Finite wants make relative abundance possible

Working paper

Finite Wants Make Relative Abundance Possible

by Roberto Verzola, rverzola@gn.apc.org

[Note: the old title of this working paper was “Finite demand makes relative abundance possible”.]

It is almost by definition that economists predominantly focus on scarcity, when they define economics as the study of “the most efficient ways to allocate scarce resources to meet unlimited human wants”. If, indeed, people had infinite wants, then not even all the resources of this finite world will be enough for a single person.

It can be argued, however, that consumer wants are not infinite. There exist physical, physiological, neurological, psychological and cultural limits – both actual and potential – to consumption which can keep individual as well as collective needs and wants within finite bounds.

If these needs and wants are finite, then satisfying them becomes a real possibility, and relative abundance is within reach.

The following three concepts will help show that needs and wants can remain within finite bounds:

Satiation. Economists define satiation as the consumption level which the consumer most prefers. The closer the consumer is to this level, writes economist Hal Varian, “the better off he is in terms of his own preferences”.1 This satiation level for a bundle of goods is also called the bliss point. Beyond it, the consumer prefers to have less of the goods. Many economists still cling to the hedonist principle that “more is always preferred to less.” But some acknowledge, at least in theory, that a satiation level exists for some, if not most, goods. Varian, in particular, says that most goods have a satiation point and that “you can have too much of nearly anything,” which contradicts the “infinite wants” assertion in most definitions of economics.

Saturation. While satiation may apply more to the psychological attitude of a consumer not wanting more, saturation is more about the physiological or physical incapacity of a person to consume more. Beyond the saturation point, one’s body either will become incapable or will involuntarily reject additional servings of food and drinks. One can only wear so many clothes, or shoes. One can listen to only so many CDs or watch only so many videos. There are only twenty-four hours a day after all.

To reach the brain, a sense stimulus takes around 10-20 milliseconds. To respond in a conscious way, neuro-scientists have found out, the brain takes longer – around 500 milliseconds (half a second).2 This suggests that our brain can only enjoy at most two distinct events every second or about 170,000 every twenty-four hours. For a world with some six billion people, that adds up to an upper limit of one quad (i.e., quadrillion) consumption events per day. That is a huge number, it is true, but finite nevertheless. Most of us will probably exceed our saturation levels long before that point.

The argument for saturation is further strengthened by the findings of experimental psychologists that people – and animals too – get less pleasure from any stimulation, the more often it happens. Not only does the pleasure diminish, but the stimulation soon becomes undesirable.3 So, the finite time to consciously respond to sensory stimulation sets a limit to the variety of stimulation one can respond to, and a single type of stimulation will also soon become undesirable, also setting a limit on the desirable amount for that type. Economist Tibor Scitovsky has further argued that not all sources of stimulation can be exchanged in the market and therefore add to economic demand.4 All these support the argument for a finite bound to consumer needs and wants.

However, the concept of saturation as distinct from satiation is hardly mentioned in consumer theory and most economists still cling to the “infinite wants” idea.

Satisficing. Even before we reach our satiation or saturation levels, we may already reach our “satisficed” level, in which the quantity we have of a particular good or bundle of goods already suffices to satisfy, and beyond which we would only weakly prefer more.5 In contrast to satiation, which results in a strictly lower preference beyond the bliss point or satiation level, points beyond the satisficing level are either equally preferred or only so slightly or weakly preferred that it does not make a difference. The idea that consumers satisfice rather than optimize when fitting their wants to their budget was first raised by psychologist Herbert Simon, who subsequently won the Economics Nobel Prize in 1978.6

Any of these “sat” concepts – certainly all of them, together – are enough to argue that individual and likewise needs and wants have finite bounds.

