7: Economics

The Problem of Scarcity

If our resources were also unlimited, we could say yes to each of our wants—and there would be no economics. Because our resources are limited, we cannot say yes to everything. To say yes to one thing requires that we say no to another. Whether we like it or not, we must make choices.

Given this situation of scarcity, every economy must answer the following questions:

• What should be produced? Using the economy’s scarce resources to produce one thing requires giving up another. Producing better education, for example, may require cutting back on other services, such as health care. A decision to preserve a wilderness area requires giving up other uses of the land. Every society must decide what it will produce with its scarce resources.
• How should goods and services be produced? There are all sorts of choices to be made in determining how goods and services should be produced. Should a firm employ a few skilled or a lot of unskilled workers? Should it produce in its own country or should it use foreign plants? Should manufacturing firms use new or recycled raw materials to make their products?
• For whom should goods and services be produced? If a good or service is produced, a decision must be made about who will get it. A decision to have one person or group receive a good or service usually means it will not be available to someone else. For example, representatives of the poorest nations on earth often complain that energy consumption per person in the United States is 17 times greater than energy consumption per person in the world’s 62 poorest countries. Critics argue that the world’s energy should be more evenly allocated. Should it? That is a “for whom” question.

Every economy must determine what should be produced, how it should be produced, and for whom it should be produced. This involves the question of who in that economy has the power to decide those questions – who decides “who gets what.”

Opportunity Cost

Another concept in terms of how people make choices is the idea of opportunity cost.

Opportunity cost is the value of the best alternative forgone in making any choice.

The opportunity cost to you of reading the remainder of this chapter will be the value of the best other use to which you could have put your time. If you choose to spend $20 on a potted plant, you have simultaneously chosen to give up the benefits of spending the $20 on pizzas or a paperback book or a night at the movies. If the book is the most valuable of those alternatives, then the opportunity cost of the plant is the value of the enjoyment you otherwise expected to receive from the book.

The concept of opportunity cost must not be confused with the purchase price of an item. Consider the cost of a college or university education. That includes the value of the best alternative use of money spent for tuition, fees, and books. But the most important cost of a college education is the value of the forgone alternative uses of time spent studying and attending class instead of using the time in some other endeavor. Students sacrifice that time in hopes of even greater earnings in the future or because they place a value on the opportunity to learn. Or consider the cost of going to the doctor. Part of that cost is the value of the best alternative use of the money required to see the doctor. But, the cost also includes the value of the best alternative use of the time required to see the doctor. The essential thing to see in the concept of opportunity cost is found in the name of the concept. Opportunity cost is the value of the best opportunity forgone in a particular choice. It is not simply the amount spent on that choice.

As the set of available alternatives changes, we expect that the choices individuals make will change. A rainy day could change the opportunity cost of reading a good book; we might expect more reading to get done in bad than in good weather. A high income can make it very costly to take a day off; we might expect highly paid individuals to work more hours than those who are not paid as well. If individuals are maximizing their level of satisfaction and firms are maximizing profits, then a change in the set of alternatives they face may affect their choices in a predictable way.

The concepts of scarcity and opportunity cost are fundamental to how people make choices between alternatives, which is at the heart of economics. The existence of alternative uses forces us to make choices. A good is scarce if the choice of one alternative requires that another be given up. The opportunity cost of any choice is the value of the best alternative forgone in making it.

This idea of opportunity cost can also be linked to the idea of sunk costs. Consider the case of Selena, who pays $8 to see a movie, but after watching the film for 30 minutes, she knows that it is truly terrible. Should she stay and watch the rest of the movie because she paid for the ticket, or should she leave? The money she spent is a sunk cost, and unless the theater manager is feeling kindly, Selena will not get a refund. But staying in the movie still means paying an opportunity cost in time. Her choice is whether to spend the next 90 minutes suffering through a cinematic disaster or to do something—anything—else. The lesson of sunk costs is to forget about the money and time that is irretrievably gone and instead to focus on the costs and benefits of current and future options.

For people and firms alike, dealing with sunk costs can be frustrating. It often means admitting an earlier error in judgment. Many firms, for example, find it hard to give up on a new product that is doing poorly because they spent so much money in creating and launching the product. This is the sunk cost fallacy – to continue down an unproductive path because you’ve already invested resources in it. But the lesson of sunk costs is to ignore them and make decisions based on what will happen in the future.

Motivation

What motivates people as they make choices?

