Austerity, Waster, and Need; E. C. Pasour, Jr.

This article first appeared in the Winter-Spring ·1978 Issue of The Intercollegiate Review, 14 South Bryn Mawr Ave., Bryn Mawr, Penn. 19010, and Is here reprinted by permission. E. C. Pasour, Jr. and other HDoomsday Models" lead to the specter of the world grinding to a halt within the next century or" so as currently known resources are depleted. What should be our pos ture toward the use of energy in the production of agricultural and in dustrial commodities? What is the appropriate approach to take toward legislation mandating mileage standards for automobiles, mandat ing insulation standards for home and office buildings, banning the use of cereals for livestock feed, and so on? Conventional wisdom holds that we should eliminate waste in the use of gasoline, electricity, and other resources. The concepts ~(need"" and ~(waste," however, are far more com plicated than the widespread use of these terms suggests. The philoso phy of austerity rests on an insecure basis and leads to measures that are harmful and contradictory. This essay explores the meaning of 743 744 THE FREEMAN December ~~waste" and ~~need" and compares the effects of market and non market rationing procedures.

Waste and Need During the energy crisis following the OPEC oil embargo, individuals were encouraged to reduce waste in the use of food, energy, and other raw materials. The same pleas were heard again in the winter of 1976-77 during the fuel crisis. If individual citizens are to respond intelligently, they must be able to identify waste. The concept ~~waste," however, has little or no objective content and appears to be closely related to the term ~~need." Furthermore, the con cept of ~~need," is meaningless as a guide in determining one's con sumption pattern. It is impossible to define objectively the goods and ser vices we ~~need." How much meat, housing, heating fuel or gasoline, for example, do we ~~need?" The concept ~~need" implies that, regardless of price, there is some minimum amount of meat, housing, heating fuel, or gasoline (or any other good or service) that is essential to our livelihood. We observe, however, that people reduce consumption when relative price rises for any good or service including gasoline, coffee, meat, and housing.

The amount ~~needed" of any good depends on the price of that good relative to the price of other goods. The ~~need" of Jones for coffee depends on his subjective valuation of coffee and coffee substitutes. It is an illusion of bureaucrats and con sumerists that the U.S. Congress, the Federal Energy Administration, or Ralph Nader can determine our individual ~~needs." Even we as in dividuals can only determine our own needs in the sense that we de cide how much we prefer at given prices. When the relative price of a good changes, however, our Hneeds" change in the sense that we prefer to purchase more or less of the good. There is no known example of any good where the quantity purchased remains the same when there is a large change in its price relative to the prices of other goods. The concept ~~waste" implies that amounts of a product which exceed our ~~needs" level provide no addi tional satisfaction. If this were in fact the case, amounts of the product above this ~~needs" level could be removed at no loss of satisfaction to the consumer. When we investigate commonly cited examples of ~~waste," however, we find that the goods presumably wasted are, in fact, contributing to consumer welfare. If the goods alleged to be wasted were providing no satisfaction, coercion would not be required to reduce use.

The use of the family auto pro vides a good example of the point being made. It is frequently alleged that the typical motorist wastes gasoline by using his auto when it 1978 AUSTERITY, WASTE, AND NEED 745 isn't ~~needed." We observe that peo ple drive their car when they could walk, ride a bicycle, or form a car pool. This fact that people use their car when alternatives are available doesn't mean that the use of gasoline used in this way is ~~wasted." There is no denying the fact that auto users could get by with much less use of the auto. The· fact that motorists could reduce auto use however, does not imply that it is in their interest to do so. Each motorist will act in the way which is most beneficial to him given the costs and benefits of various alternatives as they are perceived by him. Consum ers respond to relative transporta tion costs in deciding where to live, how to get to work, where to vaca tion, and the like.

We observe that motorists economize in numerous ways when costs of auto travel increase. As gasoline prices increase, for exam ple, there is substitution in favor of smaller autos, more bicycling, more car pooling, shorter vacation trips, and so forth. The fact that less gasoline is used when price in creases does not mean that the larger amount used at the lower price was ~~wasted." One might, to the contrary, argue that at a lower price larger numbers of consumers are able to benefit from a particular good or service, and therefore a lower price is an efficient means of effecting a widespread distribution of some item of value. People economize in the use of scarce resources in responding to their own self-interests. This does not mean that all people respond to a change in prices in the same way. We expect individuals to make dif ferent accommodations to any change in relative prices reflecting their own unique situation and pref erences.

The preceding discussion implies that there is no objective basis by which an outside observer can de termine the amount of gasoline any particular motorist ~~needs." If ~~needs" cannot be objectively de termined, decisions made to limit use through administrative controls must be arbitrary and capricious. Relative Prices vs. Need It has become fashionable in re cent years to suggest that people in the U.S. and other highly developed countries should base their con sumption not on relative prices but on ~~need." The problem as indicated above is that need and waste con cepts apart from relative prices pro vide no operational criterion by which the consumer can make choices. What do we ~~need," for example, in the way of clothing, electricity, gasoline or food? It has been shown that a nutritious minimum cost diet can be formulated for people as is done for livestock. Such a diet would 746 THE FREEMAN December enable U.S. families simultaneously to have a more nutritious diet and to reduce food expenditures to less than one-half their current level! Is this the food budget we CCneed?"Can all food expenditures in excess of this minimum cost nutritious diet properly be considered waste? Few of us will agree to sacrifice all palatability considerations and rely solely on cost considerations in choosing our diet.

