The Basic Economic Problem
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Published: Tue, 12 Dec 2017
The basic economic problem is the scarcity of resources. People want more than can be met with their available resources. The human needs are unlimited because they grow and evolve while the means of fulfilling the needs (financial assets) are limited (Stiglitz 1992: 48). The effort to overcome the relative lack of goods, in other words to solve the economic problem is the basis of the economic activity of people. If the satisfaction of a need does not have a shortage of the appropriate resource, the action for the acquisition of this instrument is not classified as economic. The effort, for example, for inhalation of air lacks is not an economic action because the air is in abundance.
The economic goods, of course, are not created on their own. It is the result of people’s effort that use whatever is available to them, to create resources that meet the needs i.e. the goods. The elements that are necessary for the creation of goods are called productive assets. Consequently, when it is said that economic goods are in relative scarcity or shortage, in fact it is meant that there is a scarcity of productive assets (nature, labor, capital).
The problem of scarcity of resources has as a result the allocation of resources. In other words the process of the selection of needs to be met and the amount of resources used to meet them. Thus economics is a social science, which deals with how society allocates scarce resources among unlimited wants and needs (Wilson & Clark 1999:21). The question that arises is how people allocate scarce resources to get the most value.
Scarcity of production assets
- The scarcity of the asset “nature” is obvious that is due to the fact that land is limited in size and productive forces.
- The scarcity of the asset “labor” is due to the limited number of people able to work and to the fact that each person can only work a certain number of hours a day.
- The asset “capital” is the result of nature and labor and these are in scarcity, the chapter will also be in scarcity.
The Basic Economic Problem and the Market Mechanism
The above mentioned definition, contained in most introduction to economic theory manuals conceals through a non historical generalization the fact that the main body of economic science has dealt with the analysis of capitalist societies which are characterized, on the one hand, by the private ownership of the means of production and unequal power relations between wage labor and capital and on the other from freedom of entrepreneurial activity and the competition of capital assets in the market.
According to the orthodox economic analysis, the scarcity (= failure, lack of) of resources in relation to social needs, forces each society to choose which products should be produced and in what quantities (Gough 1979:120). Moreover, the scarcity of resources means that the production of a particular product has costs in the form of other goods and services that could be produced in its place with the same resources spent for its production. For example, the working time and the machines that are used for car production cannot be used placed for the construction of schools.
The cost of producing a product, defined as the equivalent of the cost of products that could be produced alternatively in its place, is called opportunity cost. Each product has an opportunity cost only when social resources are fully utilized. When there are idle production assets, that means productive resources are underemployed (unemployment or incomplete use of existing machines), then the production of a product has zero opportunity cost because it does not deprive already productive resources form the production of other products (Le Grand et al. 1992:75)
The scarcity of resources and the opportunity cost impose the non-wasting of resources to maximize the product, consumption and hence social welfare. This is achieved on the one hand through the harmonization of the allocation of resources among productive uses of the social needs and preferences, and on the other through the savings of resources during the production of goods. So, the society avoids to produce useless products that nobody wants to consume or produce useful products but with more resources than those that it could use if it combined them better.
The avoidance of the waste of the productive resources of society through a continuous effort of their saving and comprehensive utilization is related to the concept of economic efficiency. An economy is effective when it does not waste its limited resources by producing useless products when it maximizes the produced goods by ensuring their full use and their excellent combination. Because the capitalist system has as structural component unemployment and periodic phases of overproduction or underemployment of resources, it suffers from permanent economic inefficiency (Barr 1998:75).
A social system to be cost effective is an important achievement, because it maximizes the production and consumption abilities of the society and hence social welfare. But a cost-effective social system is not necessarily fair, because social welfare can be unequally distributed among members of society. The wealth of some people can coexist with the poverty of others.
The methods of analysis of the economists can be used to evaluate the different modes of economic organization in achieving both efficiency and equity, as well as to evaluate other objectives such as the promotion of consumer choices and social solidarity. Although, as mentioned above, the determination of social goals is the result of the ideological and political confrontation, economic argumentation can contribute significantly to the process of clarifying objectives and options.
Generally in capitalist societies, it is possible to have a relation of reverse ratio between the objectives of economic efficiency and social justice. That’s because when the employees and other social classes and strata achieve redistribution of income to their benefit, then it is possible that the profit rate may fall, and as a consequence capital reduces the amount of investment and the rate of product slows down. So the efficiency of the economy may be reduced as a result of the redistribution of income, although the latter contributes to achieving social justice.
In summary, it can be said that social welfare that is based on the satisfaction of social needs through consumption depends on :
- the harmonization of social preferences for product consumption with the allocation of social resources in their production,
- the effective use of resources in goods production
- the fair distribution of income and the fair distribution of wealth, which ensure that social welfare is distributed equitably among all members of society.
The harmonization of social preferences for product consumption with the distribution of social resources for their production and the efficient use of resources in the production of goods, refer directly to the goal of economic efficiency whereas the equitable distribution of income and the equitable distribution of wealth refer to social justice. The two objectives may conflict in capitalist societies.
The economic problem is a permanent problem for human societies. In the immediate future there is neither a limitation of the needs nor a substantial increase in the resources to satisfy needs. On the contrary, indeed, as the pessimistic scholars support the economic problem will become more intense.
This forecast is based on three elements: 1) the continuous increase in world population, 2) the depletion of energy sources and 3) the negative effects of the production of many products in the natural environment e.g. contamination of rivers, etc.
But along with such bleak prospects there is the evolution of technology and the possibility to find new energy sources that tend to dampen the intensity of the economic problem. However, to the degree that developments can be predicted, the basic economic problem seems to be permanent.
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