Difference between revisions of "Artificial scarcity"

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'''Artificial scarcity''' describes the [[scarcity]] of items even though the technology and [[Economic production|production]] capacity exists to create an abundance. The term is aptly applied to non-rival resources, i.e. those that do not diminish due to one person's use, although there are other resources which could be categorized as artificially scarce.  The most common causes are [[monopoly]] pricing structures, such as those enabled by [[intellectual property]] rights or by high fixed costs in a particular marketplace.  The inefficiency associated with artificial scarcity is formally known as a [[deadweight loss]].
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[[page type::article]]
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[[thing type::phenomenon]]
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[[thing type::tool]]
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[[category:economics]]
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</hide>
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==About==
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[[Artificial scarcity]] refers to situations in which [[scarcity]] is deliberately created, most commonly in response to a perceived business need. The term is applied to both [[rival goods]] and [[non-rival goods]], but the significance and mechanisms are somewhat different in each case.
  
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An example of artificial scarcity is often used when describing [[proprietary software|proprietary]], or [[closed-source]], computer software.  Any software application can be easily duplicated billions of times over for a relatively cheap production price (an initial investment in a computer, an internet connection, and any power consumption costs).  On the margin, the price of copying software is next to nothing, costing only a small amount of power and a fraction of a second.  Things like serial numbers, [[Software license agreement|license agreement]]s, and [[intellectual property]] rights ensure that production is artificially lowered in order for a business to gain a monetary benefit, thus giving businesses an incentive to produce more software.  [[Technocracy|Technocrats]] argue that if the [[Technocratic views of the Price system|the price system]] were removed, there would be no personal [[incentive]] to artificially create scarcity in products, and thus something similar to the [[open source]] model of distribution would exist.
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For more in-depth discussion of these contexts, see:
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* [[/rival]]
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* [[/non-rival]]
  
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[[Image:Ppfofdigitalinformation.gif|thumb|right|485px|[[Production possibilities frontier]] of showing trade-off.]]
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The inefficiency associated with artificial scarcity is formally known as a [[deadweight loss]].
  
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With nearly all goods, a trade-off occurs when decisions are made about production.  The graph shows the economic anomaly that occurs with artificially scarce products.  Because leather boots consume resources, a trade-off is noticed between running shoes and boots; i.e. in order to produce more boots one has to produce fewer running shoes because of limited resources. This trade-off is illustrated by a move from P1 to P2 in the Production Possibilities graph on the left.
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==Causes==
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One argument is that this arrangement has come about because [[capitalism]] and the [[profit]] motive create a situation where it is easier to profit from creating scarcity than from meeting unmet needs<ref name=ws1>http://www.worldsocialism.org/spgb/apr98/scarcity.html Artificial scarcity</ref>.
  
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With computer software, no significant trade-off occurs. To produce more of a certain piece of digital information, since virtually no resources are used to copy the information there is no trade-off with the production of other things, like shoes and boots. In essence, problems of artificial scarcity usually arise when a good that was once scarce becomes abundant due to extreme increases in productivity and technology. <ref>[http://www.automation.com/sitepages/pid1698.php The Problems of Scarcity & Abundance]</ref>
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The argument goes as follows:
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* Producers are primarily motivated by profit &ndash; not to satisfy wants or needs, or even to provide [[economic value]].
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* Profit is maximized by satisfying [[effective demand]] through selling at the highest possible price.
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* When all needs are met, effective demand is low.
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* When effective demand is low, prices are also low (due to the law of [[supply and demand]]).
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* Therefore: profit can be increased by artificially limiting availability (through any of several mechanisms), thereby increasing effective demand.
  
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== Support for artificial scarcity ==
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==Mechanisms==
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Common mechanisms for creating or enforcing such scarcity include:
  
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In a market economic system, an abundance is not produced because excess product is considered an inefficient use of resources; those resources could be used elsewhere to produce something in greater demand to fulfill more wants.  A paradox is reached with artificially scarce products, as an abundance is possible, yet without creating scarcity via legal or coercive means, there is minimal profitability for the creator (or the distributor) of the product. If scarcity is allowed to reach zero, the economic model is irrelevant. If natural scarcity no longer exists, scarcity has to be created to ensure a price system of supply and demand. <ref>[http://www.manageability.org/blog/stuff/artificial-scarcity/view Manageability- Artificial Scarcity]</ref>
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* {{wp/alt|monopoly}} pricing structures, such as those enabled by [[intellectual property]] rights or by high fixed costs in a particular marketplace.
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* {{wp/alt|cartel|cartels}}
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* {{wp/alt|guild|guilds}}
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* [[copyright]] - Grants authors a limited monopoly to copy and distribute their works.
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* Hoarding by traders and middlemen
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* Black market activities
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* Insider trading
  
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Artificial scarcities are said to be necessary to promote the development of goods. In the example of digital information, it may be free to copy information ad infinitum, but it requires a significant investment to develop the information in the first place. In the example of the drug industry, production of drugs is fairly cheap to execute on a large scale, but new drugs are very expensive. This is because the initial investment to develop a drug is generally billions of dollars, due to strict regulation. Typically drug companies have profit margins much higher than this initial investment, but the high payoff also attracts many companies to compete, increasing the pace of drug development. A feature of many economies is also time limit in patent rights; after a set number of years enjoying an artificial scarcity, the patent wears off and cheap generic versions of a product enter the market. Thus, the drug developer gets a return on investment, and other companies subsequently compete to lower prices.
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All these activities are beneficial for the producer who gets a high profit margin by increasing prices due to deficiency in the supply of goods. Ultimately it is the final consumer who bears the burden of not being able to obtain the amount of goods he requires and also being unable to get them at a reasonable price.
  
