002：Economics is the Science of Scarcity

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Hello, Himalaya subscribers. My name is Timothy Taylor.  Today we're going to discuss economics is the science of scarcity. Every country has an economy. Now, think about what that means for just a minute. It doesn't matter whether the country tends to be more capitalist or socialist or communist. Every country has an economy. It doesn't matter if the country is relatively low income, middle income or high income.

Every country has an economy. It doesn't matter for talking about a country in the present or twenty years ago or fifty years ago, or five hundred years ago. Every country has an economy, no matter what the time period. It doesn't matter if the country involves a government that does lots of decision making and regulation, or a country where the government doesn't do very much decision making and regulation. Every country has an economy. So that means when we think about economics, we need to think about ways of thinking, or of frameworks, which can work in all of these different situations.

In these first few lectures, we're talking about some of the main concepts and ideas that are used in the study of economics, like the circular flow that we talked about in the previous lecture, or the division into microeconomics and macroeconomics. In this lecture, we want to keep building up our economics tool kit with a few more steps. First, we'll talk about the three basic questions of economics. Second, we'll talk about scarcity, choice, and tradeoffs. And third, we'll discuss that economics is a language for analyzing questions, but it's not a set of answers to every question you might want to ask.

So let's start off with what are the basic questions of economics. Economics takes as its subject material, questions about how a society produces and consumes. And any society must address three basic questions about the actions of producers and consumers and how they fit together. Three questions are: what should be produced, how should it be produced, and who gets to consume what is produced? These questions are unavoidable. Every single country in the world at every time in place has to answer these three questions. And that's why every country has an economy.

Now, of course, not all countries answer these questions in the same way, and it's common to draw some distinctions, thinking about a range of possible answers to these questions. At one extreme end of the range is where private individuals and firms make most of the decisions. And the other extreme and the rangers were government makes most of the decisions, but there are lots of steps in between. So let's start off at one extreme where most of the decisions about what is produced, who gets it and how it is produced are all made by individual households and firms interacting together.

And in this situation, the government is providing only very basic services. For example, it might provide police protection to avoid theft, it might enforce contracts and make sure people can hang onto their property, it might also provide national defense, but it doesn't interfere in other ways. Now you can imagine a slightly broader vision. A government does the things I just mentioned, but it also provides some public services like roads, fire protection, public education, maybe support for scientific research, laws against pollution, and things like that. Now you could imagine the government taking on a few more tasks. Perhaps the government runs certain retirement programs, or perhaps the government runs the national healthcare system.

Or you could imagine the government is running certain industries, major industries like steel or car production or banks, or ultimately you can imagine the government would give the answers to all three of the big questions. The government would say what will be produced, how will be produced and who gets it. Ah, in that situation, the government ends up handing out all the jobs, handing out all the housing, telling all the firm's exactly what to do and setting all the prices. But of course, just because the government tells people to do something doesn't mean it will necessarily happen that way.

So we need to take that thought into account, too. In the real world, few societies are total individual or total government. Instead, some mixture of the two is common. Modern economics looks at what actually happens. And you will find that in some areas, individual decisions by households and firms seem to work pretty well. In other areas, they don't work so well. In some areas, government action works pretty well. In other areas, government action might not work so well. So we need to talk about those distinctions in what follows. But for now, let's turn to our second main theme, the importance of scarcity, choice, and tradeoffs.

Let's think back to the three main questions we mentioned a moment ago. What should be produced? How should it be produced and who gets to consume what is produced? And if you think about those three questions for a moment, you'll notice they all involve choice. Choices that are made about what to produce, how to produce and who gets to produce it. Those choices can often be made by consumers, at least in part, when they're deciding what to buy; choices like whether they would like to live in a bigger space that costs more or a smaller space; choices about saving money on some items, or spending more on other items; choices that are made by workers, like deciding where to work, Uh, do you work for a big company or a small company, or try and start your own company; choices about how much to save or how much to spend, and if you decide to save, do you put your money in the bank, or do you try and invest in stocks or housing or something else.

