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And Value

Written Sunday 09/11/05 by Joe Rossini

Scarcity and its relationship to value is a topic that can be discussed endlessly. It’s a relationship that we all know exists in our subconscious, yet it sometimes takes a catastrophic event like Hurricane Katrina to fully realize this critical relationship in our consciousness. For example, we all know that clean drinking water is essential to living, however under normal circumstances we might place a low value on this precious resource as long as we have ready access to as much as we want in our kitchens and refrigerators. It’s only when it became scarce and unavailable after Hurricane Katrina hit the Southern Gulf Coast of the United States, that the residents in that region would pay any price for bottled water, to sustain their life.

A similar argument can be made for electricity, gasoline, food, medicines and many basic necessities or services that immediately became scarce after the storm. As long as there is ample supply of these necessities, we tend to take these items for granted as though they will always be available. In the case of electricity, we all know this commodity is important for comfort as well as powering necessary appliances like refrigerators. We also realize that this commodity must be commercially produced and there isn’t a free and endless supply for each of us to tap at will. Thus, as demand continues to grow for this commodity and supplies become tighter, the result is scarcity and the value goes up. In normal times, each time we lower our air conditioning thermostats and keep them low when it’s not absolutely necessary; or each time we cool an empty house for extended periods of time without regard to waste…we are in-fact making electricity scarcer as well as more expensive to purchase.

To drive this point home, recently I came across my check register for my personal checking account in 1972. At that time I was renting an apartment and my electric bills back then were around $5.00 a month during the summer. That’s a far cry from the hundreds I now pay for the same electricity and I felt as though our prices were too high today. Of course, we live in much more comfort today and have more TV’s, electrical appliances and computers. The increases were gradual over this 33 year period, electricity was always plentiful and I never paid much attention. However, just like in 1972, we still take electric power for granted today and think that it will always be readily available. Only when electricity is taken away following a hurricane, can we appreciate its true value. After watching people with no power on TV, I would gladly pay whatever was necessary to continue my electric service and not complain about its cost. That’s how scarcity adds value.

Scarcity is also a great teacher, as all of us are experiencing lines right now to fill up at the gas pumps due to scarce supplies of gasoline. We are also paying the highest prices in memory. This combination of scarcity and high prices is forcing us to value gasoline more. All of a sudden everyone has ceased joyriding or taking unnecessary trips to the store. We’ve become more conscious of the miles per gallon that our vehicles yield. And we are making driving decisions based on a scarce mindset rather than one of plentiful supply.

Now of course none of this explanation of scarcity and value is anything new. Perhaps Adam Smith, an 18th Century Scottish author of “The Wealth of Nations” best described scarcity and value in his works. He sites many examples of scarcity’s relationship to value including land, precious metals, gems and labor. In fact one might say that our whole capitalist system of economics revolves around these basic concepts. Yet it takes an event like Hurricane Katrina to give everyone an opportunity for a reality check, revealing how fragile and vulnerable our lives are to disruptions. This one event can change the course of millions of lives forever.

We should mention that scarcity does not necessarily imply poverty. Scarcity in economic terms means that the needs and wants exceed the resources that are available to meet them. The scarcity of an original sculpture or painting can make it worth millions of dollars. However, if someone produces millions of the same piece of art, and it’s readily available at every discount department store, it may be worth fifteen dollars.

One lesson to be learned from this week’s discussion on scarcity and value should be how it relates to labor, pay and job availability. Even Adam Smith argued that wage rates would be higher for trades that were more difficult to learn, because people would not be willing to learn them if they were not compensated by a higher wage. Now might be a good time to ask yourself “how scarce are my skills?” Or “how much time am I investing to improve the value of my skills?” These are critical questions to ask continually. In a time of crisis and displacement from your home or job, those with skills that are scarce and valuable, will have more choices for employment.

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