Would Guaranteed Income Help Families?

 Last October, I reported on a study that gave participants $1,000 a month and measured the impacts of the transfer. The results were disappointing to advocates of universal basic income (UBI). To summarize, the study found that people worked less, and, according to the researchers:

[Participants] used the time they gained from working less to engage in leisure, and there is no evidence of an increased use of time in other categories UBI proponents purport to care about, such as creative output, entrepreneurship, community engagement, self-improvement, or even spending time with children.

A second study on guaranteed income had similarly underwhelming results.

In a recent paper from the National Bureau of Economic Research (NBER), researchers Patrick K. Krause, Elizabeth Rhodes, Sarah Miller, Alexander W. Bartik, David E. Broockman, and Eva Vivalt examined the effects of unconditional cash transfers on parental behavior and children.

In this study, 1,000 participant families received $1,000 per month over three years, while a control group of 2,000 participants received just $50 per month. The study tracked the impact (or lack thereof) of this financial support on parenting behaviors and outcomes.

Let’s get into the results, starting with the good news. Parents in the guaranteed income group spent more on their children. The researchers estimate an additional $43 per month went to food and $22 more to child care. This is unsurprising. As income increases, we expect people to increase spending. What is surprising, though, is that this additional spending did not lead to any tangible results such as improved food security.

The parents on the survey also self-reported improved parenting behaviors, including more direct supervision of their children.

However, other findings complicate that narrative. The researchers found no significant change in time spent on parenting activities, and no positive impact on household “order” according to participant surveys.

Parental attitude doesn’t seem to change, either. The authors say, “We do not find any change in [parental satisfaction] outcomes… similarly, we do not find that parents report being less stressed or experiencing less mental distress.”

Children did not show meaningful improvements. According to the PROMIS measure of social and emotional development, children in the guaranteed income households have no significant improvements relative to the control group. The outcome on educational performance seems similarly negligible:

Public school enrollment, attendance, rates of repeating a grade, participation in gifted and talented programs, and most standardized test score measures do not appear to be affected by the [income] transfer.

The transfer, according to some results, appeared to have a negative effect on math test scores. The statistical significance of that result depends on how the authors adjust the controls. The same is true for grade outcomes. Children of families who received the guaranteed income did worse, though the result’s significance drops out by some measures.

Behavior in school did not improve, either. The study finds “no effect of the transfer on disciplinary measures overall, nor on disciplinary action taken for a specific reason (i.e., student committed a felony, student had a drug, alcohol, or tobacco violation, student committed physical violence).”

One recent concern in the West is falling birthrates. While UBI policies are generally advocated by the left, some on the right have proposed cash payments. This study cast water on this argument as well. The research “rule[s] out increases of more than 0.03 additional children due to the transfer based on survey measures or 0.02 additional children based on administrative measures.”

Put differently, if you give a group of 100 families $1,000 a month of guaranteed income, only three would have an additional child (compared to what would happen without the transfer).

Taken together, this research illustrates another lackluster result for basic income advocates. There were improvements from the income on a couple of metrics, but the upshot is:

The transfer did not have a meaningful effect on most educational outcomes measured in school administrative records, nor did it affect characteristics of the home environment, child food security, exposure to homelessness, or parental satisfaction.

The biggest challenges of parenthood don’t seem to get much easier with a guaranteed income of $1,000 a month. While all studies have limitations, this paper, on top of the other recent large studies on guaranteed income, is offering a clear picture of what a UBI policy can and, more importantly, cannot improve.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.

The Student Loan Interest Pause Finally Ends

 The last holdouts of Covid-era student loan programs will have their interest reinstated in August 2025.

In March 2020, President Donald Trump announced a pause on federal student loan payments. The economy was about to shut down (mostly due to government policy), so it seemed fair to suspend the obligation on the part of students to repay the government.

