Business and Social

Journalist Rainer Hank is able draw a lot of positives from these austere times. In an interview he explains why we need to distance ourselves economically and socially from this “land of milk and honey” mindset and why prices actually make sense.

Dr. Hank, can you explain this theory of scarcity?

The scarcer something is, the more desirable it becomes. The scarcer it is, the more value we place on it. That applies to goods, services and actually everything in this life. Everything is scarce. Finite and scarce go together. “Economy,” said British economist Lionel Robbins, “is a science that studies human behavior as a relationship between ends and scarce means that have alternative uses.” Things that are scarce are not objectively selected; they are dependent on our subjective goals.

That means, if the value of a thing is determined by what the individual applies to it, then everything has a different value for everyone.

The value of a thing is not something objectively inherent. The value of a thing is also not measured – as some people think – by the costs or time required by the manufacturer to produce it. That is irrelevant to the consumer. An example: An iPad costs anywhere from 500 to 800 Euros. One person might say it’s too expensive. The other might say it’s affordable because he/she needs it. A year ago iPads didn’t exist. Nobody knew they would need to buy one.

Is an iPad expensive or not, then?

That depends on a set of subjective values. It just depends. Let’s take another example: gold. The price of gold does not depend on the physical reserves of gold, but on the importance people place on gold relative to other things in life. The price today is high. There are two reasons for this: Gold is seen as a better investment and a better protective measure against inflation than other financial products. On top of that, the new middle classes in developing countries of Asia, for example, are adorning themselves with gold as a sign of increased prosperity. Both have generated new demand and suddenly gold is scarcer than before. That is now translated in higher prices.

What kind of a role do real or artificially generated scarcity play in our economic system?

In commerce, artificial scarcity is often used as an instrument to increase revenues. Consider the Aldi computer: only available for three days, or as long as supplies last. That is not a general scarcity of computers, but the trick generates demand. People think: If it’s scarce it must be of value. The trick works and businesses know that.

Since the 19th century we have experienced massive increases in productivity. Scarcity is a thing of the past. Today we can buy more consumer products than ever before. Everything seems to be in plentiful supply. “Germans in a shopping delirium” was the phrase going around before Christmas…

Wait, wait, it’s not like that at all. What a person buys depends on his/her available income. It’s not available for everyone. Secondly, certain goods have become general consumer goods, like the mobile phone for example. Ten years ago or so they were expensive. Only the few could afford one. Now everyone can afford a mobile. It’s a staple article. It has dropped in value because its overall perception in society spiraled along with the price. If you wanted to show your status you had to buy a Blackberry or an iPhone. They were scarcer and thus more expensive. Long story short, if everything was in surplus and we could have everything we wanted, the boredom would kill us. But we’ve never reached that point, so I’m sure people will continue to develop demand for scarce products.

What has value then in our world of scarcity? What is valuable?

That is a very interesting question. We would have to apply this theory of scarcity to the findings made in happiness research. This research has shown that the things that satisfy us are the things that are scarce or hard to get. Work, for example. People who are afraid of being unemployed, or who have lost their jobs already, are unhappy. Even more satisfying than material things in our affluent societies are the immaterial “values”. People are satisfied by good friendships, good conversations or moments of inner tranquility, but these moments are few and far between because we know we can’t produce them in a factory. So we value them even more when we experience them.

Does that mean we always want the land of milk and honey but need scarcity to be happy?

That’s it. Scarcity sounds like deprivation. The fools’ paradise, on the other hand, promises abundance. But look at the painting Land of Cockaigne by Peter Brueghel the Elder. You’ll see that it’s not a place you want to be. People are lying around in a barren wasteland stupor and don’t know what to do with themselves. Everything is sort of nasty even though the roast piglet and boiled eggs are free.

So what is the alternative?

The American economist and Nobel Prize winner Milton Friedman once said: There is no free lunch. There is nothing for free in this world. Everything has its price. We can decide what price we want to pay. But anyone who thinks he can get out of paying the costs of his own life is sorely mistaken.