can only be understood when you consider that peoples labour is a resource, and is a resource that needs to be allocated. Labour is a resource that is scarce meaning that the number of people available to work is limited.
There are two ways of allocating this resource, the first is using the market system, and the other way is the planned system. In the market system the highest bidder will claim the highest portions of labour and in the planned system a central management will allocate the resources.
These two competing systems of allocation make up the meat of economic science as they seek to deal with the problems of scarcity. They do this by tackling it in three different areas. These are what to produce, how to produce and who to produce for?
A society will have to ask what to produce because they cannot produce everything due to the scarce nature of its resources. The society will have to make a decision over whether it’s better producing food or shelter. Is it better feeding the population or protecting them from the harsh elements.
The second question the society would have to ask itself is how to satisfy most wants of the people by using as little of its already short supply of resources as possible. Which process generates the highest output in relation to its input? Which production method is the most efficient? These are really important questions as resources are scarce in relation to unlimited wants. This question is more complicated than it first seems because of the potential ethical implications of the most productive methods of allocating scarce resources.
For example, a very efficient method of picking cotton is to capture hundreds of uncivilised African people, transport them to the cotton fields then tell them that they are going to work from sunrise to sunset or else they will be beaten. This process will produce a very high proportion of cotton in relation to the amounts of resources that was injected into the scheme. The problem is that it is unfair and explorative so cannot be seen as a valid way to produce.
The choices on how to produce would always have to take into account any negative impact it may have on society.
The third and final part of dealing with the problem of scarcity is working out whom to produce for. It is impossible to satisfy all the wants of all the people so a decision will have to be made about who is going to have their wants satisfied and who is going to miss out. Another option is to give everyone an equal share. In communist countries like Cuba and Eastern European countries of the past, they adopted the method of allocating all the resources equally. Everyone got the same amount regardless of his or her position in society. This is a very extreme method of providing equality. In some countries like America there are very few deliberate attempts to make people equal and the majority of people have little of their wants satisfied.
In the UK the system for who gets what is somewhere in the middle between that of the unequitable USA and the egalitarian Cuba. Even though equality largely exists still, there are many policies aimed at re-distributing wealth and closing the gap between the rich and the poor. These policies are the progressive tax system, people who earn more get taxed more. Like the question asked before, this will also have to be taken into consideration when attempting to answer.
The actual resources that are scarce and that require allocation can be divided into four different categories, these are; land, labour, capital and enterprise. These are known as factors of production.
Land is the natural resource that includes 6the surface of the earth, rivers, lakes, forests and anything below the surface such as coal, wires and gold mines. Every economy has land resources available to them, some countries more than others. For example, South Africa has a rich supply of gold and diamond mines.
The second factor of production is the labour resources made up simply of the population in the economy. Although, not all of the population is available to work because of his or her age (too young or too old), physical and mental inability and the personal choice of not working. Many countries have owed their economic success to the ability of its workforce. Two very successful economies, Japan and Germany have found to have very high levels of university educated people prompting other nations such as the United Kingdom to place high emphasis on education in order to emulate those levels of success.
The third factor of production is capital. This is somewhat more complicated than the two other resources mentioned previously as it consists of anything that is used to aid land and labour produce more goods and services. These are man-made and can include anything from electric chainsaw to a vast oil refinery. They are used to increase the output of the previous two factors of production.
The fourth factor is enterprise, also known as entrepreneurship. This is what organises the other three factors into goods and services and also takes the risk of any other venture. Any firm that wishes to produce goods or services will need enterprise whether that’s a team of people or just an individual. There needs to be an entity that is willing to plan out all operations and be responsible in the event that something goes wrong. In the world today there are hundreds of countries all with different amounts of success when it comes to the performance of their economy. The quality of the factors of production at their disposal is largely responsible for this. Top performing countries such as the United Kingdom and the United States of America are able to satisfy many wants of their population because they have a relatively high quality of factors of production. This is labelled as good factor endowment. Those countries where there is low economic performance there is said to be low levels of quality in one or more of the factors of production. For example, in a developing country such as Ethiopia there may be more than adequate levels of land and labour but a severe insufficiency when it comes to capital or enterprise. This would cause a situation where the two high quality factors are forced to be useless because there is no tools for the people to use and nobody to tell them what to use them for.
So far I have discussed, with examples, why the economic problem is central to the understanding of economics and that we only have the process of economics because we have the problem of scarcity. There is then the question of whether it is possible to solve the economic problem.
There are two ways of solving the economic problem. The first way is to increase the amount of resources on the planet, the second way is to stop peoples want for things. Both socially are impossible to achieve.
There will always be a limit on what resources are available, they may be able to improve the factors of production in some countries with good management but never to the extent where all the wants of people are satisfied.
It would be even more difficult to put a cap on the amount of material goods a person wants. People are always looking to improve their quality of life by acquiring new possessions and partaking in activities. These wants will always increase, it will be impossible satisfy them all as new ones would appear. Peoples wants are continually expanding, developing and changing.
