Abundance and Scarcity
When you think of all the abundant natural resources in our world, all the human time and intelligence that exist, all the investments that have been made in organizing human societies, and the massive stock of machinery and other productive resources now accumulated, you realize that the world is wealthy indeed. Although the distribution of resources is far from even, across countries or among people within countries, contemporary human society as a whole still has a rich resource base on which to build. No wonder that many world religions and ethical teachings encourage an attitude of gratefulness on the part of their adherents toward the sources of life’s abundance.
It may seem odd, then, that many economists emphasize the notion of scarcity—that is, the notion that there is too little to go around—when discussing society’s choices concerning what, how and for whom. What this really means is that even with all the available resources, and even with a steady eye on the goal of well-being, not everything that is socially desirable can be accomplished, at least not all at once. The current capacity of a particular hospital, for example, may allow it to increase the number of heart transplants it performs or increase the amount of care it can provide for the severely mentally ill, but not both. A given resource (like an hour of your time) when dedicated to one beneficial activity (like studying) will be unavailable for certain other beneficial activities (like relaxing with your friends). Choices have to be made.
Macroeconomics is centrally concerned with how an overall economic environment emerges from the choices made by individuals and organizations, and to what extent choices made by governments can make this economic environment better or worse.
Society’s Production Possibilities Frontier
Economists use the notion of a societal production possibilities frontier to illustrate concepts of scarcity, tradeoffs, choice, full employment, and efficiency. The simplest version of this concept models an economy as if the only thing it has to consider is how to allocate its currently usable resources between the production of two possible flows of output over the coming year. The classic example is to take “guns” as one output, and “butter” as the other. In more general terms, the guns-and-butter tradeoff can refer to any society’s more general, and real-world, choice between becoming a more militarized society (“guns”) and becoming a more civilian- or consumer-oriented society (“butter”).
Figure 1 shows a production possibilities frontier (PPF) for this case. In this graph, the quantity of “butter” produced over a year is measured on the horizontal axis, or X axis. The quantity of “guns” is measured on the vertical axis, or Y axis. Every point on the graph represents a pair of quantities: one quantity of guns and another of butter. The point labeled A, for example, illustrates production, over the year, of 100 units of butter and 30 units of guns. Point B illustrates production of 50 units of butter and 120 units of guns.
The curve shown on the graph is the standard depiction of a PPF. The point where the curve hits the vertical axis indicates what society could produce if it devoted all of its resources to producing guns and none to producing butter. Likewise, the point where the PPF hits the horizontal axis indicates how much butter society could produce if it decided to devote itself entirely to butter production and produced no guns.
The bowed-out shape of the curve comes from the important observation that some resources are likely to be more suited for production of one good than for the other.
We can see, for example, that we have only to give up a tiny bit of butter production to get the first 30 guns. Only a few workers, for example, need to be pulled out of butter production and set to work on plentiful supplies of the materials most suited for guns, such as easily tapped veins of iron ore and minerals for gunpowder. Gun manufacturing plants can be built on land unsuitable for pasture. Because those resources had been left largely untapped when only butter was being produced, little is lost to butter production, while much is gained in guns.
On the segment between points A and B, there is a more nearly equal tradeoff, as the two processes start to compete for resources, such as land that might be used either for mining or for pasture, or the labor and materials that might be used either to build gun factories or to build dairy processing plants.
Movement from point B, into even greater gun production, comes at an increasing cost in terms of butter. The last few units of guns, from point B up to where the PPF hits the axis, come at the cost of nearly half the total possible production of butter! Why is this? Leaving even a few workers to tend the many cows and dairy plants would allow for a fair amount of butter production. Pulling them out, and putting them to work on increasingly less accessible veins of mineral ores, or on the now-crowded gun assembly lines, quickly erodes butter production while adding little to the production of guns. Point C in Figure 1 represents a production combination that is not attainable, given existing resources. To produce at that point would take more resources than society has. The PPF is specifically defined so that only those points on or inside it represent outputs that can actually be produced.
Point D represents a case in which society is producing less than the full amount that it could, given the particular set of resources. Usually such a point is associated with unemployment, waste, or inefficiency.
In more general terms, we can think of points such as A and B, which are on the PPF, as reflecting socially efficient production, because, by definition, the production possibility frontier is a collection of points at which three socially important requirements are met. These are the following:
No involuntary unemployment or undesired idle productive capacity. When economists talk about full employment of the labor force they do not mean that literally everyone is working as much as he or she can, but that everyone is working up to their potential and consistent with their desires. If the only people unemployed are those who are just very temporarily between employment situations, we would still say the economy enjoys “full employment.” People may choose not to work, or to work less than full-time. However, if people involuntarily stay unemployed for a significant period of time, or involuntarily work less than full-time or work at jobs that fail to make good use of their skills, we would say that there is unemployment or underemployment. Some of society’s productive labor resources would be going to waste.
Analogously, in a fully efficient economy the available stock of manufactured capital resources (such as machinery) and natural capital resources (such as land and mineral deposits) will be used at optimal rates, so there is no unanticipated and undesired idle productive capacity. The existence of involuntarily idle labor and/or capital resources, which could be used to produce additional output, usually implies that an economy is operating at less than its potential.
Application of optimal technology and social organization. The society is making use of the best technology and the best possible social organization of work.
Note that what is “optimal” in the use of both technology and social organization is highly context-dependent and may vary greatly from one society or one era to another. The best technique of production in any given instance will depend on the type and quantity of the available capital resources; what is best for a wealthy industrialized country will often differ from what is best for a poor or predominantly agrarian country. And the best social organization of work—for the purpose of motivating work effort and encouraging constructive interaction among workers—will depend on the nature and extent of the available resources, as well as on the overall culture of the society.
