Austrian Economics Part Two – Scarcity

Matthew John Hayden

An Austrian method can show us the nature of our madness. We act to transfer from a present, less satisfying state to a future, more satisfying state. We do so continually, because no sooner have we arrived at one satisfaction we realise there is more to do. And that holds true until death, for better or worse. This has all been established already, so now it’s time to attempt to understand how humans respond to scarcity, being as that is one of the two conditions placing constant and variable limitations upon what can be enjoyed or achieved at any given time and place during our finite lives. This formless all-thing called scarcity is what makes us economise and so is the basis of economics itself. Scarcity is defined economically as the condition in which each use of a resource has the effect of impairing subsequent uses of that resource in some way.

By this logic of scarcity we arrive at the dividing line between where economics applies and where it does not. Here on planet Earth, for example, economics does not apply to air, because my taking a breath in no way impedes your present or future ability to take a breath yourself. On the other hand, water, the stuff of life, requires effort to extract in a safely drinkable condition. This means that it is scarce; every mouthful comes at a cost of effort, time and physical resources to get a-hold of the stuff. Thus, whoever obtains it can call dibs on it, right? Questions of ought aside, even though it is more plentiful on Earth than air, water is limited in its human-drinkable quantity at any given time, making it scarce where the less prolific air is not.

We respond to scarcity in several vital ways; by looking at the relative scarcities of resources around us on the one hand and weighing up our a priori desire to formulate goals we can try to realise by acting in the external world. Economists use an abstraction called utility to describe the two processes we undertake continually, two processes which can be viewed as both discrete and separate on the one hand and as one united utility-maximisation process on the other. We weigh up different ways to satisfy our wants, and we assess the satisfaction, or utility, we’re getting from what actions we’re already taking.

The former process is ordinal utility. This is the process of ordering various potentially satisfying ends according to two factors; how highly we value the utility they offer us and what outlay of effort we will have to make to attain them. If I’m weighing up ice cream versus a cold drink on a summer’s afternoon and both are available at a roving ice-cream stand in front of me then I just get whichever one will, in itself, be most satisfying. If, however, I’m weighing up whether to buy a fruit juice now or wait until later when I’m at the supermarket, and juice will be much much cheaper, then I’m deciding between less fruit juice now and more later. This will lead us later to the concept and axiom of time preference.

The second form of utility is referred to as marginal utility, the measure of the net benefit or loss from each repetition of an action or passive return on previous action. If we are given a very large pizza it won’t matter how delicious the pizza is, eventually we’ll get sick of eating more and more slices. Eventually the marginal utility of each subsequent slice turns negative and we stop eating pizza. Another example does not turn negative, but can still flatten out or nearly do so, and that is payment in money wages per hour. At a starting total wage of zero dollars per hour the first raise to one dollar will be a big deal, as will every subsequent addition until one’s pay exceeds one’s cost of living by so much that one gets no extra use out of each subsequent dollar per hour.

Marginal utility was only fully described by Carl Menger, Leon Walras and William Stanley Jevons in the late 19th Century in what was called the Marginal Revolution. This coloured the rise of the neoclassical, Keynesian, Institutional and Austrian schools of economics, which is why economists of all four broadly agree about the basics of marginal utility and generally unite in defending the treatment of scarcity in modern economics against attacks by Marxists who avowedly conflate morality with scarcity in their confusion about the origins of scarcity in nature, not capitalism.

Humans will compare the satisfaction offered by various choices with the effort they must put in and the time they must set aside to do so. All other things equal (ceteris paribus) we’d rather have our satisfaction without giving anything up first, and we’d like to enjoy a given level and kind of satisfaction now rather than later. These two factors affecting our decisions in response to scarcity are, respectively, disutility of labour and time preference. These arise from our own internal scarcities. Our bodies have only limited mass and dimensions, not to mention a limited amount of energy at our disposal before we are exhausted, so we have only a limited capacity to act upon the world. We also need to sleep regularly, and are inescapably mortal, making time scarce as well.

These two scarcities characterising all our lives, labour and time, are an outgrowth of and will affect our decisions about what actions will satisfy our present wants. A strong example is weighing completely different choices against each other for their long-term utility. If I have to choose between a smartphone and a car I will have to consider what I will gain from both choices in the weeks and months after purchase. An even more cruel decision has to do with cheaper, immediate satisfactions versus dearer future ones. I can buy DVDs in the present moment because they are individually cheap, or I can hold off long enough to save up for the components needed to upgrade my computer. And then, what of satisfactions requiring effort in advance?

Another disincentive to attain some higher satisfaction in life is the labour required to attain them, such as the satisfaction of being a Man Booker prize winner which can only come by writing a novel the jury find worthy of that hallowed prize. It’s not something this writer feels terribly inclined to bother with when finishing present, less grandiose projects, presents far easier, if less lucrative, opportunities for more base satisfaction, i.e. income.

All of the human reactions to scarcity described here – ordinal and marginal utility, time preference, disutility of labour – impact upon our ultimate decisions. We will always be subject to scarcity of physical extension into the material world, to scarcity of time, to scarcity of material resources, and to scarcity of contact with other human-beings around us. Thus, economics, the science of human action in response to scarcity, is assured a central place in the academy of a future society as the present. All eternity is a playground, but the players are far from infinite, far from eternal, and in our passing glimmer of an existence in the universe we enjoy individual and real live’s of surpassing emotional and personal significance, and each real human being need only know this much to live free and happy and to die wide-eyed in wonder that they saw so much in a world of scarcity.

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