Nobody imagined that this would last as long as five years for some borrowers. During the Biden administration, generosity toward student loan holders expanded. One major addition was the SAVE Plan—a very generous repayment plan which capped interest and offered payments as low as $0 per month.

This plan was introduced in August 2023, and over the following months around 8 million people (nearly one fifth of all borrowers) registered, despite a coalition of states filing suit to block it. The courts issued an injunction around March 2024 that paused the implementation of SAVE, but did not remove those already registered. SAVE officially ended with the Trump administration’s takeover of the Department of Education. It remains unclear how borrowers will be transitioned off.

For most borrowers, interest forgiveness continued for about three and a half years, with interest accumulation restarting around September 2023. However, borrowers were given another year without penalties for non-payment (except for the interest accumulation).

Borrowers on the SAVE Plan, however, were allowed to remain in interest-free forbearance, where they still are, until next month.

This series of decisions has been extraordinarily expensive. According to the American Enterprise Institute, the interest pause alone cost the government nearly $250 billion. That means money that would offset federal debts must now come from somewhere else, likely taxpayers.

The US already has several legal pathways to loan forgiveness. Perhaps the largest is Public Service Loan Forgiveness (PSLF). If, after graduation, a borrower works for the government or a qualified non-profit, he can enroll in PSLF. After making 10 years of student loan payments, the remainder of his balance is forgiven.

Other programs, like Income-Driven Repayment (IDR), are available to those with lower incomes and require 20 to 25 years of payments.

This matters because during the Covid student loan repayment pause, the non-payments counted towards the timers of PSLF and IDR. If you were enrolled in one of these programs, you’ve essentially had three years of payments removed from your obligation. Assuming these programs continue, the Covid pause will have eradicated about 30% of PSLF debt for affected borrowers. Like the interest pause, this lower revenue for the government likely means higher taxes.

On August 1, the pause on interest will finally end for the SAVE Plan holdouts, who at this point have had their loan payments paused for about five years. What the future holds for student loans remains unclear. The Trump administration has signaled a willingness to chip away at programs like PSLF.

A CBS story on the budget reconciliation bill notes:

The new law also does away with Grad PLUS loans, which help people finance higher education degrees… Those seeking unsubsidized federal loans for professional degrees, such as law or medicine, will be restricted to $50,000 per year and a $200,000 lifetime cap. Those seeking advanced degrees in nonprofessional areas, such as history or philosophy, will be subject to an annual borrowing cap of $20,500 and a lifetime limit of $100,000.

This change likely targets the regressive nature of loan forgiveness—programs that often benefit doctors, lawyers, and others earning high salaries in the nonprofit or government world.

The cost of Covid student loan programs will be with us for a long time. But with the end of SAVE interest forbearance, it seems that Covid-era loan policies are finally behind us.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.

What Even Is a Non-profit?

 For “Ask an Economist” this week I have a question from Hal who asks, “What is the difference between a ‘non-profit’ and a ‘not for profit’?”

In order to address this question, I think it’s important to discuss what separates a for-profit business from these two forms of organization.

To understand the former, we first have to think about what it means to own something at all.

Economic Ownership

When we think of owning something, we usually think of it in the binary. Either you own something or you don’t. This categorization might be true and useful in some sort of legal or normative sense, but it isn’t the only useful way to think about ownership.

Economist Armen Alchian conceived of economic ownership as having multiple attributes. The first attribute of ownership is the ability to decide how a good or service is used. We can summarize it as:

1. Economic owners have the right to determine how an asset is used.

When you scroll through this story with your phone or mouse, you’re determining how it is used. This means you have some control over the asset. Economists call this “control rights.”

It’s not necessarily the case that control rights are morally legitimate. It’s possible for people to control property that is not legally their own. But the fact remains that to be the true owner of an asset, in an economic sense, you must be able to determine how it is used.

One important note about control rights is they are not optional. When anti-capitalist idealists talk about a society “without property,” they’re merely talking about a world where the law says that no one is the owner.

