Yardeni on Prosperity vs Scarcity

The following is an excerpt from my new book, Predicting the Markets: A Professional Autobiography.

The latest (19th) edition of Economics (2010) by Samuelson and Nordhaus teaches students that economics “is the study of how societies use scarce resources to produce valuable goods and services and distribute them among different individuals.” This definition hasn’t changed since the first edition of this classic textbook was published in 1948.

I’ve learned that economics isn’t a zero-sum game, as implied by the definition. Economics is about using technology to increase everyone’s standard of living. Technological innovations are driven by the profits that can be earned by solving the problems posed by scarce resources. Free markets provide the profit incentives to motivate innovators to solve this problem. As they do so, consumer prices tend to fall, driven by their innovations. The market distributes the resulting benefits to all consumers. From my perspective, economics is about creating and spreading abundance, not about distributing scarcity.

Economics gets a bad rap. It’s often called “the dismal science,” but I think of it as the science of prosperity—and what could be less dismal than prosperity? Yet given the way it’s taught in most universities, it certainly can be dismal to study. Too much time is devoted to unrealistic theories and abstract mathematical models, and too little time is spent on studying current analysis, which by its very nature is more realistic and objective. The excitement and drama of economic life are lost in lifeless econometric regressions and algebraic matrixes. The gap between interesting, dynamic, albeit messy economic reality and the boring, static, antiseptic, orderly theories taught in academia is so wide, in my opinion, that the two barely resemble each other.

Economic history—presumably the inspiration for the theoretical models—is mostly ignored or taught in elective courses. And there are few, if any, courses on the manic-depressive market cycles of greed and fear that are amplified by debt and recur along with business cycles. I would like to see at least 101-level courses on Entrepreneurial Capitalism, the History of Globalization and Trade, Creative Destruction and Technological Disruption, the History of Financial Crises, the Political Economy of Corruption, and Demography for Economists. Ideally, an introductory course in Current Analysis would be required, with my book as assigned reading!

The predictions of economists are often dismally wrong because they’re based on theory instead of reality. Economists like to predict but can’t do so very well, led in wrong directions by their faulty theoretical tools. That’s why economists are the Rodney Dangerfields of the sciences: they get no respect, or not much anyway.

But irrelevant lectures and erroneous forecasts are not the reason that economics is known as the dismal science. The reason, in a nutshell, is that economists all too often are pessimists. They tend to predict dismal outcomes for us. The bad reputation originated with the work of Thomas Malthus. Ever since, economics professors have taught their students that economics is about “the optimal allocation of scarce resources.” This focus on scarcity is anxiety provoking.

Actually, economics isn’t inherently dismal at all. There is no reason economists can’t be optimists. Indeed, many have been in the past, and many are today. Perhaps the press is to blame: the pessimists get all the attention because bad news sells better than good news.

Nevertheless, some of the blame must rest with the economics profession. Is economics really about the optimal allocation of scarce resources? “Do the best you can with what you have, because there ain’t no more.” I believe that the focus on limits is misguided. Limits are broken by human ingenuity all the time. More often than not, limits are mental blocks that vanish thanks to outside-the-box thinking.

Perhaps it is all a big misunderstanding. When economists talk about scarce resources, they mean resources that aren’t free like air and sand. You have to pay a price to get them. The more the demand relative to the supply, the higher the price, i.e., the “scarcer” the resource. However, the supply of most resources isn’t as limited as “scarce” suggests. Higher prices in most cases stimulate the production of more of the desired resource. Also, higher prices often stimulate substitution with alternative resources that then become more affordable. And higher prices stimulate technological innovations that create a new abundant resource, destroying the need for the resource that was previously deemed to be scarce, or at least too expensive.

In other words, economics isn’t about limits at all. The price mechanism linking demand with supply has the potential to increase the supply of resources as demand expands or else to satisfy demand with other relatively more abundant substitutes. There are no limits. Economics is about our unlimited potential to prosper, both collectively and individually. There are no natural resource limits, only man-made obstacles. Ideally, economists can help us eliminate the obstacles that we place in the way of our own well-being, rather than doing the opposite.

Economics is really all about power—purchasing power, that is. Most of us want as much of this power as possible. More is better than less.

This is an admittedly materialistic view of humankind. Some people seem content to earn just enough to afford a simple lifestyle. Maybe we would all be happier living frugally and ascetically on the shores of Walden Pond, in the footsteps of Henry David Thoreau. Thoreau maligned materially focused folks as living “lives of quiet desperation.” I think his thinking was wrong. Most of us know that “money doesn’t buy happiness,” as the old saying goes. However, we also know that if the choice is between being miserably poor or miserably rich, the latter is the far better alternative if possible. At least having enough money reduces one source of stress, namely not having enough of it. Most of us do desire to earn more so we can spend more and have more for ourselves and our families.

As I discuss in Chapter 7, purchasing power is best measured as real disposable income per household. Economic well-being can be measured in terms of what purchasing power actually buys—namely, real consumption per household, i.e., the standard of living. More than 240 years ago, Adam Smith concluded that “consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer.” As Smith put it, “The maxim is so perfectly self-evident that it would be absurd to attempt to prove it.” I concur.