Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.

This article, and those that will follow in this series, describe in simple but compelling form several objective truths about the dynamics of scarcity and prosperity and the role they play in human decision-making within the context of an economy. The simple elegance of the economic system I describe seems to have been long forgotten, buried under an accumulation of overly sophisticated explanations, theories and complex models.

“The record of history is absolutely crystal clear. There is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.” - Milton Friedman

Whether one thinks of a market as barter, a grocery store, Internet commerce or the New York Stock Exchange, the concepts behind each of them are identical. People have resources that they are willing to give up in order to gain something else they deem as more valuable.

If I own a coop full of chickens that produces two dozen eggs every week, then I am not likely to pay for eggs in the grocery store. More likely, a grocer may be willing to buy my eggs for resale to his customers. If my portfolio is over-weighted with technology stocks, then I am less likely to seek new technology stocks to own. If I need money to pay for my daughter’s college tuition, then I may need to work harder and/or sell some of my assets in order to meet the obligation. This simple set of examples is intended to reflect the decision-making human beings face when considering resource allocation.

In my firm’s philosophy statement, it is stated this way:

  • Human beings have desires and those desires drive decision-making. Given the desire and the means or ability to fulfill those desires, they will do so. This results in demand.
  • At the same time, in order to fulfill one’s desires, human beings will undertake activities that give them the means to fulfill their desires. This results in supply.
  • When human beings interact in a manner that allows their desires and their means to intersect, markets are created.

To emphasize the important linkage between resource allocation, economic success and the role of markets, a basic review of the terms scarcity and prosperity is important:

Scarcity is defined as a deficiency in quantity or number compared with demand. It is a universal, natural condition whereby resources such as time, labor and material wealth are limited. In a world where desires are, by nature, unlimited, people are required to make prudent decisions about the use of limited resources.

Prosperity is defined as the condition of being successful or thriving: economic well-being. It is a manufactured condition whereby the economic well-being of a person, community or nation is determined by the millions of choices citizens and government leaders make every day. Prudent decisions regarding the use of our limited resources produce prosperity.

In the opening quote, the free enterprise system to which Milton Friedman referred is the system whereby people are free to engage in a vocation of their choice as a means of fulfilling their desires by producing something others need or want. Economic value, the basis for free-market exchange, is subjective. What has great value to one person may be of little value to another. Because anything a person could desire is to one degree or another scarce, each of us must prioritize our values by our individual preferences and means. This not only applies to purchases and consumption but, just as important, how much we produce and how we spend our time.

When people are freely allowed to come together and cooperate in pursuit of their own self-interests, everyone benefits. The fewer needless restrictions imposed on a society, the more the individuals in that society are incentivized to innovate and produce as a means of satisfying their desires. This is how human beings deal with scarcity. Given our infinite desires and the natural limitations of time, energy and capital, markets determine how we navigate these exchanges.