Economics is a relatively new science, deriving its core focus on human behavior and the interaction of scarce resources in markets from the likes of Adam Smith, David Ricardo, John Baptiste Say, Frederick Hayek, and John Maynard Keynes.
Particularly at its core beginning and notions of free markets, scarcity, specialization, and free allocation of resources was Adam Smith’s book, An Inquiry into the Nature and Causes of the Wealth of Nations, which he published in 1776.
· When we study economics, we are inherently studying society’s problem of scarcity and the difficult decisions we make and must make in order to increase fairness, equity, and efficiency in our society.
· That is the economic problem. How do we satisfy human beings’ unlimited wants and their needs with finite resources? What do we produce? How do we produce it? For whom do we produce it? Those are the questions we must answer based upon our investigation into scarcity, choice, and resources.
What if we had everything we needed and wanted without ever coming up short? Would there be a word called scarcity? Not if we had everything satisfy all of society’s needs and wants. But we do.
One may think we have an infinite source of water, but we don’t. Despite seventy-five percent of the Earth covered in water, only about less than 5% of it is fresh water. Despite air being invisible and seemingly infinite, clean air is a luxury today. So, when we talk about resources being scarce and non-renewable, we must understand that we in society must make decisions based upon scarcity and determine what the optimal allocation of our resources is going to be to maximize our society’s wealth, happiness, efficiency, and equity.
Why do you suppose some countries, such as the United States, are relatively well off and its people have relatively ample and even abundant resources with which to live their lives, while other countries have relatively little?
· It comes down to the resources, which includes human, those of nature, and technology, which a country and its government possess and the allocation of those resources in its markets.
· Secondly, how much private property rights do the inhabitants possess according to the specific governmental structure within their country?
· More private property rights means more freedom to choose, retain resources, and seek a higher standard of living. Private property rights allows entrepreneurism to flourish by allowing the entrepreneur to invest his or her own personal resources and taking risks to make a venture successful.
How do we assess our views of scarcity? Do we simply project our desires or opinions about what is transpiring, or do we gather data and apply economic models and theory to understand the world around us?
That is the difference between normative economics and positive economics. Simply stating what something ought to be or what you want something to be is normative economics.
Applying data and economic models and theory to help us understand and predict economic behavior is positive economics; positive economics implies what it is, not what it ought to be.
· Normative economics can help us strive for an ultimate outcome if we can more efficiently and effectively allocate resources, but employing positive economics gives us the true situation at hand we face and what we need to do and what to expect if certain criteria are present and what choices we should and plan to make.
· Thus, when we look at scarcity, we have to take into consideration the limited resources we possess in relation to the unlimited wants and needs we in society have. Scarcity affects individuals, firms, and countries.
Individuals, firms, and countries each make choices about how to allocate resources. Trade is used to more efficiently utilize a country’s comparative advantages in producing products with the resources it possesses.
Countries where private property rights are highest tend to have more market-oriented economies in which maximizing resources and profitability are sought and individuals enjoy higher standards of living.
Simply stating opinion and how something should be without utilizing economic models, theories, and data doesn’t allow for effective problem solving. Positive economics is when we do apply models, theories, and data to assess and predict economic behavior and solutions.
Two Main Economic Systems
As we continue on the discussion about scarcity, it is very crucial to analyze the specific economic structures that are established in society, and how the governments of those economic structures allocate resources in relation to their inhabitants. Two main economic systems exist, based upon the amount of government ownership of resources and private property rights allowed to the inhabitants of the countries: Capitalism and Socialism.
Capitalism is the economic system in which private ownership of productive resources are allocated through markets and market prices. When individuals, also referred to as “households,” in an economic system provide their factors of production – land, labor, and capital – to firms, they are compensated by firms in the form of income, wages, rent, and interest.
· Firms use those factors of production to produce the goods and services individuals need and want out of firms.
· It is from the income, wages, rent, and interest that individuals, or households, purchase those goods and services. A capitalist system operates just like this in which individuals are rewarded for the use of their resources.
Within a capitalist system, the government plays an important role of overseeing and regulating markets to ensure they are competitive and free of collusion and corruption. The government’s role is less of an owner of assets and resources as much as it is to oversee markets to ensure marginal social benefits and marginal social costs are in equilibrium, leading to social equity and efficiency.
Socialism is the other main economic system in which there is much more involvement in the ownership of firms and resources, as well as manipulation of markets by government. Taxation tends to be higher in these kinds of economic and governmental systems.
· Referring back to the notion of individuals and households providing their factors of production to firms in exchange for income, wages, rent, and interest, when higher taxation is imposed, that is a leakage to that process of exchange; individuals and households are not getting paid fully for the use of their resources, in effect, and thus private property rights are less in these kinds of economic systems.
In summary, economies can be broken down into two main economic systems: Capitalism and Socialism. Capitalism entails less government involvement in market systems, and there is more freedom between the households and firms in the exchange process of the factors of production and the generation of goods and services.
Private property rights is higher in capitalism due to less government ownership and less taxation of individuals. Socialism, on the other hand, involves more government ownership of resources and firms, as well as higher taxation of individuals, thus reducing the private property rights of individuals.