Nonetheless, it’s inconceivable that there will ever be a world where goods and services are not used at all. So long as they are used by someone, that person is exercising an economic property right.

A world without property rights is a world without people. We cannot live without controlling things like food, water, and shelter.

The next two attributes of property rights are:

2. Economic owners have the right to receive a stream of income from their property.

3. Economic owners have the right to sell their property.

Unlike the first attribute of property, these two attributes can be removed entirely. It’s possible to make someone unable to sell or receive a stream of income from an asset. This possibility is central to understanding for-profit, non-profit, and not-for-profit businesses.

Profit vs. Non-profit vs. Not-for-Profit

So what makes a for-profit business distinct? To put simply, in for-profit businesses, owners have, for the most part, all three of the attributes of property rights. The owner of a for-profit business can use the business’s assets (and hire others to use them), they can receive a stream of income from the operation of the business, and they can sell the business.

At the end of the year, when the books are done and the company receives more revenue than cost, they earn a profit. The owners can decide to take the profit themselves, or they can reinvest the profit into the business (thereby increasing the value of the business they own and can sell).

What about non-profits? In the US, the law claims non-profits have no owners (or sometimes that they are owned by the public). In some sense though, this is not true. Insofar as non-profits have assets, those assets are used by someone. So whether it’s the board of directors or the employees, someone does own the right to use the property of the non-profit.

However, it’s true that no one in a non-profit has the legal right to sell the assets of the organization in part or as a whole. So there is ownership (in terms of control rights) in non-profits, but there are no sale rights. Ownership is attenuated.

So what happens when revenues exceed costs in non-profits? In these cases, the organization is legally required to use the excess revenues to improve the non-profit or fulfill its mission. Excess revenues must be re-invested.

But this is where we need to dispel a common myth about non-profits. You might think that being a non-profit means the chief executive is paid less than the CEO of a for-profit company. This belief, though understandable, is wrong.

The chief executive of a non-profit is paid a salary which counts as a business expense. As such, when revenues are higher than costs, the non-profit could always choose to increase the salary of the executive.

Technically, the board of directors of the non-profit would be responsible for avoiding situations where executives receive exorbitant salaries which expand to fill every revenue surplus, but due to knowledge and incentive problems this may not always happen.

This brings us to our last form of organization and the center of Hal’s question—what about a not-for-profit. Note a non-profit and a not-for-profit are different forms of business organization. Confusing, I know.

Generally non-profits are classified as 501(c)(3)’s by the IRS whereas not-for-profits are classified as 501(c)(7)’s. Let’s call this new type of organization an NFP to make the discussion more clear.

An NFP, in theory, has one primary difference from a standard non-profit. The language varies by state, but generally non-profits are supposed to be created for the benefit of society as a whole. In contrast, NFP’s are created for the benefit of the members of the NFP, but the organization does not provide benefit to the members via profit.

So just like standard 501(c)(3) non-profits, the members of an NFP are unable to sell the organization as a whole. They are also limited in particular ways on how much income they can draw from the organization.

So the main difference between a non-profit and an NFP, from an economic perspective, is regarding control rights. Non-profits are expected (at least by the legal system) to use assets to forward some socially aimed goal. They are not meant to be treasure troves for the board, the chief executive, or other employees.

On the other hand, NFPs are meant to use assets specifically for members.

Because of this difference, the legal system treats them differently. Non-profits, for example, have more tax advantages and the ability to create subsidiary organizations. But, on the flip side, these benefits come with strings attached. Non-profits also have more rigorous financial reporting requirements with the IRS than NFPs do.

There are several other differences between non-profits and NFPs, but, as far as I can tell, most of them seem to follow the logic that non-profits are supposed to be more constrained in the control rights of assets and therefore there is higher accountability to match the better tax incentives.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.

