Monday, April 28, 2014

The Problem Of Scarcity and The Problem of Distribution In Economics

Capitalism has two central problems: the problem of scarcity and the problem of the distribution of output.  The problem of scarcity has been the central assumption in economics.  We assume that capital and resources are scarce and we assume that competitive markets allocate scarce resources to their most efficient use.  Why worry about distribution when we should be focused on maximizing the output obtained from scarce resources?

One of our scarce resources is capital.  The stock market was created as a way to aggregate capital and distribute it to its most productive use.  This article suggests that capital is no longer scarce. The retained earnings of our large corporations are sufficient to fund investment.  They are using their retained earnings to buy back their stock and to distribute dividends to shareholders.  The financial crisis was not a problem of capital scarcity.  The system lost its capacity to distribute capital from places where it was ample to where it was needed.  Why do we need the stock market when there is no scarcity of capital?  Stock values don't even provide a good signal as to where we should be increasing our investments.  Moreover, corporate executives are not adept at allocating capital to its most productive use.  Allocation may be a bigger problem than scarcity.

We do, however, have a distribution problem than can effect the output of the economy and social well being.  The unequal distribution of wealth and income is associated with fluctuations in demand which leads to business cycles which are often difficult to moderate.  It is also clear that a small number of households have more than they need to have a happy life, and a large percent of the global population is denied access to the necessities of a happy life.  Unfortunately, we don't have a good solution for the problem of the maldistribution of resources.

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