Contemporary economists have variously defined their discipline over the two-plus centuries since its intellectual emergence from the work of Adam Smith. However, there is widespread agreement among contemporary economists that the one word that captures the core organizing concern of neoclassical economics is scarcity , which economists almost always interpret to mean the inescapable conflict that occurs when peopleās virtually unlimited (and ever-expanding) human wants grounded on subjective, mind-based evaluations (the product of myriad, often unspecified, neurological and physiological and external forces) are pitted against the known but limited or finite resources in the external physical world that are available for satisfying human wants.
The Foundations of Economics, Scarcity, and Analytical Methods
The venerable Paul Samuelson first published his once dominant introductory economics textbook in 1948 without scarcity being the focus of his construction of the discipline, possibly because he was then more concerned with introducing students to the management of the overall level of a countryās aggregate economic activity with the introduction of the then still relatively new Keynesian macroeconomics. 1 However, in later editions he fully adopted scarcity as the core organizing concept for the disciplines: āEconomics is the study of how people and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or in the future, among various persons and groups in society. It analyzes the costs and benefits of improving patterns of resource allocation.ā 2
During the first half of the 1960s, Campbell McConnellās introductory textbook began to seriously erode Samuelsonās market share in part because he adopted Samuelsonās model of placing heavy and early emphasis on macroeconomics with microeconomics relegated to the last half of the textbook (taken up usually in the second semester of the then traditional year-long introductory course). Perhaps, McConnellās market share was also boosted somewhat by his greater emphasis on the scarcity paradigm as the chief organizing concept for both macroeconomics and microeconomics: āRecalling that wants are unlimited and resources are scarce, economics can be defined as the social science concerned with the problem of using or administering scarce resources (the means of producing) so as to attain the greatest or maximum fulfillment of our unlimited wants (the goal of producing)ā (emphasis in the original). 3
In an even later edition, Samuelson with his adopted co-author William Nordhaus defined economics (which in the 2010s had been in print for nearly seven decades) with greater brevity, as āthe study of how societies use scarce resources to produce valuable commodities and distribute them among different people.ā 4 In his widely adopted introductory textbook, first published in 1998, that follows in the Samuelson/Nordhaus tradition (but with more emphasis on microeconomics), Gregory Mankiw writes that āthe management of societyās resources is important because they are scarce. Scarcity means that society has limited resources and therefore cannot produce all the goods and services people want.ā Accordingly, he defined economics in much the same way that Samuelson/Nordhaus (and what seems to be an ever-changing horde of other textbook writers) did, as āthe study of how society manages its scarce resources.ā 5
Again, the conventional construction of scarcity in economics is largely grounded in the boundedness of resources in the external real world in which people must survive (or, as the case might be) prosper and the unboundedness of peopleās capacity to imagine things they want and ways to obtain what they want.
In short, scarcity occurs at the intersection of the physical and subjective universes (as economists conceive and limit them). Scarcity also constrains, if not determines (in some tightly constructed mathematical models), peopleās decision-making and economistsā analytics. Scarcity in the external world defines the subject matter of economics, as well as defines and largely guides what and how economists do what they do, as well as teach what they do.
In economistsā conceived āstate of nature,ā not all human wants, obviously, can be satisfied. Choices must be made. Modern economics as a discipline is most often seen as bounded, but only by those arenas in which people have meaningful choices and make decisions among viable options. That is, economics is not generally thought to extend to those realms of human behavior in which people do not have two or more meaningful alternative courses of action, as may be the case after people are lifted into the vortex of a tornado or when they are tightly shackled. Until the advent of sexual reassignment surgeries, economics played no (or a thought-to-be little) role in āgenderā identity matters. People had no choice about their sexual orientation (at least, as once presumed by economists, and almost all other social scientists, in their modeling).