Economics in the Bible

 This week for Ask an Economist I received a question from Steve R. It’s a question of Biblical proportions! He says:

This past Sunday the pastor talked about 2 Kings 4: 1-7, the story of Elisha and the widow’s oil.

My mind went off on a tangent regarding the miraculous creation of olive oil from the widow’s small container, which filled many other containers so she could pay off her late husband’s debts and even live off the rest of the money.

I got to thinking about whether it’s different from the way central banks print money and devalue currency.

Steve goes on to give two hypothetical differences between God’s creation of olive oil and the central bank’s creation of more money. I’ve chosen to exclude them at this point because he isn’t far off, and I’d rather build toward the answer than lay it out. Steve concludes with:

I just wondered if my conclusions are correct and if you had ever thought about this or other economic situations from the Bible.

So the two questions are:

1. What are the similarities/differences between God’s creation of olive oil in 2 Kings 4:1-7 and the central bank’s creation of money?

2. Have you ever thought about other economic situations from the Bible?

I’ll consider both in turn.

The Supply of Oil

So what’s the difference between increasing the money supply and increasing the supply of a commodity like oil? To start, let’s consider the effect of increasing the supply of a commodity like oil.

In order to sell oil, producers must bear some cost. For example, if producing a cup of oil costs $1 sellers must receive at least $1 in order to be willing to produce. Based on this, it may be tempting to claim that prices are determined by cost, but this is not right.

Prices are completely determined by consumer valuations which often manifest in terms of costs.

For example, imagine the only ingredient to making olive oil is olives. Now let’s say consumers are willing to pay 20 cents per olive, and it takes five olives to make one cup of oil. These numbers are unrealistic, but will help us understand the market.

If a company wants to make one cup of olive oil, it must give up the money from the sale of five olives. Five olives which cost 20 cents a piece means that producing one cup of olive oil causes the producer to forgo $1 (5 x $0.20) of money from olives. Thus the cost of one cup of olive oil is $1.

But remember that the cost itself is derived from how much consumers value olives! If consumers suddenly decided they liked olives more (say they were willing to pay $1 for each olive now) then olive oil producers would have a higher cost per cup of production ($1 x 5 rather than $0.20 x 5). But, ultimately, the cost is derived from how much the consumers value the alternative goods produced by the inputs.

This remains true even if we make the example more complicated with more production inputs.

It’s also the case that as production increases, sellers are going to require higher prices, all else held constant. To understand why, imagine some olives are better for making olive oil than others.

This violates an unspoken assumption we’ve had to this point that all olives are equally good for eating and oil production. But if some olives are better at producing oil than others, businesses will use the ones best suited for producing oil first. This means the more the business produces, the more olives are going to be required to produce the same amount of oil, because the best oil-producing olives are used first.

In other words, as the quantity of oil a business supplies increases, the sale price required to satisfy the producer will increase because the cost of the inputs (olives) used increases as determined by consumer valuations.

Economists capture this idea neatly in what is called the supply curve. The supply curve illustrates the various quantities which producers are willing to sell at any given price. This relationship between quantity supplied and price is called supply by economists. Because of the logic above, the supply curve slopes upward and will look like this.

Economists similarly are interested in the quantity of a good consumers are willing to purchase at any given price. This concept is called demand. Steve’s question is primarily about supply, so I’ll spend less time explaining demand.

Essentially, though, consumers use the first unit(s) of a good to satisfy their most urgent desires. This implies every subsequent unit is used to satisfy a less urgent desire. In other words, as you receive more units of a good, you value the next unit relatively less because it serves a less valuable end. As such, as the quantity of a good increases, consumers’ willingness to pay for each additional unit of that good falls.

In other words, the demand curve for a good slopes down. Supply curves are actually derived from the same logic applied in a more roundabout way. So our supply and demand curves for oil might look something like this.

In this market, consumers will buy 3 cups of olive oil. Why? Well the supply curve shows us that sellers are willing to sell the first cup for $1 and buyers are willing to pay $5 for it. So it makes sense for an exchange to occur. Similarly sellers are willing to sell the second for $2 and customers are willing to pay $4. Again, this is a win-win.