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== Economic actions that create artificial scarcity ==
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These actions are used to artificially prevent [[market failure]], artificially preserve profits for producers, or artificially reduce costs for a certain group. A state of complete abundance will crash any [[market economy]].
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==Related==
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* [[Price floor]] - This discourages access to a resource (creating scarcity and profits) and waste is produced.
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* {{wp/alt|Club good}}
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* [[Price ceiling]] - Discourages production while encouraging consumption of a resource (two way creation of scarcity).
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* {{wp/alt|Criticism of intellectual property}}
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* [[Subsidies]], which may be subsidies to production (usually creating surpluses) or subsidies to consumption (usually creating shortages).
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* {{wp/alt|Disney Vault}}
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* [[Cartels]]
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* {{wp/alt|Post-scarcity economy}}
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These actions are used to artificially prevent [[market failure]], artificially preserve profits for producers, or artificially reduce costs for a certain group.
 
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== Responses to artificial scarcity ==
 
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The term 'artificial scarcity' is used by [[Technocracy Incorporated]] to point out one aspect of productive inefficiency in the [[Technocratic views of the Price system|price system]].<ref>  http://www.technocracy.org/Archives/I%20Am%20The%20Price%20System-r.HTM I Am The Price System R. B. Langan 1944 Published in:Great Lakes Technocrat March/April 1944, No. 66</ref> Technocracy advocates predict that a technologically advanced state is capable of producing an abundance of consumer goods, depending on an areas resource base.<ref>http://ecen.com/eee9/ecoterme.htm Economy and Thermodynamics</ref>  Technocrats point out empirical evidence; even though the productive capacity may exist to feed everyone in a given area, under-production, waste, or misallocation is used to enforce scarcity, because there is no way to sell an abundance. A conflict between economic coersion (forcefully maintaining a low supply) and scientific reality (natural abundance) stifles the possibility for abundance within the context of a given resource base and land area.  A price system only creates opportunities for scarce products, whereas a method of [[Energy Accounting]] according to this idea, would make consumables available to all in a [[Technate]].<ref>http://www.eoearth.org/article/Biophysical_economics</ref>
 
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In the absence of artificial scarcity, businesses and individuals would create software based on their own need (demand). For example, if a business had a strong need for a voice recognition program, they would pay to have the program developed to suit their needs. The business would profit not on the program, but the on the resulting boost in efficiency caused by the program. The subsequent abundance of the program would lower operating costs for the developer as well as other businesses using the new program. Lower costs for businesses result in lower prices in the competitive free market. Lower prices from suppliers would also raise profits for the original developer. In abundance, businesses would continue to pay to improve the program to best suit their own needs, and increase profits. Over time, the original business makes a return on investment, and the final consumer has access to a program that suits their needs better than any one program developer can predict. This is the common rationale behind [[open-source]] software, such as [[Mozilla Firefox]].
 
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== See also ==
 
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*[[Disney Vault]]
 
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*[[Scarcity]]
 
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*[[Post scarcity]]
 
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*[[Technocratic views of the Price system]]
 
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*[[Wealth, Virtual Wealth and Debt]]
 
  
 
==References==
 
==References==
 
<references/>
 
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[[Category:Technocracy movement]]
 
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[[Category:Scarcity]]
 
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Latest revision as of 20:04, 27 December 2013

About

Artificial scarcity refers to situations in which scarcity is deliberately created, most commonly in response to a perceived business need. The term is applied to both rival goods and non-rival goods, but the significance and mechanisms are somewhat different in each case.

For more in-depth discussion of these contexts, see:

The inefficiency associated with artificial scarcity is formally known as a deadweight loss.

Causes

One argument is that this arrangement has come about because capitalism and the profit motive create a situation where it is easier to profit from creating scarcity than from meeting unmet needs[1].

The argument goes as follows:

  • Producers are primarily motivated by profit – not to satisfy wants or needs, or even to provide economic value.
  • Profit is maximized by satisfying effective demand through selling at the highest possible price.
  • When all needs are met, effective demand is low.
  • When effective demand is low, prices are also low (due to the law of supply and demand).
  • Therefore: profit can be increased by artificially limiting availability (through any of several mechanisms), thereby increasing effective demand.

Mechanisms

Common mechanisms for creating or enforcing such scarcity include:

  • monopoly [W] pricing structures, such as those enabled by intellectual property rights or by high fixed costs in a particular marketplace.
  • cartels [W]
  • guilds [W]
  • copyright - Grants authors a limited monopoly to copy and distribute their works.
  • Hoarding by traders and middlemen
  • Black market activities
  • Insider trading

All these activities are beneficial for the producer who gets a high profit margin by increasing prices due to deficiency in the supply of goods. Ultimately it is the final consumer who bears the burden of not being able to obtain the amount of goods he requires and also being unable to get them at a reasonable price.

These actions are used to artificially prevent market failure, artificially preserve profits for producers, or artificially reduce costs for a certain group. A state of complete abundance will crash any market economy.

Related

References

  1. ↑ http://www.worldsocialism.org/spgb/apr98/scarcity.html Artificial scarcity
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