"The more I find out, the less I know."

Thursday - October 09, 2003 at 03:37 AM in

Scarce Resources

One way to look at economic systems is that they are the mechanisms through which a group of people allocate scarce resources. The growth and size of an economy is limited by its most scarce resources, and (at least in a free-market economy) mechanisms evolve to try to use relatively plentiful resources instead of scarce ones. So what is the limiting resource in our economy today, that resource which keeps our economy from growing faster? The answer will come as a surprise to anyone who has been unemployed lately, but our economy is limited by the relative scarcity of people.
What is a limiting resource?
Any system which consumes resources to grow or sustain itself will have one or more limiting resources. For example, in order to grow, a tree has to have water, sunlight, oxygen, carbon dioxide, fixed nitrogen, phosphorus, potassium, several trace minerals, and so forth. As the tree grows, it consumes these resources at least temporarily (oxygen, for example, is actually returned to the atmosphere in greater quantity than the tree uses, but the tree will still die if there's no oxygen in the air). If any of these resources is scarce enough that its absence keeps the tree from growing faster, then it is a limiting resource. If there's relatively little sunlight, then sunlight may be a limiting resource, and more light would cause the tree to grow faster.

There can be several limiting resources in a system, and if a limiting resource suddenly becomes plentiful, then usually a different resource becomes limiting.

An economy is similar to the tree example, in that it consumes resources, such as raw materials, energy, labor, and ideas; and produces everything that people want to own and consume, such as food, clothing, cars, industrial lathes, reality TV, etc.

That's cool, tell me more.
Limiting resources have some interesting properties:

1) Adding more of a limiting resource into a system will tend to make it grow, or grow faster. In contrast, adding more of a non-limiting resource will have little effect, or may even be harmful (for example, over-fertilizing a lawn).

2) Adaptable systems (such as living things, ecosystems, and economies) will tend to optimize the use of limiting resources. That is, non-limiting resources will be used (even very inefficiently) to replace and conserve limiting resources.

So what does this have to do with the economy?
The economy, and any piece of it (say, a factory) is subject to resource limitations. At the level of an individual factory, the limitation might be the number of stamping presses available. Provide more stamping presses, and production increases. Or it might be sheet aluminum, or lathe operators, or customer orders.

So what is the one resource which our economy consistently tries to optimize through new technology, better processes, and improved management? What is the one resource which is the most expensive single cost for the vast majority of businesses in the world? People. Or, more accurately, skilled people. Even in the past couple years, any hiring manager will tell you that finding the right skills is still very difficult.

Nearly every piece of technology developed recently has been sold by promising to reduce a company's reliance on people. Technology is cheaper than people. Raw materials are cheaper than people. Industrial machinery is cheaper than people. Generally speaking, people are the most expensive way to do anything which can be done some other way. Fortunately, there are a lot of things which simply cannot be automated.

Why are people so expensive? Economics 101 tells us that things are expensive when they are scarce.

Then why is there still unemployment?
Unemployment happens not because there isn't a demand for people, but because the available people (i.e. the unemployed) don't match the skills needed in the economy at that moment. For example, if you're a computer programmer, it has been a tough couple of years. But if you are a registered nurse, you can pretty much write your own check in many communities.

An interesting (and related) phenomenon is that unemployed people often create their own jobs. To make ends meet, be productive, and sometimes to stave off boredom, many unemployed try to apply their skill sets to find new things to do. This is a source of new businesses and innovation in our economy, and helps lay the foundation for future growth.

But so what? We can't just make more people.
No, but we can make more skilled people (through colleges and universities), and we can import skilled people.

As a matter of public policy, this suggests a couple of things:

1) Trying to increase the number of jobs by limiting work hours (as many European countries have done) is completely wrongheaded. This essentially amounts to taking the limiting resource (skilled people) out of the economy, which will cause it to shrink.

2) Anyone who possesses a scarce (i.e. in-demand) skill should be allowed to emigrate to the U.S. Near-term, that will lower wages for other people who posses the same skill, but long-term, by increasing the availability of that skill, it will allow the economy to grow faster. What is a scarce skill? That's a tricky question, but I'd say that if a company is willing to pay someone prevailing U.S. wages, and sponsor his or her emigration by paying relocation costs, then I think you can argue that the skill is in-demand.

3) Higher education needs to be encouraged, but at the same time there have to be economic incentives for students to learn things which the economy needs. We don't want to be subsidizing thousands of philosophy majors when what we need are analog circuit designers. Student loans aren't a bad way to do this; but perhaps we need a way for companies to pay off the student loans (tax free!) of their employees as a benefit. Think of it as a retroactive education savings plan.

4) By the way, emigration of low-skilled workers has a place, too. Those jobs need to be filled, and if importing cashiers and farmhands allows more educated people to obtain the skills they need to find better jobs, that's clearly a net win.

But what about the poor and unemployed?
We absolutely need a social safety net. We don't want children suffering in order to absolutely optimize the productivity of every unit of labor.

Importantly, the safety net has to at least accommodate, and ideally encourage, being productive. This means a couple of things:

1) Everyone should have access to a minimal level of health care. Actually, this already happens, but in an extremely inefficient fashion. Emergency rooms must care for emergencies regardless of a patient's ability to pay. So, if you let that chest pain go until you have a heart attack, you get free care. Perhaps there's a better way to do this...

2) Childcare for working families should be free and universally available, including nutritious food. The current system is actually kind of dumb. You're on your own until the kid turns 5, then you get free schooling for the next 13 years. Why not start earlier, allowing moms and dads to re-enter the workforce earlier, and help get those families out of the poverty trap? Oh, and a little bit of parent education would go a long way, too.

Both of these programs would be expensive, but in the long run, they would pay for themselves by allowing the economy to grow faster, and creating a smarter, healthier, less troubled workforce.

But what if there aren't enough jobs?
Amazingly enough, the size of the economy is determined, in large part, by the number of people in it.

There may be mismatches between needed skills and available workers, due to economic fluctuations or bad government policy, but as a rule, there will be jobs somewhere for everyone who has the desire and motivation to find one. This assumes a willingness to retrain, take a lower-paying job than you're used to, or take some risks by signing on with a startup or moving somewhere else.

What it comes down to is this: The economy is us. We are the economy. We hire each other, to do things we want done for ourselves. If we work harder, the economy grows faster. This is inescapable.

Posted at 03:37 AM | Permalink | | |

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