For the third cup, sellers need at least $3 to sell and buyers are willing to pay $3. Both are willing to agree to the exchange. So in the end three cups are sold and the price that enables this is $3. This point where supply and demand cross is called the equilibrium point by economists, and it illustrates how the market process determines prices—everything else held constant.

Armed with this knowledge, we can now see the effect of the miraculous creation of oil in second Kings. At every given price, there is now more oil available than before. In other words, our supply increases. We can illustrate this by having a larger quantity of oil at every given price. That looks like this:

Notice what happened to the equilibrium. There is now more oil being sold (3.5 cups) and a lower price for oil ($2.50).

This is what I expect is the effect of the miracle in second Kings. The increasing supply led to a larger quantity of oil being consumed at a lower price. There’s a way to conceptualize this as being a demand change instead, but this analysis does the job fine.

The Supply of Money

So let’s talk about what happens now when the supply of money increases. Right now we live in a monetary system where the money is issued by the government as a legal means of paying debts. Economists call this a fiat money system. Fiat money is contrasted with commodity money systems where the currency is redeemable for some fixed amount of some commodity (like gold or silver).

The supply of money can be increased in both a commodity system and a fiat system. In the former case, increasing the supply of the commodity (e.g., mining gold) will increase the supply, and in the latter case the government could increase the supply (e.g., printing money). The constraints on producing more fiat money are different than for producing more commodity money, but they both have variable supplies.

But what happens when the supply of money increases? Well, the market for money is much like the market for other goods. People demand to hold money. The “price” of money is what it costs in goods to obtain a unit of money. The more goods you need to obtain one unit of money, the higher the “purchasing power of money” is. So, one way we can think about the price of money is that the price of money is its purchasing power.

As the purchasing power falls (i.e., as money prices of goods and services rise), people want to hold more money to satisfy every day needs for money. It’s important to note that when we’re talking about “money” here we don’t mean “wealth.” You can hold your wealth in many forms: stocks, real estate, and paintings to name a few. However, when economists talk about the demand for money, they’re talking about the demand to hold money rather than other assets.

For sake of ease, let’s assume some fixed amount of money exists—say 100 units. Here is our supply and demand for money.

Now let’s imagine that the supply of money suddenly doubles. Look what happens:

The purchasing power of money falls. Just like our oil example, when the supply of money increases, the value of money decreases. So in one way our miracle in second Kings is similar to an increase in the money supply. Both result in the good which increased in supply having a lower value relative to other goods and services.

But here is the primary difference. Money represents one side of nearly all exchanges. For (almost) every exchange that happens, one side is bringing money to the table. This is not the case with olive oil. So when God increases the supply of olive oil, the market for olive oil (and closely related markets) is impacted. However, when the supply of money increases, every price is impacted. Prices of all goods and services rise.

This leads to a few important issues. First, because of limited knowledge, the price changes that happen due to an increase in the money supply don’t all happen at once. Instead, new money affects prices and incomes in some markets before others. This means the relative prices of many goods and services will be disturbed while the new money ripples through the economy. These price changes in turn result in distortions in the structure of production, a phenomenon known as the Cantillon effect.

Second, because many people store a significant amount of their wealth in the form of money, the lower purchasing power means lower wealth for a large portion of people. Specifically, increases in the money supply hurt money savers. In contrast, an increase in the supply of olive oil would impact those who hold a significant amount of wealth in olive oil. While such a change would hurt olive oil investment maximalists, the increase in the supply of money would be painful for the much larger group of currency savers.

Third, one very important type of exchange which is paid out with money is impacted: labor contracts. Many salaries and wages are pinned at somewhat fixed amounts. For example, if you signed a contract agreeing to work for $50,000 per year, that amount won’t increase with inflation. As such, an increase in the supply of money will hurt those whose income terms are relatively more fixed.

