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Monday, August 20, 2012

Choice and Limitation: the Essence of Economics

We have now reached a point in our inquiry where we can begin to grasp the fundamental nature of economics. On every hand we are hemmed in by scarcity: by scarcity of goods, scarcity of time, scarcity of physical strength. We cannot fill one hole without opening another somewhere else. In this world of scarcity we are faced with a twofold task. In the first place, we must choose from among our several wants those which are in most urgent need of satisfaction. In the second place, since marginal utility decreases with the increasing satisfaction of a want, we are compelled to interrupt this satisfaction sooner or later. We are under the continual necessity of achieving some kind of balance between our unlimited wants and our limited means. This we do by making a choice from among our wants and by limiting the extent to which any one of these wants is satisfied.
On what basis shall we make these decisions? It is certain that we shall arrange our purchases in such fashion that the satisfaction procured by the last increment of one commodity will be approximately equal to that afforded by the last increment of any other commodity. This is the abstract explanation of what is, in reality, a very simple process, something we do at every hour of the day without waiting on the proper formula. A very clear illustration of what is involved here is to be found in the otherwise trivial act of packing one’s bag for a journey. Since we cannot take all of our possessions with us, we first decide upon the things which we most urgently require (choice). At the same time, we proceed to balance a plus in shirts by a minus in shoes, a plus in books by a minus in suits, in such a way as to arrive at a reasonable proportion among the several items (limitation). Silly as it may sound, it is really true that the traveling bag is ideally packed when the marginal utilities of suits, shirts, socks, handkerchiefs, shoes and books are at the same level and higher than the utilities of the things left behind.
Our example may be objected to on the grounds that it omits the possibility of taking along more and bigger bags. This complicates our problem somewhat, but changes nothing with respect to the principle involved. For how would the size and number of bags be decided on unless by all sorts of utility comparisons between more and bigger bags? Those to whom such an objection occurs have only to consider the plight of the soldier in the field who is restricted to one haversack and consequently must take very seriously indeed the operations of “choosing” and “limiting.” Who would have thought that the whole of economic activity is only an endless series of very complicated variations on the simple and fundamental theme of packing a bag? Our whole life is made up of an immense number of similar decisions serving to balance continuously means with wants. Choice, limitation, equalization of marginal utilities—these are the concepts to which we must repeatedly return. They determine how we use our incomes, how we direct our businesses, how we organize production, how we divide up our time between work and leisure, and even between sleep and wakefulness. The utility we renounce constitutes the “costs” of the utility we realize in our private economy as well as in the national economy. To economize is simply to be constantly making a choice from among different possibilities. Economics is at bottom nothing other than the science of alternatives. Choosing and limiting are the eternal functions of every human economy, whatever its organization, be it the isolated economy without exchange or our highly developed market economy founded on the division of labor and the circulation of money.

Economics of the Free Society

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