Scarcity implies (or so economists who adopt scarcity as their core concern, founding analytical presumption) that in making choices people will seek to maximize attainment of utility from the fulfillment of wants that, in turn, implies optimum use of resources. Why would people, within the constraints of their volition, do anything less, at least for modeling purposes? The presumption of maximizing behavior implies people have some rational capacity, which is to say that they have some ability to weigh off the relative value of various wants that can be fulfilledāand to fulfill with some consistency, within constraints, those wants that have the greatest value.
For Samuelson, McConnell, Mankiw, and a generation of economists who followed textbook writersā lead on āunlimited wants,ā scarcity did not extend to the generation of wants (for the most part). Wants are just āthere,ā unaffected by anything, or are unaffected by resource constraints, and are, effectively, beyond economistsā concerns (as Lionel Robbins insisted in the early 1930s was the case, a point I take up in the next chapter).
Modern economists have sometimes parted ways on just how rational people can be in real life from economists who followed the methodological framework laid down in clearest terms by Milton Friedman in the early 1950s. The overwhelming majority of contemporary economists have assumed some variant of perfect rationality , some as a matter of conviction that peopleās level of rationality is close enough to perfect rationality that little is lost in descriptiveness in assuming perfect rationality, while others have assumed perfect rationality as a means of easing their analytics, an approach that elevates the importance of testing empirically the accuracy of their theoriesā predictions. 6
Neoclassical (or mainstream) economists have acknowledged their own and their subjectsā mental limitations in one important theoretical regard. As Friedman contended, the founding premise of all theories dealing with complex phenomenon must, to one degree or another, be āunreal,ā or not strictly in accord with how people make decisions in the āreal world.ā The real world is complex and messy, with āwhat isā at any point in time or within any period of time necessarily the consequence of myriad, ongoing, and continually interacting economic and noneconomic variables. The real world is made ever messier by a multitude of humans imposing varying and different evaluations and actions on life in all arenas, not just business.
Understandably, Friedman reasoned that theories could not be ācomplete,ā or fully descriptive, and, by chance, if a theorist tried to devise a truly complete theory, he or she could not understand or be able to work with it. A complete theory would overtax the limited mental capacities of economists, which is why theories are devised to reduce (or abstract from) complex reality to a manageable form. Understandably, Friedman concludes, as a matter of human mental limitations and scientific necessity, āthe legitimacy of and justification for this abstraction [that people maximize or act fully rationally or markets are frictionless] must rest ultimately, as with any other abstraction, on the light shed and the power to predict what is yielded by the abstraction.ā 7
Economists might as well simplify their analytics as much as possible to facilitate their analyses, and progressively simplify them so long as nothing, or little of consequence, is lost in the insightfulness and accuracy of predictions from the theory. The usefulness of economic analytics is determined by the congruence between theoretical deductions and empirical findings.
In neoclassical economics, the rationality premise is grounded on the type of decision-making consumers and producers are likely to adopt, or to be pressured to adopt generally (but not necessarily everywhere and always), in a world of pervasive scarcity. The premise, in other words, has a grounding in reality, not just in the creative imaginations of economists whose first and only purpose is to ease their analytics. Seen from this perspective, the rationality premise is a necessary starting point, which need not be proven but does require general consent for its reasonableness from a community of scholars, for a deductive science, a means to an end, the development of predictions that can be falsified. If they are not falsified in repeated tests, the following analytics can give rise to acceptable insights into, or generalizations about, human behavior in face of changing market forces, including government policies. Because the premise is accepted as being less than fully descriptive of how people think and behave, then empirical tests are crucial in neoclassical economics (but not in, say, Austrian economics). Otherwise, without testing, neoclassical predictions might just be totally misleading, a product of a lack of coherence between the unreality of the founding premise and complex reality.
By the same token, inductive empirical studies not guided by some general theory, founded on an agreed-upon premise, can also be misleading, because the studies are not testing predictions. The data series created within or abstracted from and selected for study of complex reality, which encompasses a multitude of variables (all of which canāt be considered), might not be representative of complex reality (or even ...