In some ways, money is “just a good.” People, and society as a whole, are better off for having access to a medium of exchange. In other ways, though, money is more than just a good. Since money makes up half of all exchanges, a disturbance in the market for money has much larger consequences for the economy as a whole.

Biblical Economics

Steve’s last question was about whether I’ve considered other similar questions about the Bible and economics. I have and can think of three separate types of questions at the intersection of the Bible and economics.

1. Moral/ethical

This category considers whether certain economic actions or policies are morally right or wrong by Biblical standards. Alejandro Chafuen has written a great book on the subject titled Faith and Liberty: The Economic Thought of the Late Scholastics. The book examines the Christian Late-Scholastics who discuss the morality of everything from taking bread while starving to monetary policy.

2. Philosophical

This category considers the nature of God’s creation and asks what role economic concepts have in it. For example, is the existence of scarcity a result of the fall, or does God’s call for Adam and Eve to work in the garden provide evidence that some level of scarcity is consistent with “good” creation?

3. Functional

This category examines the results or economic reasons for particular Biblical actions or institutions. The question about the supply of oil is a functional one. Similarly, many of my professors and colleagues are economists who are interested in explaining the rationale behind certain economic systems. My graduate Microeconomics professor Walter Williams includes the following list of questions for his PhD students on his website:

Give economic interpretation of the following excerpts from Exodus and Deuteronomy: Nonsense is forbidden!

(a) ‘The woman shall not wear that which pertaineth unto man, neither shall a man put on a woman’s garment: for all that do so are an abomination unto the Lord thy God.’

(b) ‘Thou shalt not plow with an ox and an ass together.’

(c) ‘He that is wounded in the stones, or hath his privy member cut off shall not enter into the congregation of the Lord.’

(d) ‘Honor thy father and mother. . . .’ (How come honoring of children is not required by the Commandments?)

(e) ‘Thou shalt have no other gods before me.’

(f) ‘And if a man entice a maid that is not betrothed, and lie with her, he shall surely endow her to be his wife. If her father utterly refuses to give her unto him, he shall pay money according to the dowry of virgins.’

(g) ‘A bird in the hand is worth six in the bush.’

For statement (a), it seems like the most likely explanation is that such an arrangement allows clothing sellers to charge different prices to men and women according to their different willingness to pay. Economists call this price discrimination. If groups with different willingness to pay can resell their products to each other, price discrimination is impossible. However, if resale is prohibited by law (Biblical or otherwise) price discrimination is possible!

You can spend your time trying to think through the other questions. Similarly, a few other economists I know have recently tried to explain how the Jewish ban on pork served the function of eliminating pig-based externalities.

Some Christians are uncomfortable with these sorts of functionalist explanations because there is a fear that they undermine the explanation that Biblical laws are written based on moral truth. Personally, I don’t see any contradiction between the two. It seems likely to me that moral laws would be functional as 

In conclusion, I think the intersection of the Bible and economics is truly a fruitful one, and I’m grateful that Steve gave me a chance to explore this topic.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.

What Is Scarcity, Really?

 The most basic concept in economics is scarcity. If you open an economics textbook, the first chapter will undoubtedly mention the concept.

Unfortunately, the concept of scarcity suffers from the problem of multi-sense. In other words, scarcity is used both inside and outside the economics field to mean more than one thing. Not only that, but sometimes the word is used to describe concepts that are at odds with sound economics.

So let’s explore scarcity and what it does and does not mean.

Economic Scarcity

The first definition of scarcity we’ll focus on I call “economic scarcity.” This is the scarcity that sound economics textbooks focus on.

Economic scarcity describes the relationship between people, the ends they seek, and the means they have to achieve those ends.

We live in a world of economic scarcity, where the ends we desire exceed our means of attaining those ends. In short, we want more than we have.

