Wednesday, July 22, 2015

Scarcity - Correctly Understood

All economic goods are scarce

All economic goods are scarce. This simply means that the supply of the good is less than infinite. There is a chance that all of the good will be consumed, making further consumption impossible.

Nothing is ever created or destroyed

The total quantity of matter and energy in the universe is fixed.  Matter can be transformed into energy, energy into matter. All the different chemical elements and compounds, and all forms of energy, are simply different arrangements of atoms (or sub-atomic particles, or disturbances in the Higgs field, or whatever nature's fundamental building blocks turn out to be).  For our purposes here, "atoms" means the fundamental building blocks of nature, and "matter" means any arrangement of atoms, including energy.

In all of history, human activity has never created or destroyed anything. All we do is transform matter as we find it into an arrangement we find more useful. The name given to this act of transforming matter into usefulness is "homesteading", while the useful thing is called a "good".

Elements of a Good 


All goods are comprised of two factors:

1. Matter 
2. Human effort

For example, imagine an arrangement of matter called "iron ore" laying inside a larger arrangement of matter called "a hillside". We know that iron can be very useful, because it can be fashioned into a cast-iron skillet, and a zillion other things.  However, this particular batch of iron is not an economic good, because laying undiscovered and dormant in a hillside, the iron is not in position to do us any good at all. So long as the iron lies in the hillside, it might just as well be at the bottom of the ocean, or on Mars, or a distant galaxy. It might just as well not exist at all. In terms of being an economic good, iron in the hillside does not exist. 

To transform iron ore into an economic good, somebody must first discover it, then go dig it up, bring it out, refine the ore, and do all the other things necessary to transform it into something that a person finds useful.

The same pattern - matter + human effort -  holds true for all goods. There is some arrangement of atoms that occurs in nature, and some human effort in transforming the atoms into a different arrangement.

What Causes Scarcity? 


Here is the key insight to understanding scarcity:

Matter is infinite, human effort is limited. 

The scarcity of economic goods is completely related to the limitations on human effort, and has nothing whatsoever to do with the quantity of matter.

Consider the organic compound known as petroleum. Petroleum is useful for making gasoline and hundreds of other products. Like any other economic good, petroleum is scarce, and seemingly becoming more scarce all the time. After all, once petroleum is pumped out of the ground, refined into gasoline, and burned up, it is gone forever, right? It's only a matter of time before it is all used up, right? It's tempting to think that the scarcity of petroleum has to do with the limited quantity that exists. But it isn't so.

What we call "petroleum" is just another arrangement of atoms. Burning it up transforms the arrangement, but destroys nothing. Even if we pumped out and burned up every last drop of naturally occurring petroleum, if we wanted more of it, all we would have to do is figure out how synthesize more petroleum from the matter at hand. Doing so may be prohibitively expensive, or even  technologically impossible to accomplish. But all that means is that there is insufficient human effort available to solve the problem. The scarcity of petroleum is not a function of its quantity, even if the quantity goes down to zero. Human effort is always the limiting factor creating scarcity. This is true of iron, petroleum, and every other economic good, without exception.

What About So-Called "Free Goods"?

Atmospheric air is widely cited as the quintessential example of a "free good", meaning that atmospheric air is supposedly non-scarce. But we can see that atmospheric air follows the same pattern. Atmospheric air blanketing planet Earth is not immediately useful. In order to make use of air, a person must bring it under control by inhaling, i.e. flexing the diaphragm muscles, drawing air into the depths of the lung tissue, where the precious oxygen can be extracted and exchanged for carbon dioxide, and exhaled as a waste product.
Every breath you take is an act of homesteading. 

Baker's First Postulate:


Every economic good is comprised of two factors - matter and human effort.

Baker's Second Postulate:


The supply of matter is infinite and literally inexhaustible, while the supply of human effort is limited.

Baker's Third Postulate:


Economic scarcity derives entirely from the limitation on human effort, and has nothing to do with the quantity of matter.