BCOR Module 1: Scarcity

What is the problem that Hayek wants to solve when trying to “construct a rational economic order”?

• The main problem is how to make the best use of all knowledge dispersed among individuals in society→ how can society coordinate the use of resources and knowledge that no single person fully possesses?

• The challenge isn’t just about logic or math — it’s about organizing and communicating scattered information so that people’s separate decisions lead to efficient outcomes.

What conditions need to be met in order to construct a rational economic order?

• A rational economic order would require:

  • All relevant information about resources, preferences, and technology.

  • Complete and centralized knowledge held by one mind or authority.

  • Consistent coordination so that marginal rates of substitution (trade-offs) are equal across all uses.

• But Hayek argues this is impossible in reality, because knowledge is never fully “given” to one person — it is scattered across individuals.

What are the two types of knowledge in society, according to Hayek?

• Scientific knowledge:

  • General, theoretical, and organized knowledge (e.g., scientific or technical laws).

  • Can often be centralized or shared through experts.

• Knowledge of the particular circumstances of time and place:

  • Local, specific, practical knowledge that only individuals “on the spot” possess.

  • Includes details about local resources, skills, conditions, and opportunities.

  • This type is crucial for effective economic decisions and cannot be centralized.

What is the problem that Hayek wants to solve when trying to “construct a rational economic order”?

• To secure the “best use of available resources [...] for ends whose relative importance (value) is known only to individuals”

• In other words, how to get people the things they most want, efficiently, when those things are limited (scarcity) and desires are personal

What conditions need to be met in order to construct a rational economic order?

• First, have to know nearly everything about everything (“possess all relevant information”)

• Second, have to know what people want (“start out from a given set of preferences”)

• And, third, have to know all the ways to get people the things they most want! (“complete knowledge of available means”)

→ Hayek’s central point: there is no way any one person or entity can know all of these things

Two types of knowledge in society, according to Hayek?

• Expert/Scientific Knowledge – popular, says Hayek

•  But don’t forget about Circumstantial Knowledge – unorganized, individual “special knowledge of circumstances of the fleeting moment not known to others”

🡪 It’s this latter type of knowledge that a decentralized economy runs on

Centralized Planning

Decisions on what to produce, how to produce and for whom are taken by the government in a centrally managed bureaucracy.

• Scarce resources can be carefully rationed

• Means of production owned by government

• Decisions are made with authority and clarity

• Socialist economies argue that markets create (not reduce) scarcity.

  •  Freedom in the marketplace and prices foster individual entitlement, greed and selfishness

• If the central planner is truly altruistic, they will do the most “good” for the most amount of people

Decentralized Decision- making

Market Economy:

▪ Factors of production are owned privately

▪ Transactions occur freely b/w buyers and sellers by

mutual agreement

▪ Prices are determined by supply and demand

▪ Businesses freely compete to attract customers

▪ Businesses seek to maximize profits

▪ Government role is minimized to maintaining property

rights, rule of law, and ensuring a level playing field

THE PRICE SYSTEM

How does a decentralized economy run itself?

• By “attaching to each kind of scarce resource a numerical index” (aka a price)

• Price doesn’t come from the thing itself necessarily, but rather how desirable it is at any given time and place.

• The price fluctuates and responds to change.

• The spontaneous coordination is “bottom up.”

Prices at work

Prices solve two main problems:

• Information problem: The information problem is that no single person or central planner knows everything — like how much of a resource exists, what people want, or what it costs to make things → Prices signal that information

• Incentive problem: Even if people have the information, they still need a reason to act on it. People need motivation to act on that info → Prices motivate behavior (buy less, produce more)

CENTRALIZED PLANNING CAN BE CHALLENGING!

• Need to know the value in each of its uses.

• Know which consumers value it the most.

• Know the value of each substitute in each of its uses (and the substitutes’

substitutes).

• Solve all of this and then issue millions of orders to get people to act.

• People would have to give the planner truthful information, but they’d have an

incentive to say that they all valued the product highly.

Arbitrage Definition:

the practice of exploiting tiny, temporary prices differences of the same or similar assets across different markets or platform to make a profit

Hayek viewed arbitrage very positively

• use local, specialized knowledge — for example, knowing where a good is cheaper or more in demand — and act on it.

• By doing so, they coordinate markets and help prices reflect true conditions of supply and demand.

• Even though they act for personal gain, their actions improve efficiency and move resources to where they’re most valuable.

Property Right

the legal and social rules that determine:

1. Who owns a resource (like land, a car, or an idea),

2. How it can be used, and

3. Who has the right to transfer or sell it.

Bethhell: Property Rights 

“private property is the guardian of every other right”

Without it, there can be no…

Peace: Peaceful, rather than violent, competition

Prosperity: incentive to work; property rights allows for long time horizon

Freedom: is not subject to someone stronger or more powerful; free to strive for financial independence

Justice: avoid haphazard justice and discrimination. Price, not personal attributes, rules.

John Locke: Property Rights 

• we have the right to acquire property and productively apply it to sustain ourselves

  • it is private ownership as it is the result of your labor (the handwork and effort you put into it)

However:  As much as anyone can make use of to any advantage of life before it

spoils, so much he may by his labor fix a property in: whatever is

beyond this, is more than his share, and belongs to others

John Locke and the role of government

• the state of nature; people could only take as much as they needed — because goods spoiled (like food rotting). This natural limit prevented people from taking too much and harming others.

• however- once money was invented→ money doesn’t spoil so people can accumulate wealth without limit

  • natural limits disappear, and greed or inequality could grow

  • needs a new rule system that makes sure everything is acquired fairly and that is the Government.

John Locke view on scarcity:

Locke didn’t see scarcity as the natural human condition

→ People could freely take from nature without harming others as long as resources were plentiful — like water in a big river or unused land.

• In the beginning, nature had enough for everyone — abundance, not scarcity.

• Property rights were fair as long as your use of resources didn’t deprive others.

  This is sometimes called the “Lockean proviso” — you can take from nature only if there’s enough and as good left for others.

Only when resources became scarce did questions about fairness, property, and distribution become more complicated.

Oxenberg on Property Right 

• Property rights aren’t “natural” or given by nature or God.

• They are created and justified because rational people would agree to them if everyone were deciding together under fair conditions (no one having an unfair advantage).

The contractarian perspective says property rights are fair and legitimate because they come from an agreement among equals about how to live together — not just from force, custom, or nature.

Scarcity and property rights in a nutshell

Robin Cox View on Scarcity

• a functional requirement of capitalism itself

• Scarcity is an illusion

  • market measures profit, not efficiency

• Price system communicates wants, not needs

Robin Cox: Artificial Scarcity

What does Cox mean by artificial scarcity?

• Artificial needs are things “over and above what we need”

that we are encouraged to think that we need

• They are “insatiable”

• It is a core part of capitalism; without consumers buying

things, the system would collapse

Robin Cox: Socially useless production

• refers to work or economic activity that doesn’t meet real human needs — like food, housing, healthcare, or education — but instead serves to keep the capitalist system running.

→ Banking, corporate consulting, advertising, military/security industries, or administrative jobs that exist to manage profit and competition

Robin Cox: Surplus Value

difference between the value that workers produce through their labor and the wages they are paid.

→ Workers create more value than they receive — and that extra value becomes profit for the capitalist (the owner of the business).

Cox calls this part of “artificial scarcity” because:

• Workers don’t get to enjoy the full wealth they create.

• Their wages are kept low, so even though society produces plenty, many people still lack what they need.