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Economists - not on this planet

Most modern textbooks will contain a variation of the following famous definition of economics as: 'a science which studies human behaviour as a relation between ends and scarce means which have alternative uses.'

This makes economics the study of the logic of choice in conditions of scarcity. This is not how most people would understand the term, but check for yourself and you will see that the word scarcity occurs again and again in textbook definitions of economics. Paul Samuelson in his Economics, in a very widely studied economics textbook, speaks of a "large scarcity" and says that if goods were not scarce then there would be no role for a science of economics. So, on these definitions, economics is seen as the study of the production and distribution of scarce goods.

The Scarcity Dogma

This definition, however, can only be sustained by giving a peculiar meaning to the word 'scarcity.' The normal sense of scarcity is that of shortage, implying that something is in short supply in relation to the claims on its use. The scarcity theory economists, however, define scarcity to mean the absence of unlimited supplies. Since no good produced by humans is, or can ever be, available in unlimited amounts all such goods are, by definition "scarce".

They reinforce this with a second assumption—that human wants are unlimited. This provides a fall-back position, since, if human wants are infinite, even on the normal meaning of scarcity as shortage of relation to uses goods are always going to be in short supply. But this assumption of human wants being infinite is equally dubious since, while human wants might be great, they are not unlimited. Nor do they exist outside particular social and historical contexts but are determined by the society in which particular humans are living at a particular point in time and are in practice always limited.

This school of economics (which is the dominant one today) needs the scarcity assumption—whether based on an unrealistic definition of scarcity or on an unrealistic assumption of infinite human wants, because it is the basis of its claim that the best way to solve the perpetual either-or problem, which they see humans facing when it comes to deciding what to produce, is to have recourse to money, prices and markets. They want to be able to prove that the present economic system, under which most wealth is produced for sale on the marketplace, is the best one possible. They need the scarcity assumption, in other words, so that they can beg this question.

The scarcity school of economics is right to see economics as the study of the way in which what to produce and how to produce it are determined under a market system. Where they go wrong is in making such a system the outcome of "scarcity".

Scarcity, in their peculiar sense, has existed throughout human history, but the market system—where everything, including the mental and physical energies of humans, has a price and where everybody has to have money to obtain what they need—only began to come into existence comparatively recently, about 500 years ago, and has only come fully into existence in places like America, Europe and Japan within the last 100 or so years. It is still not fully developed in most of the rest of the world.

The basis of the market system is not some eternal scarcity, but the separation of most people from the access to the land which enables them to produce their own food, clothes and houses. In other words, its basis is the dispossession of the majority of the population of all productive resources except their own ability to work and the concentration of the ownership of these resources into the hands of a small minority of the population. It is this, not scarcity, that makes money, prices and the market the universal features of life they are today.

We have now reached a definition of economics: the study of the production and distribution of wealth that is produced to be sold on a market. Economics is the study, not of scarce goods but of marketed goods.

What is wealth?

Wealth "is any material object or service that serves to satisfy some human need or want." An individual item of wealth is known in economics as a good.

Some goods essential to human life, such as the air we breathe and the heat and light of the Sun, are provided spontaneously by nature without humans having to do anything and so are called 'free goods'. Most goods, however, including others equally essential to human life such as food, have to be produced in the sense that humans have to exercise their mental and physical energies to obtain them, even if all that it involves in some cases is picking a fruit from a tree. Most goods, in other words, are products of human work.

When humans produce a good they are not creating something out of nothing; what they are doing is transforming parts of nature into something useful to them. This transformation may, as is the case of the picked fruit, only consist in changing the place of some nature-given material; generally speaking, however, a change of form is involved as well as a change of place.

Production, then, is the process of transforming parts of nature into goods. Apart from "free goods", all wealth is the product of human beings working of materials originally supplied by nature.

Any activity that transforms parts of nature into something useful to humans is productive activity. This is so even if the transformation is merely a change of place, so transportation is a productive activity. So is storage, as preserving the usefulness of some good. Some products of labour are intangible, such as a haircut, and are known as 'services'.

Some people have argued that only tangible goods are wealth, and that therefore only labour that results in some physical product is productive. But they are wrong. The only difference between a tangible and an intangible good, or service, is that in the latter case the product is consumed as it is being produced, but it remains a product.

Goods can be divided into two main groups. First, those which are directly consumed by humans to meet their personal needs, or 'consumer goods'. These may be consumed as they are being produced (some services) or in one go (as food and electricity are) or over a period of time (as clothes, and furniture, and houses, are).

Second, those which are used to produce other goods, or producer goods (also known as 'intermediate goods' and as a 'means of production'. These are consumed (used up) of course but to make other goods and now by humans directly. They include materials extracted from nature, semi-finished goods, tools, machines, buildings, fuel and means of transport.

The basis of the market system is not some eternal scarcity, but the separation of most people from the access to the land which enables them to produce their own food, clothes and houses. As Sir William Petty (1623–1687) put it, labour is the father of material wealth, the earth is its mother.

However, humans are tool-making and tool-using animals and, apart from very basic productive activity such as picking fruit from a wild tree, production involves a third element: the tools and machinery humans use to transform nature-given materials into wealth. These producer goods are of course derived from the other two since they will have been fashioned into their existing form by past human labour working on nature-given materials.

The 'distribution' of wealth is simply the way in which what has been produced is distributed—i.e. divided up—shared, amongst the members of society.

The Market System

Samuelson describes the present economic system (his ideal system) as follows:

Everything has a price—each commodity and each service. Even the different kinds of human labour have prices, usually called wage rates. Everybody receives money for what he sells and uses this money to buy what he wishes. (His emphasis.)

So, under the market system the vast majority of goods (though by no means all, as we shall see in a moment) come to be produced for sale. A good that is produced for sale is called, in modern economics, an 'economic good' (or, in Marxian economics, a "commodity"—note the difference with Samuelson's use of the same word above to mean simply a tangible good). The concept economic good excludes a whole range of non-marketed goods such as housework, vegetables grown in your garden, do-it-yourself repairs and voluntary work. This in itself confirms that economics is concerned not with the production and distribution of wealth in general, but only with the production and distribution of wealth that has been produced for sale.

Goods produced for the market have an 'economic value' in addition to their capacity to satisfy some human need or want, or use value. This economic value is measured by the quantity of other economic goods they can be exchanged for. It is generally expressed in money as their price.

This means that under the market system the basic underlying physical factors involved in production—nature-given materials, human mental and physical energies, and producer goods—all come to have a monetary value. They become 'capital'. Hence "capitalism" as another name for the market system.

In its original sense capital is a sum of money lent out as interest and is still used to mean this today. Under the market system there is another way—it is in fact the overwhelmingly predominant way—in which those with capital, or capitalists, can make money, and that is to use it to purchase productive resources with a view to using them to produce wealth for sale. It is this that turns them into capital. (Note: somewhat confusingly, economists also use the word capital in another sense to refer to fixed produced goods such as buildings, machinery and plant only, thus excluding stocks of raw materials and of finished products and work in progress as well as the case to pay wages and for fuel and services, which accountants, more logically, count as capital).

The act of purchasing productive resources to engage in producing goods for the market is called 'investment' and the monetary gain that results is called 'profit'. The total monetary value of the new wealth produced is a given country over a given period is called either the 'national income' or the 'national product' (the two have the same monetary value). It is distributed by being bought by the members of society out of the monetary income they receive and which is initially generated at the point of production in the form of either wages and salaries or of profits.

It is these relationships, which only arise when the great bulk of wealth is produced for sale, that form the subject-matter of economics. Economics is the study of the factors governing the production and distribution of wealth under the market system of production for profit.