The evidence for that is simple—people act! Every day, you and I take actions because we want something we don’t have. Why do people go to college, start a family, or get a job? They have some end goal they’re trying to achieve. This insight comes primarily from the economist Ludwig von Mises in his magnum opus Human Action. Mises says:

Means are necessarily always limited, i.e., scarce with regard to the services for which man wants to use them. If this were not the case, there would not be any action with regard to them. Where man is not restrained by the insufficient quantity of things available, there is no need for any action.

Conscious action implies economic scarcity. As long as people are intentionally acting, they prove that they have desires which are not yet met.

Consequently, as long as there is human action there will always be scarcity. Even in supposedly post-scarcity utopian stories like Star Trek, scarcity is present. Economic scarcity is even present in the Biblically perfect world of the Garden of Eden. Adam acts in the Garden, which signals his desire to change his state of affairs.

In a certain sense, this type of scarcity is binary. It defies simple measurement in terms of more or less. If there is something (tangible or intangible) that a person desires but does not have, then he or she faces scarcity.

Insofar as we can measure economic scarcity, the best way to do so would be to measure the cost of obtaining some desired end. When we act and use resources, we give up some alternative action and use of those resources. Economists call this lost opportunity of an action its opportunity cost.

If the opportunity cost of something grows, then it probably makes sense to think of that thing as “more scarce.” There are different ways to try to quantify opportunity cost. The economist Julian Simon argued that the best way to quantify economic scarcity was to look at inflation-adjusted prices over time. Gale Pooley and Marian Tupy, in their recent book Superabundance, attempt to put costs in terms of the time it takes the average person to acquire something (they call this measure a time price).

So if your cost of obtaining a good or end falls, it makes sense to think of it as becoming less scarce; but, for the reasons discussed, we shouldn’t mistakenly think that falling scarcity of one good means we will someday eliminate scarcity.

Economics is fundamentally about how humans cooperate under the condition of scarcity. The economic institutions we create to deal with this problem may change as it changes form, but these systems and their study will always be relevant so long as humans act to attain things they desire. In this sense, we will never overcome scarcity.

The Scarcity Mindset

Economic scarcity may be an unavoidable fact, but that doesn’t mean we can’t overcome some of the other “types” of scarcity.

Another way the word scarcity is used is related to the scarcity mindset. The short summary is that the scarcity mindset views one person’s gain as another person’s loss. If you’re doing well, someone else must be doing poorly. If you’re winning, someone else must be losing. Economists call this a zero-sum view of the world.

Viewing the world as a zero-sum game or resources as a fixed pie is the essence of the scarcity mindset. Sometimes when people say, “Resources are scarce,” what they’re really saying is, “All interactions have a winner and a loser.” My colleague Patrick Carroll addresses this fallacy in more detail here, and I owe him for bringing my attention to how this is connected to the scarcity mindset.

This view of scarcity is wrong. It is not true that one person’s gain is always to the detriment of others. Humans have the potential to create new value and new economic resources.

The simplest example of this is exchange. In the morning, my wife and I give our girls vitamins to start their day. My oldest prefers the pink vitamins, and her younger sister prefers purple vitamins. Unfortunately for them, I don’t take time digging through the vitamin bottle for their favorite colors. When it comes to Dad giving vitamins, you get what you get.

But sometimes, something magical happens. My oldest will get a purple vitamin, and her younger sister will get pink. It didn’t take long to figure out the magic of mutually beneficial exchange.

When they receive each other’s favorite, they trade. When they do this, both of them are happier. Notice, the number of vitamins remained the same, but the happiness created by the vitamins increased due to trade. The “pie” of satisfaction is not fixed merely because the resources are countable. Trade increases the size of the economic pie!

This capacity to increase the size of the pie grows when we consider that humans can also behave entrepreneurially and create resources of value. Once upon a time, oil was of no value to human beings. It was just a messy annoyance. Then, some brilliant innovators discovered that it could be converted into usable, cheap energy for generations of humans.

