Tuesday, April 5, 2016

Is "Need" a Valid Concept in Economics?

Need: Is it an actual part of the economic lexicon? Or are there good reasons why need isn't directly associated with standard economic thinking? Perhaps the answer depends on how the word is referenced. For instance, the need for what is still a missing marketplace in terms of services potential and asset formation, is a different dynamic than "need" for seemingly reasonable fiscal policies.

How does one visualize need for something that doesn't currently exist? The forms of marketplace potential which aren't immediately obvious, exist in relation to how economies are defined in terms of societal wants. Whole sets of aggregate resource potential may be dismissed out of hand, because of a lack of economic access on the part of those who would benefit. In a recent Money Illusion post, a commenter expressed concern about (supposed) needs in terms of infrastructure, and Scott Sumner replied:
...my econ teacher once forbade me from using the term need. What people need and what they can buy are two different things. I'm trying to explain the world as it is.
This makes sense, insofar as governments and the private sector proceed in similar manner for their wants in the marketplace. However, this reality leads to distortions, in terms of economic outcomes and fiscal measures. Both public and private institutions - through the guise of what they want - define societal "need" upward, wherever it is possible to do so. When private interests "want", governments often oblige with regulation, if policy makers are rewarded for the favor. Then, governments may end up with dubious reasoning for societal "need", as a proxy to fulfill its commitment to those earlier expressed wants.

It's a process which can lead to a peculiar form of fiscal abuse. Government "wants" lead to greater complexity in defined consumption settings. But raising the bar wherever possible, makes the fiscal policy which accompanies these definitions, less effective over time as an economic stimulant. Fiscal obligations become a form of indebtedness, which slowly undermines the ability of fiscal policy to positively affect economic conditions.

Only consider a single example from 1936. At the time, Washington and the national economy were still sufficiently "lean" that fiscal policy - in the form of a lump sum payment to WWI veterans - actually contributed to aggregate supply. My grandfather purchased a tractor with the money, which meant he was able to plant and harvest more crops than previously. Not only did this make him less dependent on family members for help, he was also able to hire labor - a process which was doubtless repeated by other fortunate farmers as well.

If only economic circumstance could be so responsive to stimulative policy in the present. Private industry faces similar flexibility issues, as the cumulative regulatory effect of multiple "wants" has become a hurdle of financial obligation to be traversed before additional activity can play a role. Often, the sole compromise left in environments arbitrarily defined upward, is yet another rise in minimum wages. Of course this public/private fallback position further distorts equilibrium conditions, and runs counter to economic logic as well.

When exorbitant definitions for public and private consumption "wants" are firmly ensconced in regulation, innovative adaptations for resource use have little fertile ground, in which to take root. New ideas run headlong into already existing resource requirements, for building and physical infrastructure. An apt example is today's plumbing mandates which indiscriminately apply, yet are increasingly out of reach of the resource capacity of lower income levels. Still, the problem isn't so much one of "small" wage capacity, but the fact building component innovation has been held back.

What if specific income capacity - as opposed to need - was taken into consideration for production and consumption definitions? Income fluctuations and wants are not set in stone. Any attempt to design a consumption or income base that "takes care" of someone's need is a bad strategy. What is possible, are design initiatives for local asset formation and services generation, which facilitate individual production and discretionary choice. Instead of a "need" baseline for consumption, leave a fallback position for personal risk, which makes it feasible to regain one's time value and resource capacity.

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