Problems With Economic Theory
    By Gerhard Adam | July 6th 2009 07:42 PM | 2 comments | Print | E-mail | Track Comments
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    Let me start by saying that I am not an economist. I’ve always been somewhat put off by the topic and felt that it was largely based on supposition and little science. After observing the antics in this country (the U.S.) over the past few months, I’ve become more convinced of it.

    If there are any economists in the reading audience, I would welcome your comments, because I really would like to make sense of what’s going on, although I fear that there is little that makes sense.

    The first problem I have is with the definition of economics as "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses."[3] Scarcity means that available resources are insufficient to satisfy all wants and needs. Absent scarcity and alternative uses of available resources, there is no economic problem. The subject thus defined involves the study of choices as they are affected by incentives and resources. (from Wikipedia). Another definition reads:

    Economics studies the allocation of scarce resources among people – examining what good and services wind up in the hands of which people. (Introduction to Economic Analysis, McAfee)
    So, it appears that according to the definitions, economics deals with the scarcity of resources and choices. While it may seem like a purely semantic argument, I wonder why the word “scarce” was chosen, since in the vast majority of cases, scarcity isn’t really an accurate description of what takes place. I know scarcity has been used to describe resources, as well as money, so it implies that there is a perpetual shortage of these items which drives the choice.

    However, my own preference is to consider these resources as “finite” and not scarce. This may seem like I’m splitting hairs semantically, but the image these two words conjure up represent two entirely different viewpoints in what is taking place. I’m sure when you’re considering your budget, the degree to which it is “finite” is a much more apt description than to consider it “scarce” (although I guess that depends on your salary). Similarly it is hard to reconcile (as a society) that given the vast wealth that flows around the country that we could consider it a “scarce” resource, rather than one that is finite with finite divisions around which it is distributed.

    This is another case, where word usage carries with it a connotation (and consequently problem) because it mis-represents what is taking place. Just as when economics (as in biology) describes individuals as “selfish” for modeling purposes, instead of “self-interested”, it conveys the incorrect model behavior and doesn’t reflect reality (1).

    So while it may not seem like much, I submit that it makes more sense to talk about individuals behaving in their own self-interest with finite resources and competing for finite resources, than it does to refer to selfish individuals competing for scarce resources with scarce resources.

    This becomes even more important when one examines the business decisions and choices that people actually have to face. Many costs are unavoidable, so when we consider that a resource is finite, we can begin a useful examination of all the claims that may be made on that resource. Consider that one of the more brilliant implementations in this country has been the use of penalities and interest to get more money from people that don’t have any money. In other words, when someone doesn’t have enough money to pay a bill on time, we charge them more money to penalize them.

    In my view, this clarifies one key element in economic theory. It is a tacit admission that NOTHING in economics is infinite and perhaps it will be easier to understand what’s happening when we consider that the resources being studied are finite.

    In subsequent posts I’m going to examine the Laffer curve, supply and demand, and credit. Hopefully this will generate some interesting discussions.

    (1) Economics actually does worse because it describes people as “selfish” and then says that the technical term is “self-interested”. Pretty convoluted thinking for concepts that clearly have different meanings.


    Apparently your issue is with technical jargon in general. Economists use these terms in a technical way, and the general connotations that they have are irrelevant to the types of theoretical analyses conducted. I would say that "self-interest" is a more common term than "selfish" among economists, but nonetheless serious economists rarely take even "self-interest" as an absolute, just a useful approximation of how most people behave most of the time, and it also can be expanded to include things such as other-regarding preferences, e.g., altruism. Though "selfish" may be an unfortunate term to apply, if it really affects your view of the nature of economic theory then it just shows how shallow your understanding of that theory is. If the best you can do is to say that technical terminology used in the field does not give the appropriately nuanced view of reality in itself, then you really ought to be directing your "finite" time resources elsewhere, perhaps to literary criticism where these things are important (note: it is in no way my intent to demean literary criticism, which I believe is a very valuable pursuit, but rather present it as an example of a field in which the topics you bring up are in fact relevant). I would think as someone with an interest in science that you should understand that it is the underlying ideas rather than the particular way they are often presented that is relevant in a scientific field. It is not the theory that you should be criticizing but rather the fact the economists have not always done the best job communicating their ideas to the public, which is a valid concern. I would also like to note that finite is essentially a meaningless term in this context - the universe itself is finite, the largest number ever computed is finite, all real quantities are finite.

    On your other point, that scarcity does not capture the economic realities of modern life: I really can't do much better than to point you to the case of India, or essentially any other undeveloped country. If you think scarcity is not a reality you clearly have a distorted view of the world. Or perhaps you're just ignorant. Economists do not restrict themselves to studying only rich developed countries (it was created before rich developed countries even existed!), and thus to say that since there is an abundance of wealth in this country, economists should not worry about "scarcity" is a totally irrelevant point.

    I also wonder how you believe that scarcity is not an appropriate term in this country. Consider, as just one example, the supply of jobs in the United States, or perhaps Michigan. The US unemployment rate has hovered around 9.6% since mid-2009. In Michigan it has not dipped below 12% in the same period, and currently stands around 13%. This amounts to over 625,000 people who are unable to find work in the state ( ). I'm curious what city you are living in, if you think that "resources" (I apologize for using a more abstract, technical meaning of this term than is popularly used) are not scarce.

    (I noticed that this original post is over a year old an thus the numbers reflect a more recent perspective on the economic climate in this country, but that does not change in any way the substance of my response, and in fact the situation in the US mid-2009 was more dire than today, as we were reaching the trough of recession.)

    Gerhard Adam
    I find it interesting that you invoke the word "scarce" in precisely the same context that renders any economic meaning useless.  Poor people cannot consume resources, and therefore can contribute nothing to "economics".  Unemployed individuals are not consumers unless someone is providing them funds.

    So your use of the term "scarce" has little meaning, which was precisely the point I was making.  In economic terms, "scarce" is simply used to mean finite, in a manner that ensure competitive pressures to set prices and to allow the flow of resources (between those that possess) them to interact.  It says nothing about people that have no resources or money, nor does it say anything about those that have an over-abundance of resources and can do anything they like.
    Economists do not restrict themselves to studying only rich developed countries (it was created before rich developed countries even existed!)
    Of course economists restrict themselves to studying the rich, since those are the only members that can participate.  As for your comment that "economics" was created before rich developed nations existed, I would beg to differ.  Economics existed when the first humans first traded for goods, however economists only took an interest when the ability to concentrate wealth into the hands of corporations and individuals became of concern.  Therefore economists have always attempted to explain the interchange between people as if it were a science that they invented, rather than that it was a natural human phenomenon long before there were economists around to try and explain it with convoluted theories.

    The only reason most economists favor a free market is because there is some notion that if things are left alone they will tend to work themselves out and yet economists fail to realize that it is THEIR tinkering and advice that invariably destroys that same free market.  It is economists that have created the "science", policies, and legal framework whereby all manner of economic subversions have been created denying the ability for a free market to exist at all.
    Mundus vult decipi