Value creation is all around us. This doesn’t mean that there aren’t any zero-sum games in the world. Sometimes there is a winner and loser—think sports. But the point is that sometimes we have win-win scenarios. Sometimes creative people grow the pie. Insofar as people use scarcity to mean that the pie is fixed and cannot grow, they are wrong.

This also helps us reconcile two ideas that seem at odds but aren’t in fact.

The economist Thomas Sowell famously said: “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”

Seemingly in tension with this, Julian Simon makes an interesting claim:

Our supplies of natural resources are not finite in any economic sense. Nor does past experience give reason to expect natural resources to become more scarce. Rather, if history is any guide, natural resources will progressively become less costly, hence less scarce, and will constitute a smaller proportion of our expenses in future years.

How do we square these two quotes? Do they contradict? Not at all.

Thomas Sowell is talking about the realm of politics. In politics, all policies are paid for by someone else. Every dollar spent on the military is a dollar the taxpayer could have spent on something else. Politics is zero-sum.

On the flip side, Simon is talking about how human creativity channeled in markets and voluntary exchange can lead to a decline in scarcity. Notice, Simon claims resources are not finite in an economic sense (more on that later), but he never claims resources are not scarce in an economic sense. Simon agrees with Sowell—resources are scarce. However, he adds that human ingenuity in markets gives us the potential for decreasing scarcity. We can reject the zero-sum scarcity mindset while maintaining that the government is incapable of providing a free lunch.

Physical Scarcity

One last way people talk about scarcity is in a physical sense. People count the resources around them, and they take this counting to be a measure of scarcity. I’ll call this type of scarcity physical scarcity.

It’s important to note that while counting according to some physical metric matters in an engineering sense, it matters much less for understanding economic scarcity. To see why, you just have to notice that something being limited in quantity does not make it something people desire.

Imagine scientists discover an element that emits significant radiation. Now let’s imagine that there is no safe way to handle or convert the element (even as a weapon). How much would people be willing to pay for such an element? My guess is they wouldn’t pay for such an element. In fact, people would probably pay to avoid it. Even if this element is physically rare, it may not help people attain their ends. In that case, it is not scarce.

In contrast, we can imagine something physically plentiful being scarce. There are thousands of tons of gold that exist below the earth’s surface. Does the existence of this physical quantity of gold make it less scarce? No. If it isn’t accessible to use to achieve human ends, it does not alleviate scarcity. Physical scarcity and economic scarcity are not the same thing.

As a last example, we can imagine a natural resource that becomes less scarce without any change in physical quantity. This happens with gasoline. Imagine that suddenly a clever entrepreneur develops a new, more efficient car engine which raises fuel efficiency to 100 miles per gallon. The physical supply of gasoline remains unchanged, but the economic scarcity of gasoline would diminish immediately.

This isn’t to say that there is absolutely zero relationship between physical and economic scarcity. There is some relationship. But the point is that what directly matters to humans is the economic scarcity of the resource, which is diminished by human creativity. To paraphrase Julian Simon, oil comes from the human mind, not the ground.

Abundant Hope

There are likely more ways that the term scarcity is used and misused, but these are the major three senses.

Separating these three different concepts which are described by scarcity helps us reconcile the inevitability of scarcity with an unyielding optimism.

It’s true that people will always have goals they have yet to achieve, but this shouldn’t make us gloomy. In their pursuit of these goals, humans use their creativity and perseverance to grow the pie and alleviate the economic scarcity around us. Doing so does not have to mean that someone else loses. Instead, a world of economic scarcity, natural abundance, and win-win scenarios can exist without contradiction.

Article by: Peter Jacobsen

Peter Jacobsen teaches economics and holds the position of Gwartney Professor of Economics. He received his graduate education George Mason University. His research interest is at the intersection of political economy, development economics, and population economics.

This article was originally published on FEE.org. Read the original article.