Knowledge And Decisions

An economic system is a system for the production and distribution of goods and services. But what is crucial for understanding the way it functions is that it is a system for rationing goods and services that are inadequate to supply all that people want. This is true of any economic system, whether it is called capitalism, socialism, feudalism, or by any other name. The Garden of Eden was not an economic system, even though it produced and distributed goods and services, because it produced them in such abundance that rationing was unnecessary. A utopia would not be an economic system, for the same reason. In short, while economic systems of various sorts boast of their achievements in bringing goods and services to people, what makes them all economic systems is that they have systematic procedures for preventing people from getting goods and services, denying them access to natural resources, tools or equipment for production, and limiting their ability to work at the tasks they would prefer. Capitalist systems use capitalist methods of denial, socialist systems use socialist methods of denial, but all economic systems must use some method of denial.

Looked at another way, there are inherent constraints, given the limitations of nature and the unlimited desires of man, and economic systems are simply artificial schemes for administering the inherent scarcities. The scarcities themselves exist independently of the particular economic systems, and would exist if there were no economic system at all and people simply fought over everything they wanted. Economic institutions exist to introduce elements of rationality or efficiency into the use of inputs and outputs.

The classic definition of economics is that it is the study of the allocation of scarce resources which have alternative uses. If resources — the ingredients of production — were not scarce, there would be no economics. We would be in an Eden or a utopia. Similarly, if each resource had only one possible use, we would simply use as much of each resource as was available to produce as much of its unique output as we could, and the only economic problem would be deciding which particular individual should produce it or consume it. But economics is much more complicated than that because, in the real world, the same resource can be used to produce a wide variety of products. Coal, for example, can produce dyes, electric power, heat, nylon, or liquid automotive fuel, and milk can produce ice cream, yogurt, and innumerable kinds of cheeses, as well as providing an ingredient in a virtually limitless variety of cooked foods. An economic system must determine how much of each resource shall go to each of its various uses, under the inherent constraint that all of the desires for all of the users cannot possibly be satisfied simultaneously.

While economic systems may become very complex, the economic situation or predicament is quite simple: there just is not enough to go around. Like so many simple and important realities, it often gets lost sight of, or is completely ignored, in the midst of complicated reasoning or emotionally powerful rhetoric. For example, some social commentators point to the existence of “unmet needs” in society as evidence of the “failure” of the economic system. But, in fact, because economic systems are essentially systems of rationing, any successfully functioning economic system would have “unmet needs” everywhere. The alternative would be to completely satisfy all of some category of needs — the most urgent, the moderately important, and the trivially marginal — thereby leaving still more unsatisfied (and more urgent) needs unmet elsewhere in the economy. We could, for example, completely solve the downtown parking problem in every city in the country, so that anyone could easily find a convenient parking space at any hour of the day or night — but the resources needed to do this would mean severe cutbacks in municipal hospitals, schools, and water supply. The mundane fact of insufficiency must be insisted upon and reiterated because so many discussions of “unmet needs” proceed as if “better” policies, practices, or attitudes would “solve” the problem at hand without creating deficiencies elsewhere. Typical of this attitude is the comment that, “If we can send a man to the moon, why can’t we — ” followed by whatever project the speaker favors. The fact that we sent a man to the moon is part of the reason why many other things could not be done.

KNOWLEDGE IN THE ECONOMY