Economists assume that individuals make choices they think will create the maximum value for them. Economists assume that people’s objectives will be those that serve their own self-interest. In this sense, people are expected to behave rationally in terms of maximizing what they get. This may seem to make sense – people want all they can get, right?

But in recent years, a new field of behavioral economics has been developing, focused on field-testing economic behavior with actual experiments.

For example, if we pass a table with a bowl labeled “free candy”—how many would we take? If the same bowl were labeled ‘candy–$1 each’—would we buy more or less candy than we took when they were free? From the rationality discussion we just had, you might predict that we would take more of the free candy than the $1 candy, since the $1 candy uses up our scarce resources. Not so! When researchers have tried different versions of this experiment, they have found that we act very differently—perhaps irrationally– in response to the word “free.” In many experiments people took less candy when it was free, and bought more when they were actually paying. Maybe they were embarrassed to take too many free candies. Maybe the whole set-up encouraged them to feel considerate of others.

In other experiments, people preferred a higher-priced version of a medication to a cheaper one. They said they believed the higher price tag indicated that it was better, even though the actual medications were identical. Sometimes, when a series of purchase options are set out (buy a 1-year print subscription for $20, 2-years print and digital for $45, or 5-years of both for $90) we tend to pick the middle option, simply because it is positioned in the middle. There is nothing rational about always choosing the middle option, but it’s been proven that we often decide that way.

Here’s another of our irrational decision-making habits: a company advertises an item—an elliptical exercise machine, for example—by first telling us it retails for $899. Then they tell us that they’re selling this machine for only $299! If we had no idea what such machines normally cost, and they just presented us with a $299 price-tag, we might have ignored the ad altogether, thinking that $299 was a lot to pay for a machine we would never use. But when we are given information on what something might cost, before being shown our ‘special’ price, that earlier price quote anchors our price expectations. Suddenly, it looks like a bargain!

What these behavioral economists have found, is that we are more irrational in our economic decision-making than economists have assumed. This is not big news to the folks in marketing—they’ve been researching our irrationality for a long time. But it’s only recently that economists are exploring the impact of irrationality on conventional economic analysis.

B. It is social because it involves people and their behavior.

This comes in two ways: one, economic analyses may be aimed at explaining individual choice or choices in an individual market; such investigations are largely the focus of microeconomics. Two, the analysis of the impact of those individual choices on such aggregates as total output, the level of employment, and the price level is the concern of macroeconomics.

Microeconomics

Microeconomics is the branch of economics that focuses on the choices made by individual decision-making units in the economy—typically consumers and firms—and the impacts those choices have on individual markets.

What determines how households and individuals spend their budgets? What combination of goods and services will best fit their needs and wants, given the budget they have to spend? How do people decide whether to work, and if so, whether to work full time or part time? How do people decide how much to save for the future, or whether they should borrow to spend beyond their current means?

What determines the products, and how many of each, a firm will produce and sell? What determines the prices a firm will charge? What determines how a firm will produce its products? What determines how many workers it will hire? How will a firm finance its business? When will a firm decide to expand, downsize, or even close? In the microeconomics part of this book, we will learn about the theory of consumer behavior, the theory of the firm, how markets for labor and other resources work, and how markets sometimes fail to work properly.

Macroeconomics

Questions that deal with aggregates, or totals, in the economy are problems of macroeconomics.

What determines the level of economic activity in a society? In other words, what determines how many goods and services a nation actually produces? What determines how many jobs are available in an economy? What determines a nation’s standard of living? What causes the economy to speed up or slow down? What causes firms to hire more workers or to lay them off? What causes the economy to grow over the long term?

We can determine an economy's macroeconomic health by examining a number of goals: growth in the standard of living, low unemployment, and low inflation, to name the most important. How can we use government macroeconomic policy to pursue these goals? A nation's central bank conducts monetary policy, which involves policies that affect bank lending, interest rates, and financial capital markets. For the United States, this is the Federal Reserve. A nation's legislative body determines fiscal policy, which involves government spending and taxes. For the United States, this is the Congress and the executive branch, which originates the federal budget. These are the government's main tools. Americans tend to expect that government can fix whatever economic problems we encounter, but to what extent is that expectation realistic?

C. It is a science because it uses the scientific method

Much of the basic methodology of economics and many of its difficulties are common to every social science—indeed, to every science. This section explores the application of the scientific method to economics.