Efficient resource allocation. An efficient process is one that uses the minimum value of resources to achieve the desired result. Put another way, efficiency is achieved when the maximum value of output is produced from a given set of inputs.
In an efficiently run economy, the resources used in the society’s production processes are allocated within enterprises, and across enterprises and spheres of the economy, in such a way that each resource is deployed where it contributes most to desired production.
This condition is not met if reallocation of resources within enterprises, or across the whole economy, would enable society to produce increased quantities of desirable outputs. A particular enterprise may simply not use resources in accordance with the best technique. Perhaps, for example, the “gun” and “butter” activities are so badly managed that the very best pastureland was used to build the first gun factories. More of both could be produced simply by reassigning resources to their more appropriate uses. Societies should obviously avoid having to make such costly changes by using the lowest-cost inputs for each process at the outset.
Whereas points inside the PPF illustrate waste or inefficiency, points along the PPF itself illustrate the important notion that scarcity creates a need for tradeoffs. Along the frontier, one can get more of one output only by “trading off” some of the other. We can also see an illustration of the important concept of "opportunity cost".
Opportunity cost is the value of what one loses by not choosing the best alternative to the choice one actually makes. Looking at the PPF, we see that the cost of increasing gun production is less butter, and the cost of increasing butter production is fewer guns.
Of course, we could put on the axis many other pairs of outputs, besides guns and butter, and still illustrate these concepts. We could look at soda and pizza, cars and bicycles, or health and highways. This classic example, however, is a good one. In the real world, such guns/butter, or militarization/peacetime tradeoffs can be crucially important.
What precise combination of outputs, such as guns and butter, or health and highways, should society choose to produce? To determine which point on the PPF would be best, we would have to have some way of figuring out which was preferable for the society. For good social decision making, these kinds of production questions would have to be considered together with questions of resource maintenance, distribution, and consumption, since all have effects on well-being. In a society with free speech and democratic discussion, there is wide room for disagreement about what the best mix of goods might be. The PPF is a model that provides a mental image for thinking about tradeoffs but tells us little about how to choose among the possibilities it illustrates.
Tradeoffs Over Time
We have said that a PPF reflects possible production combinations given a certain set of resources. This idea deserves more investigation. Do we mean that society should look at all the resources it has at a point in time and then strive to employ them to produce the absolute most of valued outputs over the coming year?
If we consider that achieving well-being also involves questions of how and for whom, as well as activities of resource maintenance, distribution, and consumption, then the question becomes more complex—and more interesting. For example, we generally want to conserve resources so that we can produce goods not only right now but later in our lives. And we have an obligation to future generations to include them in our considerations of for whom.
Some production activities are also resource maintenance activities, of course, and the flow of output from these adds to the stock of resources available for the future. Investments in plant and equipment can provide productive capacity not just for a few months, but often for years. Production of goods and services that protect the environment, or that encourage the formation of new forms of knowledge and social organization, also lead to an improved resource base. As mentioned earlier, technological progress can lead to very long-run improvements in productive capacity. New technologies can create new, more efficient methods for converting resources into outputs—or even create new kinds of products, never before imagined. To the extent that production is of this sort, production can add to the production possibilities for the future. The PPF may expand over time, out and to the right, making previously unobtainable points obtainable, as shown in Figure 2.
Some productive activities contribute an ongoing flow of outputs without drawing down the stock of capital resources. Sustainable production activities, such as some agricultural and forestry processes when they are suitably planned and carried out, may not add to the resource base, but neither do they deplete it.
But many other productive activities lead to resource depletion or degradation. The intensive use of fossil fuels is now depleting petroleum reserves, degrading air quality, and contributing to global climate change. Production processes that destroy important watersheds and wildlife habitats are also resource-depleting. Mind-numbing drudgery, or work in dangerous circumstances, can degrade human resources by leaving people exhausted or in bad mental or physical health. These kinds of productive activities are at odds with resource maintenance.
Taking a longer-term view, then, it is clear that getting the absolute most production, right now, out of the available resources is not an intelligent social goal. Decisions like guns vs. butter need to be accompanied by another decision about now vs. later. What needs to be currently produced, what needs to be maintained, and what investments are needed to increase future productivity?
Figure 3 shows a production/maintenance frontier, which illustrates the tradeoff between resource-depleting kinds of production and resource maintenance activities (the latter including both conservation and investment). Point A illustrates a societal decision to engage in considerable resource-depleting production in the present year, while putting little emphasis on maintenance for the future. Point B illustrates a decision to engage in a higher level of maintenance this year and in a lower level of resource-depleting production. Point C is, again, truly unobtainable (for now), and Point D illustrates a case of inefficiency or wasteful unemployment.
The consequences of choosing between points A and B are illustrated in Figure 4, where once again we portray a two-output (like guns-vs.-butter) PPF. Now, however, the depiction is of some time off in the future, following the current choice between A and B. As Figure 4 shows, a decision to maintain more for the future, by choosing point B in Figure 3, leads to a larger set of production possibilities in future years. A decision to engage in considerable resource depletion, by choosing point A in Figure 3, leads to the smaller future PPF shown in Figure 4.
Of course, some will argue that advances in technology (which we have included as a resource-maintaining type of production) will always push out the PPF (as in Figure 2) more than resource depletion will pull it in (as in Figure 4). But this is no more than an assertion of belief. If this belief turns out not to be warranted, then acting on the basis of it may lead to large-scale, unfortunate, and irreversible consequences.
- Global Development And Environment Institute, Tufts University