Causes of 6 Economic Problems That Arises from Problem of Scarcity

Economic Efficiency Vs. Technological Efficiency:
It is important to note here the difference between technological efficiency and economic efficiency. Technological efficiency prevails when a firm, industry or an entire economy utilises its available resources fully and most effectively and thereby produces maximum possible output of goods and services with the given amount of resources. That is, a firm or industry or an economy is said to have achieved technological efficiency when it is having greatest possible rates of physical output from available inputs, given the existing technology.It is worth noting that a society that has achieved technological efficiency, that is, making full and most effective use of its available resources may not have attained economic efficiency. Economic efficiency is achieved by a society only when there prevail efficient allocation of resources between products and also efficient distribution of products between any pair of individuals in a society so that through any re-organisation of production and exchange it is not possible to make some people better off without making any one worse off.Besides the economy may have achieved technological efficiency in the use of its resources for the production of goods but its pattern of production may not conform to the consumers’ preferences so that there are long queues outside the markets or stores selling commodities whose level of production has been quite insufficient or inadequate as compared to the wants of the consumers for them.Such was the case in erstwhile USSR before the collapse of communism in late nineteen eighties. In our opinion, it is the failure to achieve economic or allocative efficiency which was the chief economic cause of the downfall of communism in erstwhile USSR and East European countries.It may however be noted that attainment of economic efficiency also involves the achievement of technological efficiency. This is because if technical efficiency in the use of resources is not achieved, it would then be possible to make some people better off by increasing production through fuller and better utilisation of resources without making others worse off.Thus with the achievement of economic efficiency a society not only produces the largest possible output with the available resources but also allocates its resources for the production of goods in such a way that conforms to consumers’ preferences. It may be noted that the concept of economic efficiency explained above was put forward by the Italian economist Vilfredo Pareto (1848-1923) and is therefore also called Pareto Optimality.
5. The Problem of Full Employment of Resources:
Whether all available resources of a society are fully utilized is a highly significant question because answer to it would determine whether or not there will exist involuntary unemployment of labour as well as of capital stock. In view of the scarcity of resources to satisfy all wants of the people, it may look strange to ask a question whether or not all available resources of a community are being fully utilized.This is because resources being scarce, a community will try to use all the available resources to achieve maximum possible satisfaction of the people. Thus a community will not consciously allow the resources to lie idle. But in a capitalist free market society it so happens that at times of depression available resources are not fully utilised.At times of depression, many workers are rendered unemployed; they want to be employed but no jobs are there for them. At such times, factories which can employ people are there, but they are not working. Thus, at times of depression in capitalist economies, even the scarce available resources are not fully employed.This question assumed great importance in economic theory during the depression of nineteen thirties when, on the one hand, about 25 per cent of labour force in the USA, Britain and other industrialised countries was rendered unemployed and, on the other, a number of factories representing a lot of capital stock remained idle and unused. How did it come about became a controversial question at that time.An eminent British economist, J.M. Keynes put forward a different explanation from the then popularly held view advocated by neo-classical economists led by A. C. Pigou. Thanks to J.M. Keynes who in his book “General Theory of Employment, Interest and Money “published in 1936, explained what caused such involuntary unemployment of resources. Keynes’ explanation was that unemployment of labour at that time was found not because money wages were fixed at higher levels by the activities of strong labour unions and intervention of the Government but because of the fall in aggregate effective demand for goods and services.His theory of deficiency of effective demand causing recession and resulting in involuntary unemployment of labour and underutilisation of capital stock has played an important role in the formulation of economic policies to control fluctuations in economic activity. Keynesian analysis has greatly widened the scope of economic theory and improved our understanding of the working of the capitalist economic system which suffers from large fluctuations in economic activity.This branch of economic theory which deals with the problem of employment of resources (and thus with the determination of national income) is called Macroeconomic Theory. This macroeconomic theory has been greatly developed beyond the Keynesian perception in recent years and several alternative models of macroeconomics have been put forward.
6. The Problem of Economic Growth:
It is very important to know whether the productive capacity of an economy is increasing. If the productive capacity of the economy is growing, it will be able to produce progressively more and more goods and services with the result that the living standards of its people will rise. The increase in the capacity to produce goods over time is called economic growth. Now, the analysis of the factors on which the rate of economic growth depends has interested economists since the days of Adam Smith who in his book.“An Enquiry into the Nature and Causes of the Wealth of Nations “threw light on the subject. But after the classical economists and with the advent of marginalism the economists’ interest in the problem of economic growth almost disappeared and the marginalist theory of relative prices and resource allocation with its emphasis on scarcity and choice occupied the central position in economic theory for a long time. In the thirties and forties, with the publication of Keynes’ General Theory of Employment, Interest and Money, the problem of depression and business cycles occupied the minds of the economists.But the need for balanced equilibrium growth rate in the developed capitalist countries on the one hand and the urge to remove mass poverty, hunger and chronic unemployment in the developing countries after their achievement of political independence have once again aroused the interests of economists in the problems of economic growth and numerous growth and development models have been put forward.Some of these growth models such as Harrod- Domar model. Neo-classical growth models of Solow and Swan, Cambridge growth models of Kaldor and Joan Robinson etc. have been propounded to explain and analyse the growth problem of the industrialised developed countries. Likewise, to initiate and accelerate the process of growth in developing countries, the various theories and models of growth and development have been offered.However, it is worth noting that till 1980s the concept of economic development generally implied the active intervention of the government and the public sector in the field of production. And, with the fall of communism in the USSR and East European countries and dismal experience of the working of public sector in the developing countries, the trend all over the world today is to adopt market friendly approach to development. To what extent free-market economy approach would generate greater economic growth and ensure economic efficiency in the developing countries, only the future will tell.