Researchers often examine relationships between variables. A variable is something whose value can change. By contrast, a constant is something whose value does not change. The speed at which a car is traveling is an example of a variable. The number of minutes in an hour is an example of a constant.

Research is generally conducted within a framework called the scientific method, a systematic set of procedures through which knowledge is created. In the scientific method, hypotheses are suggested and then tested. A hypothesis is an assertion of a relationship between two or more variables that could be proven to be false. A statement is not a hypothesis if no conceivable test could show it to be false.

The statement “Plants like sunshine” is not a hypothesis; there is no way to test whether plants like sunshine or not, so it is impossible to prove the statement false. The statement “Increased solar radiation increases the rate of plant growth” is a hypothesis; experiments could be done to show the relationship between solar radiation and plant growth. If solar radiation were shown to be unrelated to plant growth or to retard plant growth, then the hypothesis would be demonstrated to be false.

If a test reveals that a particular hypothesis is false, then the hypothesis is rejected or modified. In the case of the hypothesis about solar radiation and plant growth, we would probably find that more sunlight increases plant growth over some range but that too much can actually retard plant growth. Such results would lead us to modify our hypothesis about the relationship between solar radiation and plant growth.

If the tests of a hypothesis yield results consistent with it, then further tests are conducted. A hypothesis that has not been rejected after widespread testing and that wins general acceptance is commonly called a theory. A theory that has been subjected to even more testing and that has won virtually universal acceptance becomes a law.

Testing Hypotheses in Economics

Here is a hypothesis suggested by the model of demand and supply: an increase in the price of gasoline will reduce the quantity of gasoline consumers demand. How might we test such a hypothesis?

Economists try to test hypotheses such as this one by observing actual behavior and using empirical (that is, real-world) data. The average retail price of gasoline in the United States rose from an average of $2.12 per gallon on May 22, 2005 to $2.88 per gallon on May 22, 2006. The number of gallons of gasoline consumed by U.S. motorists rose 0.3% during that period.

The small increase in the quantity of gasoline consumed by motorists as its price rose is inconsistent with the hypothesis that an increased price will lead to an reduction in the quantity demanded. Does that mean that we should dismiss the original hypothesis? On the contrary, we must be cautious in assessing this evidence. Several problems exist in interpreting any set of economic data. One problem is that several things may be changing at once; another is that the initial event may be unrelated to the event that follows. The next two sections examine these problems in detail.

The All-Other-Things-Unchanged Problem

The hypothesis that an increase in the price of gasoline produces a reduction in the quantity demanded by consumers carries with it the assumption that there are no other changes that might also affect consumer demand. A better statement of the hypothesis would be: An increase in the price of gasoline will reduce the quantity consumers demand, ceteris paribus. Ceteris paribus is a Latin phrase that means “all other things unchanged.”

But things changed between May 2005 and May 2006. Economic activity and incomes rose both in the United States and in many other countries, particularly China, and people with higher incomes are likely to buy more gasoline. Employment rose as well, and people with jobs use more gasoline as they drive to work. Population in the United States grew during the period. In short, many things happened during the period, all of which tended to increase the quantity of gasoline people purchased.

Our observation of the gasoline market between May 2005 and May 2006 did not offer a conclusive test of the hypothesis that an increase in the price of gasoline would lead to a reduction in the quantity demanded by consumers. Other things changed and affected gasoline consumption. Such problems are likely to affect any analysis of economic events. We cannot ask the world to stand still while we conduct experiments in economic phenomena. Economists employ a variety of statistical methods to allow them to isolate the impact of single events such as price changes, but they can never be certain that they have accurately isolated the impact of a single event in a world in which virtually everything is changing all the time.

In laboratory sciences such as chemistry and biology, it is relatively easy to conduct experiments in which only selected things change and all other factors are held constant. The economists’ laboratory is the real world; thus, economists do not generally have the luxury of conducting controlled experiments.

The Fallacy of False Cause

Hypotheses in economics typically specify a relationship in which a change in one variable causes another to change. We call the variable that responds to the change the dependent variable; the variable that induces a change is called the independent variable. Sometimes the fact that two variables move together can suggest the false conclusion that one of the variables has acted as an independent variable that has caused the change we observe in the dependent variable.

Consider the following hypothesis: People wearing shorts cause warm weather. Certainly, we observe that more people wear shorts when the weather is warm. Presumably, though, it is the warm weather that causes people to wear shorts rather than the wearing of shorts that causes warm weather; it would be incorrect to infer from this that people cause warm weather by wearing shorts.

