Economic Scarcity I

Rightful liberty is unobstructed action according to our will within limits drawn around us by the equal rights of others. I do not add 'within the limits of the law' because law is often but the tyrant's will, and always so when it violates the rights of the individual.
--Thomas Jefferson

In living their lives, individuals face a fundamental problem. Many resources required to survive, or to thrive, are available only in limited quantities. They are scarce. They are called 'economic' resources because of the need to economize, or smartly utilize them.

Another word for economizing, a word that has received ill press of late, is rationing. Were there not some mechanism for rationing economic resources, then they would disappear quickly. This is because, absent penalty or incentive to do otherwise, people are prone to elevate their standard of living (consume more) in the present. Increased consumption in the present period increases standard of living now but decreases the likelihood of maintaining this living standard in future periods--because resources consumed in the present will not be available to consume in the future.

Since the beginning of civilized history, two primary mechanisms have emerged for rationing economic resources. One is the market, or capitalistic, mechanism. The market mechanism is built on the concepts of property rights and free exchange between individuals. Individuals control the means (a.k.a. capital) to transform economic resources into consumable goods. Producers market their goods to potential buyers.

Buyers and sellers negotiate the amount of producer goods to be traded for buyer goods or resources. This exchange rate is commonly referred to as the price. Exchange ensues to the extent that both parties perceive that they will be better off by engaging in the transaction at the negotiated price.

It is commonly presumed that those individuals who control the means of production (capital) exert the dominant influence on market systems. This is mistaken, however as dominant influence in market systems rests with consumers. If producers generate output that consumers will not purchase at a price agreeable to both parties, then those enterprises will fail since there are no incoming resources to support it.

On the other hand, if producers do generate output that consumers are willing to trade for, then the exchange provides a signal to those producers (and to competitors) that those enterprises are on the right track, and that further use of scarce economic resources for this purpose is desireable. Producers with output that is in high demand may be able to raise prices, but higher prices offer further incentives for competitors to innovate in a manner that increases value for buyers.

Thru their choices to purchase goods at a particular price, consumers direct how producers should utilize scarce resources under their control. If certain producers do not heed these signals, then they will be financially unprofitable, and they will lose control of those resources to other producers.

As demand for particular goods increase, supply of associated resources declines, which ultimately raises the price to consumers. Higher price reduces demand, as fewer consumers are willing to sacrifice more resources to procure the pricier good. Fewer goods means less resources are used as inputs.

In market situations, then, rationing is achieved by the price consumers are willing to pay in order to acquire the goods configured by producers from scarce economic resources.

We'll consider the other mechanism for rationing economic resources in a future missive.