Disputing the Scarcity Principle

One of the basic tenets of economics is that there is a principle of scarcity, which gives rise to economic theorizing and observations about economic life. The evidence of it can be taken from two simple examples: the air and a house. We evidently need both things in order to live, but the one thing exists in abundance and is for free, while the other one is scarce and quite expensive. Why would housing be scarce? Well, housing is created mostly from human labor. We, therefore, need construction workers to build the house for us. We need the raw material such as brick and cement, which requires more workers. We need an architect to plan the design of the building for us. We need city officials to give us the approval for the project, because the new house can not conflict with zoning regulations. We need realtors to tell us about the availability of houses in the neighborhood, and so forth.

All of these people that are connected to the process of getting a house need to be paid off, such that I can enjoy the comfort of a home. It is not surprising that housing is one of the most expensive items for our daily budget, while we scarcely worry about enough air to breathe. (It is a somewhat different picture in countries where the water and air are so polluted that it is hard to breathe or drink the water there. What a great externality!)

The factor of labor that is embedded in the final product has a great influence on the final price. This is an old insight in classical political economy, and was theorized as such from Smith, to Ricardo and Marx. Labor is the decisive scarce factor in our political economy, and if we want to cut down on our personal expenses we need to expend as little labor from another human being as possible. If I want to save money on food, I would go to the supermarket and buy raw meat and vegetables, and cook it at home. It costs more time to cook it myself than go to a restaurant, but I am not paying another cook, so I get to save money when I do the cooking.

If we look all around us, therefore, the scarcity principle must be the most important factor that is ruling our material lives, and we are constantly facing a trade-off between consuming different items, because we are facing a budget constraint resulting from our limited wage income (or other income, usually for more affluent people, such as rents and dividends). Richer people face a smaller budget constraint than poorer people.

But I would argue that the textbook scarcity model is increasingly becoming obsolete. We are facing quite the opposite situation: a society of surplus production, which does not really trickle down to the masses because of growing wealth and income inequality resulting from private property laws favoring the owning class. US presidential candidate Bernie Sanders is correct in pointing out that the US “is the richest country in the history of the world. But most Americans don’t know that because almost all of the wealth rests in the hands of the few. America now has more wealth and income inequality than any major country on earth, and it is worse today than at any time since 1928.” (Sanders 2015)

So why do I think that the scarcity model is wrong? Let me explain. During the time of the industrial revolution, most people shifted from farming to manufacturing, which has been such a labor-intensive activity. This is merely a labor-shifting activity, as human needs have grown with the increased scale of production. In other words, in addition to just eating food, and having a regular food supply, people began to purchase cotton clothing and later household gadgets like refrigerators and so forth. The displaced workers in the farming sector, which has increasingly grown more productive have found a safe haven in manufacturing production.

One essential insight provided by Schumpeter (1942) is that the capitalist economy is a very dynamic socio-economic system, which is marked by growing innovation and increases in labor productivity. Machinery, technology and R&D are important aspects for capitalist dynamism and growth. Increasing labor productivity could be translated into more jobs, because more people consume the stuff that gets produced, but that is a short-term effect. The long-term effect is usually a saturation of demand, such that consumers use their savings to buy other commodities, and create jobs in other sectors. In an ideal economy, we could endlessly produce new and good jobs, and the economic circulation functions pretty well.

However, we know that is not what has happened. As labor productivity continues to increase, we are certainly moving up the frontier of development and production, but we are pushing most workers out of the nice high-paying and high-productivity jobs, which today encompass agriculture, manufacturing, oil, gas, utilities and transportation among a few other industries. These are all sectors, which explain why our standard of living is so high today, yet it is not in those sectors that most of us work in. Why is the link between the standard of living and work so important? Because our political economy is still based on wage labor and the principle of scarcity. Workers need to be able to justify their existence by selling their labor power to any employer willing to hire them at a given wage.

But the problem is that most of the new jobs are low-income service-sector jobs, where the ability to unionize and get better wages and working conditions are simply terrible. Attempts to unionize Walmart hit the barrier that it is difficult to coordinate a united strike in over more than 4,000 stores nationwide, which was not the case for auto workers, who needed to shut down two plants to shut down the entire car industry, and could press their demands more effectively against recalcitrant management.

The other problem is that of stagnant productivity in the service industry, which is associated with Baumol’s cost disease, as it is applied to education or medicine, two of the most labor-intensive industries of the present. Labor productivity remains constant, but wages need to increase to attract sufficient talent into these areas, which has a crowding out effect, according to this economic theory. But let us slow down for a minute and take away the economist-speak. It is true that doctors and teachers don’t tend to increase their productivity, but would you say that seeing your doctor for five minutes is better than seeing him for half an hour? Would the quality of his service be really much better for you if he processed you faster? I very much doubt that. Would you say that a teacher, who can process a larger amount of students in shorter periods of time can fulfill his pedagogical duties to his students? I very much doubt that.

Overcoming Baumol’s cost disease in many service industries, therefore, makes no sense, even though the automation geeks want to innovate these sectors too, e.g. expanding Web MD and online education courses. The doctors and teachers are still quite lucky, because they are professionals with scarce skills, but the high-demand, low-skill, low-pproductivity jobs are now associated with low wages too, and there is great hesitancy to raise their wages for the market-distorting effects it will have (I doubt that claim, because I think current minimum wage laws are way too low to have adverse employment effects.)  Now neoclassical economists will insist that workers that, therefore, work in low-productivity industries will have to toil in poverty forever, because that is all the economic contribution that they are making.

But let me go back to a point made earlier: the conundrum is that we have a few capital-intensive sectors with very few jobs that tend to pay high wages (though that is also a function of organized labor power) and dish out high profits, while we have many service sector jobs that pay low wages, especially in lower end health services, hospitality and retail, where the bulk of the jobs are. Education, medicine, business and professional services tend to be rather well-paid, but given the increasing level of job competition and education credentials that many young people are racking up, I can not imagine that their wages will stay so high indefinitely (unless they purposefully limit entry, like the doctors).

But there is no law of reason or economics which says that the profits which remain in the capital-intensive sector should stay within that sector. Yet in a private-enterprise and private property based economy, we are stating precisely such. Exxon Mobile is a massive oil corporation with $40 billion in annual profits. This is plenty of cash to help out communities that are struggling to keep their libraries and schools open, but the latter will continue to be starved, while the oil giants continue to collect huge subsidies and tax breaks from the government, which simply enriches the few shareholders while hurting almost everyone else. Growing wealth and income inequality has negative consequences for the spiritual well-being of society, and also diminishes future growth prospects, because the rich only spend a small fraction of their total income (see IMF 2015).

For leftists to demand a universal basic income, flowing to the beleaguered low-income workers and unemployed people, financed either via the taxation of the highly profitable capital-intensive industries or direct public ownership over these industries is precisely right and reasonable. To finally reclaim to the communities what are now royalties and rent payments to the global oligarchs would be a huge win for most ordinary people, and a blow to the principle of scarcity, which has controlled the livelihoods of so many workers around the world.

I am mindful that scarcity will continue to exist, because we won’t be able to continue our growth, waste and consumption model and live in a habitable planet, but we should go away from the idea that poverty and misery are in any way essential to a 21st century modern society. Resources will need to be rationally allocated under any new system with strong consideration for environmental impacts, but rational certainly does not mean that a few people own almost everything while everyone else owns almost nothing.

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One Response to Disputing the Scarcity Principle

  1. Pingback: How to Help Low-Income People out of Poverty | Mr Liu's Opinions

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