Reaching the incorrect conclusion that one event causes another because the two events tend to occur together is called the fallacy of false cause. (This is also sometimes discussed as the idea that correlation is not causation – just because two things happen at once or appear together does not mean that one thing caused another to happen.)

The “Case In Point” regarding baldness and heart disease suggests an example of this fallacy.

Case in Point: Does Baldness Cause Heart Disease?

A website called embarrassingproblems.com received the following email:

“Dear Dr. Margaret,

“I seem to be going bald. According to your website, this means I’m more likely to have a heart attack. If I take a drug to prevent hair loss, will it reduce my risk of a heart attack?”

What did Dr. Margaret answer? Most importantly, she did not recommend that the questioner take drugs to treat his baldness, because doctors do not think that the baldness causes the heart disease. A more likely explanation for the association between baldness and heart disease is that both conditions are affected by an underlying factor. While noting that more research needs to be done, one hypothesis that Dr. Margaret offers is that higher testosterone levels might be triggering both the hair loss and the heart disease. The good news for people with early balding (which is really where the association with increased risk of heart disease has been observed) is that they have a signal that might lead them to be checked early on for heart disease.

Source: www.embarrassingproblems.com/problems/problempage230701.htm.

Because of the danger of the fallacy of false cause, economists use special statistical tests that are designed to determine whether changes in one thing actually do cause changes observed in another. Given the inability to perform controlled experiments, however, these tests do not always offer convincing evidence that persuades all economists that one thing does, in fact, cause changes in another.

In the case of gasoline prices and consumption between May 2005 and May 2006, there is good theoretical reason to believe the price increase should lead to a reduction in the quantity consumers demand. And economists have tested the hypothesis about price and the quantity demanded quite extensively. They have developed elaborate statistical tests aimed at ruling out problems of the fallacy of false cause. While we cannot prove that an increase in price will, ceteris paribus, lead to a reduction in the quantity consumers demand, we can have considerable confidence in the proposition.

Normative and Positive Statements

Two kinds of assertions in economics can be subjected to testing. We have already examined one, the hypothesis. Another testable assertion is a statement of fact, such as “It is raining outside” or “Microsoft is the largest producer of operating systems for personal computers in the world.” Like hypotheses, such assertions can be demonstrated to be false. Unlike hypotheses, they can also be shown to be correct. A statement of fact or a hypothesis is a positive statement. Although people often disagree about positive statements, such disagreements can ultimately be resolved through investigation.

There is another category of assertions, however, for which investigation can never resolve differences. A normative statement is one that makes a value judgment. Such a judgment is the opinion of the speaker; no one can “prove” that the statement is or is not correct. Here are some examples of normative statements in economics: “We ought to do more to help the poor.” “People in the United States should save more.” “Corporate profits are too high.” The statements are based on the values of the person who makes them. They cannot be proven false.

Because people have different values, normative statements often provoke disagreement. An economist whose values lead him or her to conclude that we should provide more help for the poor will disagree with one whose values lead to a conclusion that we should not. Because no test exists for these values, these two economists will continue to disagree, unless one persuades the other to adopt a different set of values. Many of the disagreements among economists are based on such differences in values and therefore are unlikely to be resolved.

2) Why Study Economics?

Now that you have an overview on what economics studies, let’s quickly discuss why you are right to study it. Economics is not primarily a collection of facts to memorize, although there are plenty of important concepts to learn. Instead, think of economics as a collection of questions to answer or puzzles to work. Most importantly, economics provides the tools to solve those puzzles.

Consider the complex and critical issue of education barriers on national and regional levels, which affect millions of people and result in widespread poverty and inequality. Governments, aid organizations, and wealthy individuals spend billions of dollars each year trying to address these issues. Nations announce the revitalization of their education programs; tech companies donate devices and infrastructure, and celebrities and charities build schools and sponsor students. Yet the problems remain, sometimes almost as pronounced as they were before the intervention. Why is that the case?

In 2019, three economists—Esther Duflo, Abhijit Banerjee, and Michael Kremer—were awarded the Nobel Prize for their work to answer those questions. They worked diligently to break the widespread problems into smaller pieces, and experimented with small interventions to test success. The award citation credited their work with giving the world better tools and information to address poverty and improve education. Esther Duflo, who is the youngest person and second woman to win the Nobel Prize in Economics, said, "We believed that like the war on cancer, the war on poverty was not going to be won in one major battle, but in a series of small triumphs... This work and the culture of learning that it fostered in governments has led to real improvement in the lives of hundreds of millions of poor people.”

