The Economics of Scarcity

Every now and then there are some economic stories that fall through the cracks. In this segment,  the GED Team will present to you those economic stories, which we found most interesting recently but felt received less popular media attention than they actually deserved. These stories can come from all over the world. They can be relevant and important for the global economic system as a whole or just affect a select group of few, they can be serious or they can be humorous. In any case they will be interesting. This is “GED Under the Radar”!

This Month’s Radar Stories in Short:

• Is the World Running out of Sand?
• The Price for Spice – Are Vanilla Prices About to Go Over the Edge?
• The Cost of Research – Is the Economy Suffering From an Idea Shortage?

Today’s edition of Under the Radar is all about scarcity. At a most fundamental level any economic exchange comes down to an interaction between supply and demand. Resources, however, most times are finite and so, often the natural demand for a product exceeds its natural supply. Consequently, the price for that good rises, lowering demand until an equilibrium is reached. We found three different stories that you probably didn’t yet have on your radar, that illustrate the different types and forms of this phenomenon.

Is the World Running Out of Sand?

The first shortage we will look at in this post is the result of a long ongoing, gradual process and it concerns one of our economy’s most basic and important goods that nonetheless people do not tend to think about all that often: Sand. In today’s global economy sand is being used in a number of different ways. We need it to produce glass and electronics, extract oil from the ground in the fracking business or even to create new land from the sea in places like Singapore or Dubai. Most importantly, however, we need sand to make concrete and asphalt for the construction industry, making sand quite literally the foundation that our economy is built on. No wonder then that extracting sand from the ground has become a major industry itself. Worldwide the sand extraction business is estimated to be worth around $70bn and sand and gravel are reported to make up 85% by weight of everything mined globally each year making them the most extracted materials in the world.

There is no shortage of natural demand either as more and more people, particularly in the developing world, move from the countryside to cities fuelling a constant need for more construction. In 2016, 70% of mined sand went to construction jobs in Asia, half of all the sand to China alone. As with most naturally-occurring resources, however the amount of sand we can ultimately extract is finite and the rate at which we extract it currently vastly outpaces the rate at which it naturally replenishes. Not all types of natural sand can be used either and so securing the yearly amounts of sand needed by the global economy becomes an ever more difficult task. This brings with it a whole range of problems though. Not only are the prices for sand constantly rising, the increasingly more aggressive ways of extracting sand have significant environmental effects too, polluting natural habitats, erasing whole islands from the maps, thinning coastlines and reducing coasts like those in the Caribbean in their capacity to absorb the effects of big storms hitting the land.

In many places like India, illegal mining and smuggling of sand have also become a problem, with the Times of India estimating the black market for Sand to be worth $2.3bn dollars there alone. In the long run as prices continue to rise, alternatives will have to be found and made practicable to use in construction instead of sand. For now though, the market for sand is still booming and the negative externalities that go along with it are not likely to go away.

The Price for Spice

Our second story today illustrates another way a shortage can come to be: A natural shock. Vanilla, after saffron, is the most expensive spice in the world. Prices for vanilla have already risen dramatically over the past years due to issues of speculative hoarding. This year, however they exploded to new peaks as the worst tropical cyclone in 13 years hit the world’s largest vanilla producer: Madagascar. One kilogram of the sweet spice that was worth not more than $30 in 2014 has gone up to $600 in 2017.

Madagascar makes up a good three quarters of the world’s supply of fresh vanilla. This makes the market for vanilla highly shock sensitive as any effect on Madagascar’s crops automatically has an immense effect on the whole world market. New crops cannot be harvested quickly either, as a vanilla plant needs a full three years from being sown to carrying matured beans. That means that prices will not be able to come down again quickly unfortunately, which means that many producers of ice cream, chocolates or perfumes will likely either have to switch to artificial vanilla flavoring for their products or increase their prices, too.

A rise in consumer prices could ultimately lead to a shift in demand as consumers switch from natural vanilla to other sweet flavor substitutes at lower prices. This is also what happened around 2003 / 2004 after a similarly drastic increase in the price for vanilla. Back then world markets saw the price of the bean go up to $500 a kilogram before consumers and the industry turned away from the spice. Global demand fell by 40% and the price of vanilla plummeted. It will be interesting to see if producers will be able to stabilize the price for their product in time on their own this time around or whether prices will remain high until demand collapses yet again.

Good Ideas are Hard to Come by – And it’s Not Going to Get Any Easier

Finally, we want to look at a third kind of shortage the world is currently struggling with, one that is a bit different from the previous two. Whereas the previous case studies dealt with material shortages of a physical resource, this shortage concerns a much more fleeting concept: Ideas.

For several decades now economic growth in the west has been falling, from around 4% annually in the 1950s and 60s to around 2% nowadays. One largely contributing factor to this has been a decrease in the rate of productivity growth in the US and Europe. Groundbreaking innovation, it seems, is harder and harder to come by. But is that because all the big ideas have already been had, as some argue, or are we just waiting for the next big step forward, the next industrial revolution, to occur that will drive innovation for years to come?

But there is another way in which this case differs from the two previous ones. A new study by Bloom et al. now shows that a quantitative lack of new ideas might not be the real problem at all actually. Rather, it is the cost of “extracting” those new ideas through research that has been skyrocketing, thus creating this artificial shortage. Think of it this way: Even though reports in the past have claimed global oil and gas reserves would run out over the next decades several times, scientists have instead always found more and more new and previously unreachable oil discoveries. Similarly, as technology progresses we see a continuous new stream of innovations. Like with the oil, however, each new layer becomes more difficult and cost intensive to reach and extract.

A graphic from Bloom’s study shows the drastic reality behind this concept. While research output (the blue line in this graphic) has been slowly decreasing over the past decades, the amount of researchers in the economy, which is to say the amount of input to create our idea output (green line here), has increased more than 20-fold over the same time. This is true not just in the aggregate but also for any individual sector case study the paper looked at.

A possible explanation for this imbalance might be that as humanity pushes forward the frontiers of science, researchers have to spend more and more time to become an expert in just one aspect of that knowledge, leading to constantly increasing overall costs as well as the need for larger teams of individually specialized researchers to generate new ideas. It is uncertain how humanity will deal with this situation in the long-run. It might be that the diminishing returns of research are truly set in stone at that any future progress will simply have to be bought at greater and greater costs. Or perhaps the optimists are right, and we truly are at the verge of a whole new step forward, a singularity in artificial intelligence perhaps, that will catapult innovation forward. Only time will tell.