This justifies the following assertion: some consumers have a satisficing level for some goods.7 As the price of a good goes down, consumers will then be able to afford enough to reach their satisficing levels. We will leave to future research the debate whether the weak assertion of “some consumers” and “some goods” can, in some contexts or periods, be changed to a stronger assertion of “some consumers for all goods”, “all consumers for some goods”, or even “all consumers for all goods”.8

The above assertion leads directly to a formal definition of abundance: when a person can afford enough quantity of a good or bundle of goods to reach his/her satisficed level, then the person enjoys a state of abundance for that good/bundle of goods. The concept is not new. Gandhi must have been referring to abundance when he said “the Earth has enough for everyone’s need”. This definition also allows a good’s state of abundance with respect to one person to be quantified: it is the ratio of that person’s affordable quantity (economists call this demand, which varies according to price) to his/her satisficing level, which is the point where any further reduction in price does not anymore increase that person’s demanded quantity. For instance, if a person’s satisficing level is five pairs of shoes, but s/he can only afford two pairs (i.e., she is only willing to buy two pairs at current prices), then s/he enjoys a state of abundance of 40% (two out of five) with respect to shoes. This makes it simple to relate abundance to its inverse, scarcity: the person needs three pairs more to reach the five-pair satisficed level. Thus s/he faces a scarcity level of 60%.

For a group of consumers, the level of abundance can be determined by aggregating the quantities each individual can afford (the demand), divided by the aggregate of their individual satisfaction levels. This makes it possible, in theory, to determine the relative level of abundance (and scarcity) of a good for an entire society.

Economics usually assumes that business firms maximize their profits by producing until their marginal cost (the cost of the next additional unit) equals their marginal revenue (unit price of the good). If, in addition to this behavioral assumption, we also assume diminishing returns or decreasing returns to scale, this will eventually result in increasing marginal costs. When the increasing marginal costs reach the good’s market price, economic theory says the point of maximum profit has been reached. Thus business firms will, in theory, reach their satiation point when they reach their maximum profits.

This also means, however, that profitable firms employing technologies with constant or increasing returns to scale will face constant or decreasing marginal costs. They will therefore have no profit maximum and likewise no satiation level. These firms will conform to the theoretical hedonist idea that “more is always preferred to less.” They will try to keep increasing their scale of operations, as they go after higher and higher profits – making them an engine of globalization.

It is the profit-motive, it seems, that keeps us away from abundance, not “infinite” human wants.

1 Hal Varian. 1996. Intermediate Economics: A Modern Approach (4th ed.). W. W. Norton & Co., New York. p. 43-44.

2 Robert Matthews. 2007. 25 Big Ideas: The Science That’s Changing Our World. Oneworld Publications, Oxford.

3Tibor Scitovsky. 1976. The Joyless Economy: An Inquiry Into Human Satisfaction and Consumer Dissatisfaction. Oxford University Press, London. p. 35-40.

4Tibor Scitovsky. See above, p. 81-83.

5 Economists often represent the quantity of good desired relative to another good (or other goods) using indifference curves, which include on the same curve equally preferred ratios of one good over another. Through the same graphical tool, “satisficed” levels may then be described using thick indifference curves. Such thick curves mean that small increases in quantity of a consumer’s bundle of goods do not increase a consumer’s preference for that bundle, suggesting that they have reached their satisficed level. Standard indifference curve analysis can then be used to determine the economic implications when consumers reach this level. One implication, for instance, is that the demand curve turns concave as the satisficing level is approached. This upsets the First Fundamental Theorem of Welfare Economics, which assumes strictly convex indifference curves and non-satiation. This is the theorem which asserts that a free market leads to an efficient allocation of resources.

6 See Herbert Simon. Feb. 1955. “A Behavioral Model of Rational Choice” in The Quarterly Journal of Economics (Vol. 69 No. 1). p. 99-118

7 “Satisficing” seems to have no noun form. Instead of “satisfaction” — which many economists use to mean “reaching the highest level desired” rather than “meeting a level that suffices” — this paper uses “satisficing level” if the level has not been reached yet, and “satisficed level” if it has been reached.

8The satisficing principle is widely used in logical/mathematical proofs and, by extension, in all physical, natural and social sciences that use such proofs in their fields. Consider the following assertions: (1) A, B and C imply X; 2) D and E imply X, and 3) F implies X. As soon as the truth of (1) is proven, the sufficient conditions for X will have been satisfied, a very common exercise in many fields. Subsequent work may show that (2) and (3) are also true, with (3) possibly established as the optimal sufficient condition for X. But (1), (2) and (3) are all equally sufficient to satisfy the conditions for X. Anyone who has ever established, used or accepted such proofs is using the satisficing principle.

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