As you can see, economics affects far more than business. For example:

• Virtually every major problem facing the world today, from global warming, to world poverty, to the conflicts in Syria, Afghanistan, and Somalia, has an economic dimension. If you are going to be part of solving those problems, you need to be able to understand them. Economics is crucial.
• It is hard to overstate the importance of economics to good citizenship. You need to be able to vote intelligently on budgets, regulations, and laws in general. When the U.S. government came close to a standstill at the end of 2012 due to the “fiscal cliff,” what were the issues? Did you know?
• A basic understanding of economics makes you a well-rounded thinker. When you read articles about economic issues, you will understand and be able to evaluate the writer’s argument. When you hear classmates, co-workers, or political candidates talking about economics, you will be able to distinguish between common sense and nonsense. You will find new ways of thinking about current events and about personal and business decisions, as well as current events and politics.

The study of economics does not dictate the answers, but it can illuminate the different choices.

Figure 1.9 A Market Economy Nothing says “market” more than The New York Stock Exchange. (Credit: work by Erik Drost/Flickr Creative Commons, CC BY 2.0)

Although command economies have a very centralized structure for economic decisions, market economies have a very decentralized structure. A market is an institution that brings together buyers and sellers of goods or services, who may be either individuals or businesses. The New York Stock Exchange is a prime example of a market which brings buyers and sellers together. In a market economy, decision-making is decentralized. Market economies are based on private enterprise: the private individuals or groups of private individuals own and operate the means of production (resources and businesses). Businesses supply goods and services based on demand. (In a command economy, by contrast, the government owns resources and businesses.) Supply of goods and services depends on what the demands are. A person’s income is based on their ability to convert resources (especially labor) into something that society values. The more society values the person’s output, the higher the income (think Lady Gaga or LeBron James). In this scenario, market forces, not governments, determine economic decisions.

Most economies in the real world are mixed economies. They combine elements of command and market (and even traditional) systems. The U.S. economy is positioned toward the market-oriented end of the spectrum. Many countries in Europe and Latin America, while primarily market-oriented, have a greater degree of government involvement in economic decisions than the U.S. economy. China and Russia, while over the past several decades have moved more in the direction of having a market-oriented system, remain closer to the command economy end of the spectrum.

Regulations: The Rules of the Game

Markets and government regulations are always entangled. There is no such thing as an absolutely free market. Regulations always define the “rules of the game” in the economy. Economies that are primarily market-oriented have fewer regulations—ideally just enough to maintain an even playing field for participants (although it very debatable if a level playing field has been reached, can be reached, or how it may be reached). At a minimum, these laws govern matters like safeguarding private property against theft, protecting people from violence, enforcing legal contracts, preventing fraud, and collecting taxes. Conversely, even the most command-oriented economies operate using markets. How else would buying and selling occur? The government heavily regulates decisions of what to produce and prices to charge. Heavily regulated economies often have underground economies (or black markets), which are markets where the buyers and sellers make transactions without the government’s approval.

The question of how to organize economic institutions is typically not a straightforward choice between all market or all government, but instead involves a balancing act over the appropriate combination of the two.

Are Unlimited Wants (and therefore Scarce Resources) a Fact of Life or a Belief?

Outside of orthodox economics, the issue of scarcity as induced by unlimited wants has been extensively evaluated and re-evaluated. For many theorists, the concept of unlimited/endless want of material items is simply not an immutable fact present in all times and places among all human beings. Among anthropologists, for example, there is a rich history of ethnographic studies documenting ways in which small-scale, non-market oriented economies appear to behave differently than orthodox economists predict.

One such anthropologist, Marshall Sahlins, explicitly notes that people residing in hunter-gatherer societies, while viewed as deeply impoverished by the standards of people residing in advanced industrial economies, are actually quite affluent because “all the people’s wants are easily satisfied.” For Sahlins and other anthropologists, the hunter-gatherer’s affluence is not one of vast material abundance, but rather a happiness shaped by being contented with having basic needs and wants met. By having little and demanding little, a successful hunt can yield great want satisfaction.

