Friday, December 4, 2009

Scarcity & Markets

Economists talk of scarcity of resources and the role of the market in ensuring the efficiency of resource allocation. Is this true in real life?

To a certain extent, scarcity exists when we talk of what is available at our disposal today, and our ability to transform those available natural resources into things we want or desire.

In reality, given what we already know, there is still immense scope for people to produce the things that we want or desire. It is just a matter of unleashing the productive talent, and things will be produced. A whole new world is being created in China just by the stroke of the pen, and the freedom for people to follow their instinct for survival or security.

The efficiency that economists talk about is really the efficiency of production or getting what we want from the same amount of resources. This reflects our technological knowledge.

Of course, market efficiency can be obtained if the market is not controlled so that more output and lower prices can be obtained by consumers as producers compete to survive.

If we have businesses controlling policy, then the tendency is for policy to ensure prices high enough for business to make money, not matter how inefficient they may be.

But the markets we have in the world today is an exchange market. The market is where different producers of different products exchange with each other their products.

The market is an attempt at diversity, to exchange what we have plenty with others for the little or nothing that we have but where they have plenty. It is not an attempt at unity except probably for the price, and even this is possible only under very special conditions.

But the market does not spread efficiency between those who have with those who have not. Those who have not are excluded from the market. They are outside the market. They cannot participate. To participate, they must attempt at production, and hopefully something which they like and which others like as well. They must also be able to increase the production, so that there is a surplus to trade.

There can be no advantage to be obtained by restricting others in production, so that one can have the market. This will merely result in a lower output level.

The only way that restrictions can work is in commerce, where one can trade but others cannot trade. This assumes that both the market demand and supply are available, without any productive work involved. In this case, with market restrictions, market demand may not be sustainable because there is a constant leakage from the system in the form of rent or profits from restrictions, and the tendency is for the economy to go down on a vicious cycle.

A temporary way out of that vicious cycle is by printing money, when the central bank lends to the government or when banks lend to consumers.

A better way out of the vicious cycle is by increasing confidence and investment, aided by banks lending to businesses and investors.

1 comment:

walla said...