Businesses make lots of choices, too. When they decide what to produce, they're deciding how to produce it, how many workers to hire, what skills are needed, what wages to pay, how much equipment to buy, do we need new equipment, can we use old equipment, do we need to invent some new technology that doesn't exist yet. And of course, government makes choices, too. How much to collect in taxes, what kind of taxes to use, how much to spend overall, and what specifically to spend on, should the government borrow some of the money and have government debt or not, should the government run certain parts of the economy or leave them up to private firms, how much should the government regulate the economy when it comes to prices or environmental rules or other issues. The idea of needing to make choices is so central in economics that it sometimes treated as the idea that actually defines the subject of economics. One famous example comes from the writing of a British economist named Lionel Robbins. He died a quiet a while ago back in nineteen eighty four, but he wrote an essay on the subject of how to define economics way back in nineteen thirty two.

That essay is often still read today. Here's a little taste of what Lionel Robbins wrote. He said the time at our disposal is limited. There are only twenty four hours in the day. We have to choose between the different uses to which they may be put. We have neither eternal life nor unlimited means of gratification. Everywhere we turn, if we choose one thing, we must relinquish others, which in different circumstances we would wish not to have relinquished. Scarcity of means to satisfy given ends is an almost ubiquitous condition of human nature.

Here then is the unity of subject of economic science, the forms assumed by human behavior in disposing of scarce means. Now, when some people hear that comment from Lionel Robbins referring to the study of economics as the subject of economic science, sometimes it makes people a little crazy.

Now, let me give you one example of scarcity and choice. A famous example that economists have been talking about for more than two hundred years. The question is, what is worth more-diamonds or water? Now, it might seem like the answer to this question is so obvious. Only an economist could wonder about it. Diamonds are much more expensive than water, right? I know this, but it still seems a little strange if you think about it. After all, water is basic necessity for human life. You die if you don't get it.

Diamonds can be pretty in jewellery, and they have some uses in industry when you put them on the blade of a cutting tool or a drill bit. But diamonds are not a basic necessity for human life. It seems like water is really worth a lot. So why is water so cheap while diamonds are so expensive? An obvious answer goes back to this issue of scarcity. Diamonds are rare. They're hard to find. in comparison, water is a lot easier to find. Water even just falls out of the sky sometimes, and diamonds do not fall out of the sky.

But when you think about it a little more, you can come up with strange situations where you might think that water is worth more than diamonds. For example, imagine that you have a pocket full of diamonds, but you're stuck in the middle of a desert, and you don't have any water. In that situation, you might be willing to trade some diamonds for water. In other words, the value of something depends on what is more scarce at a certain time. The basic lesson is that scarcity is a fact of human life.

No one can have everything they want. For most of us, our choices are limited by things like how much income do we have or how much we can borrow from a bank. But even the richest person in the world is limited by the fact that they do not have more than twenty four hours in a day. When it comes to time, every single person in the world lives in a situation of scarcity and needs to make choices. Or as economists put it, we all face tradeoffs.

We live in a world of scarcity. We have to make choices. And when we make a choice, if we want one thing, we have to give up something else. We have to trade off something else. And our role, our choices and our tradeoffs are what make up the subject of economics. This takes us to the third main point in this lecture. When it comes to looking at these choices and tradeoffs, economics is a method of analysis, not a set of answers. One of the most famous economists of the twentieth century was named John Maynard Keynes, a British economist.

But for the moment, I want to focus on a comment Keynes once made in talking about the subject of economics. Keynes wrote, economics is a method rather than a doctrine and apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.

In other words, economics doesn't give you the answers. Economics doesn't give you the power, for example, to forecast the future of the economy. You can know a lot about the economy and how it works, but the economy is influenced by whether by politics, by technology, by all sorts of factors. But economics is a method of thinking, a technique that helps you think about what the likely answer to the question is. As you'll see, this technique is so powerful, it can be used by people who reached very different conclusions. Economists often disagree with each other.

For example, there are economists who might say that a country should provide its health care through a system where the government plays a big role. Other economists might say, a country should provide its health care in a system where individuals and households, firms, and private insurance companies play a big role. Others might try to mix these two possibilities together. But all of these economists, even though they are disagreeing, we'll use the same terms and talk the same language. They will all agree there are problems of scarcity and choice and tradeoffs. They're just looking at the evidence a little bit differently.

In the next lecture, we'll describe some of the ways in which economists think about tradeoffs that are often a little different from how everyone else does so.

 I’m Timothy Taylor, thank you for listening to Himalaya.