Borrowing from psychology, there is also a sub-discipline of economics known as Happiness Economics. Utilizing survey data, theorists pursuing the study of happiness have repeatedly found that people that focus on the goals of monetary gain and material benefits tend to be less happy than people who are less focused or not focused on those goals. It seems that for every endless maximizer of products, there are many more people that are apt to be content and satisfied with far fewer material items, particularly if fewer material items mean a greater level of interpersonal satisfaction like love, the respect of peers, affection, family fulfillment, and relationship fulfillment. Apparently, these and other equally non-material but important psychological factors are more important to the pursuit of happiness than is monetary wealth.

Scarcity or Surplus?

There is another fundamental question that Polanyi’s critique alludes to: does scarcity as perceived by the mind actually mean that there is a scarcity resources? For Polanyi, the orthodox definition of economics is circular, it has neither a beginning nor an end, just continuous scarcity because of limitless want. After all, if human beings have unlimited wants, then resources have to be scarce, there is simply no way for all wants to be met if wants are endless. Close inspection of the orthodox definition of economics makes it clear that the picture of the homeless man on the bench presented in chapter one is not actually a result of scarcity, at least not as scarcity is defined within the orthodox tradition.

Again, recall that the orthodox definition of economics describes scarcity as resulting from endless “want.” Endless want does not mean that there are not enough resources available to fulfill all of humanities basic needs. Nor does endless “want” mean that many wants cannot be met given available resources. Obviously the man on the park bench may have some very legitimate wants (certainly needs, like adequate shelter), but is he on the bench because there are not enough resources available to make sure his basic needs, such as a home, or other wants, are met? At least in terms of available housing, the answer to this question is an overwhelming no. According to the U.S. Department of Housing and Urban Development on any given night in January of 2015 564,708 people were homeless. At the same time, the number of vacant residential properties in the United States numbered approximately 1.4 million.

The homeless man’s lack of housing is not the byproduct of scarcity, at least not by the definition of scarcity that many people are accustomed. Rather, the homeless man on the bench is the byproduct of either misallocated resources or a maldistribution of production.

Homelessness (or house-less-ness) is not the only instance in which the orthodox economic scarcity story breaks down. There are other well documented instances. One particularly disturbing instance relates to malnourishment and general starvation. According to the World Hunger Education Service (WHES) around the world there is enough food produced on an annualized basis to ensure that every person is adequately nourished. In fact, the sheer amount of calories per person generated by global food production has risen since the early 1960s through the mid-2000s, with the amount of per capita calories produced being enough to adequately feed an adult in both developed and developing economies. At the same time, “The United Nations Food and Agriculture Organization estimates that about 795 million people of the 7.3 billion people in the world, or one in nine, were suffering from chronic undernourishment in 2014-2016.”

Again, this instance of basic needs not being met may be perceived as a situation of scarcity. However, as reported by the WHES, poverty is the overwhelming driver of global malnourishment. While poverty implies a scarcity of income, possibly due to a scarcity of employment possibilities, the actual product that resolves malnourishment, food is produced in enough abundance to adequately feed everyone. Once again, basic human needs are going unmet and this has nothing at all to do with the scarcity of resources.

An interesting outcome of reorienting the definition of economics away from the scarcity story, when evaluated on what is actually available, is not that resources are endless or that all wants can necessarily be met, but that it is apparent that there are often more than enough resources to meet all of humanity’s material needs as well as many, many, many of humanities wants. Reoriented this way the story of economics becomes a story of surplus and abundance, rather than shortfall and hardship. A much less dismal, and likely more realistic, science indeed!*

*Economics is sometimes called “the dismal science.”

For those outside of the orthodox economic tradition, many important considerations are seemingly lost by the direction of orthodox economic analysis. Take for example the question of how broader societal norms as a function of social institutions may have influenced the behavior of individuals. By assuming away the social and focusing exclusively on the individual, the orthodox economist will be apt to ignore such issues as how social institutions may have influenced individual behavior such that it is now not prone to maximizing individual acquisition.

In other words, let’s say people really don’t just look out for themselves all of the time, seeking to acquire as many products for themselves as they can, but instead, people behave such that they are concerned for the well-being of others, maybe because the norms of their society encourage a less than self-centered set of behaviors. Non-acquisitive, non-self-interested individual behavior tends to be outside of the scope of orthodox economics, but it is not outside the scope of actual human economic interactions. For many non-orthodox economists, the absence of a clear social perspective limits the understandings available to the practitioner of methodological individualism.

Limitless versus Limits: The Implications for the Health of the Planetary Environment

The final critique presented here may be the most important in terms of its implications for the future of humanity. The Earth is a finite biosphere. There is simply only so much atmosphere, land, water, minerals, ores, and other natural resources within the bounds of the planet. In this way, the Earth really is representative of a circumstance of scarcity. Certainly improved efficiency is capable of extending the productive capability of the available natural resources, but this does not change the fact that there is a limit to how much is actually available.

Regardless, for many orthodox economists, the principle of endless growth is unquestionably desirable and it is downright sacrilegious to doubt the merits of endless economic growth. Consider the orthodox definition of economics and its emphasis on the desirability of endless happiness and that happiness being derived from the endless consumption of products. Given the premise of unlimited wants, the need for endless production is obvious and, by continuation, endless production is a synonym for endless, exponential, economic growth. In the simplest sense, more products produced means that the material well-being of society is improved. For orthodox economists, the improved material well-being of society cannot be understated. For example, it is not uncommon for orthodox economists to argue that given enough growth, social maladies such as poverty can be alleviated and, in time, eliminated.

Of course, the orthodox economic perspective leaves aside incredibly important considerations such as whether or not new material products are equitably distributed. Also, if resources are finite, how is endless growth possible? Finally, it is clear that human economic activity nearly inevitably leads to the creation of waste byproducts, pollution. Not only is the Earth’s biosphere limited in terms of what it can provide in the way of natural resources toward productive output, it is also limited in terms of how much waste it is capable of absorbing on land, in the sea, and in the air. Clearly, human economic activity, and the associated environmental destruction of the Earth’s biosphere as a result of economic growth, does present a powerful challenge to the importance of economic growth.

Given the above-stated considerations, going forward humanity must consider the possibility of orienting its economic activity within the context of limits. The direction of orthodox economics, as guided by its definition, is not, however, oriented toward accepting limits.

Some critics of the standard orthodox environmental resource economics arguments, through their application and advocacy for ecological economics, have sought to re-orient the relationship between the economy and the environment. Whereas orthodox economics views the natural environment as an external factor that may be impacted by economic activity, ecological economists place the economy in a subordinate role to the natural environment.

Ecological economics generally tends to support the notion that the natural environment must be nurtured and protected, as, without it, an economy and human life cannot function. As such ecological economics has a more cautious perspective regarding economic activity and how it impacts the natural environment. As a result, standard orthodox economic concepts such as endless economic growth and want fulfillment are of secondary importance to long term sustained living made possible through the protection of the natural environment. As such, ecological economics operates outside of the orthodox definition of economics.

Given the problems associated with the orthodox definition of economics, a concerned student may be apt to ask, what does an alternative definition of economics look like? The answer to this question is that there are many possible alternative definitional variations.

The structure of an alternative definition of economics can take many forms, although the overall essence of alternative definitions is frequently similar. With regard to structure, some alternative definitions are apt to simplify economic activity to its most basic form. For example, economics can be the study of how human beings must work together, and with nature, to produce those things that fulfill the material needs and wants of society. In other instances alternative definitions of economics seek to reduce the definition to the essential characteristics of an economy.

For example, economics can be defined as the study of how human beings organize production, distribution, and consumption. Still in other instances alternative definitions of economics focus on interdisciplinary facets of the structure of economic decision making. For instance, economics can be defined as the study of how cultural norms, social institutions, political structures, and general decision making processes influence human behavior toward economic ends.

Importantly, each of the possible definitional structures stipulated above appear to avoid the pitfalls that plague the orthodox definition of economics. First, none of the above alternative definitional possibilities assumes scarcity. Rather, each definition is open to the possibility of differing forms of economic organization and a diversity of ways to meet societal needs and wants. Second, none of the above alternative definitional structures make unprovable assumptions about individual human behavior and motivation. Rather, the social elements of the organization of economic activity are emphasized, opening the door to analyzing how individuals respond to social conditions. Third, none of the above alternative definitional structures predicates endless want and the need and desirability for endless economic growth. Rather, each is open to the possibility of alternative economic structures that can be coordinated to operate within the limits of the natural biosphere.

This lead to another definition of economics for your consideration: Economics is the study of social provisioning, in which an understanding of the development of political economies is rooted in social, political, natural, and cultural processes.

References

Food and Agriculture Organization of the United Nations, (2015) “FAO Hunger Map.” Available at FAO [www.fao.org]