The same problem arises in the use of gasoline, electricity, and in fact, all goods and services. How does one decide what size car to drive, amount of electricity to use, temperature to set the home ther mostat? We, as consumers, respond to changes in relative prices in de ciding what to eat, where to live, how to travel to work, heat our homes, and so forth. Each of us would do virtually everything we do in some other way if changes in relative costs were sufficiently large. Attempts to get people voluntarily to change consumption habits are unlikely to have much effect so long as relative prices remain un changed. On the other hand, when relative prices change, no one has to encourage consumers to make ad justments in the mix of goods consumed-regardless of whether the good is coffee, beef, gasoline or heating oil. In recent years, as rela tive prices changed, we have observed pronounced changes in size of auto, in meat consumption, in coffee consumption, in use of electricity, and the like. Market price will effec tively ration goods when prices are not held down by administrative de cree. There is no known example of a shortage persisting over time where price was relied upon as the ration ing mechanism.

Problems of NonMarket Allocation Methods Few people who suggest that con sumers should make choices related to food, gasoline and other products on the basis of some criterion other than price recognize the problems to be overcome when the market mechanism is-abandoned or market signals are ignored. Price in a mar ket economy provides signals to both consumers and producers. The mar ket is a highly useful mechanism for determining_ and transmitting in formation between all persons in the market. If the market is not permit ted to coordinate the decisions of consumers and producers, central direction must be used. However, there is no way for the central plan ner to obtain all the information which enters into any real world market transaction. Knowledge about no good or resource exists in concentrated form or in a single mind. The economic problem, as Hayek has long stressed, is to secure the best use of our resources utiliz1978 AUSTERITY, WASTE, AND NEED 747 ing the knowledge of all members of society for ends whose relative impor tance only these individuals know.

In the absence of market signals, the regulator faces severe informa tion problems. When the market is abandoned, the planner has no way to determine the information neces sary to coordinate supply and de mand. Consider the problem of de termining the ~(appropriate" temperature setting, for example, where energy use is to be restricted not by price but by restricting fuel use. The regulator must not only predict the amounts which will be used at vari ous settings, but also the amount which will be produced at the price level which is arbitrarily held below the market-clearing level. Mandatory allocation or rationing schemes cannot be based on individ ual preferences and must be arbi trary and capricious. ~~N eed" has no objective content as a guide to allo cation, and in the absence of price signals there is no way for the cen tral planner to make an allocation which reflects the subjective consid erations of all persons in the mar ket.

Problems are also created for the individual consumer who unilater ally adopts austerity measures and does not respond to market signals. Attempts by a single individual to reduce consumption of food, energy, and other raw materials beyond the level dictated by relative prices will serve little or no useful purpose. If an individual, acting alone, reduces the level of consumption, the effect on total consumption will be negli gible. For example, consider the effect of a decision by one ~~socially aware" person to reduce gasoline use. The effect on total gasoline usage will be negligible but the inconvenience to that individual can be quite large. If the individual is in business such a decision will increase costs and under competitive conditions will seriously decrease profits or bank rupt the entrepreneur attempting to (~do good." Appeals for Group Action What are the possibilities for group action? If large numbers of consumers reduce consumption be low the level dictated by relative prices, producers receive incorrect signals. Consider, for example, the effect of consumer boycotts of beef, coffee and other goods. A reduction in demand will decrease price, given the level of supply. The decrease in price resulting from the boycott is likely to reduce future supply and cause future prices to be higher than they would otherwise be. Unless the product is effectively monopolized, there is no way for group action by consumers to reduce the long run price of the product.

What do these comments imply about moral suasion as a method of rationing and reducing resource 748 THE FREEMAN December use? Pleas to reduce use may be effective for a limited period of time when the situation is deemed to be urgent by a large part of the popula tion. The problems enumerated above which arise when market sig nals are ignored are not eliminated by moral suasion. Moral suasion is also subject to another set of prob lems. First, there is the free rider prob lem common to all voluntary group activity. These activities confer ben efits on people who cannot be made to pay for the benefits they receive. When the demand for gasoline is reduced by everyone except Jones, the price is decreased. Jones as a free rider will benefit through the lower price and use more gasoline. Moral suasion may be effective for a limited period of time but it cannot solve the free-rider problem as sociated with pleas to reduce gasoline use, lower thermostats, and otherwise reduce resource use below the level dictated by market prices.

Second, moral suasion to reduce resource use to one's ttneeds" or to reduce ttwaste" is subject to all the problems associated with identify ing ttwaste" and ttneed" discussed above. There is no objective basis upon which the ((socially concerned" citizen can determine the proper level of energy use. Consider, for example, the natural gas shortage during the winter of 1976-77 and the pleas to reduce ttwaste" in home heating. Upon what basis can the ttsocially concerned" homeowner de cide whether to heat his home to 68°F, 65°F, 60°F, 55°F (or even lower)? Third, even if moral suasion is effective and all citizens fully com ply with, say, a request that ther mostats be set at 62°F, the impact will differ greatly from person-to person. Such a policy as in the case of mandatory restrictions assumes that everyone has similar circum stances. In reality, people differ greatly in their preferences for heat and in their preferred tradeoffs be tween heat and other sources of ex penditure including size of house.

The differential impact of any re striction in use of any good or re source is greatly magnified if an attempt is made to indicate the ap propriate amount to use, e.g., 10 gallons of gas per car per week or 1000 KWH of electricity per month. The circumstances of time and place vary greatly from person-to-person. Conservation and Rationing A great deal of effort has recently been devoted to reduce ttwaste" of natural resources. The effects of such efforts, however, may be incon sistent with other closely related goals. First, consider-action to reduce waste of renewable resources. En vironmen talists and consumerists have been active in promoting recy cling of paper in recent years as a 1978 AUSTERITY, WASTE, AND NEED 749 way of conserving trees and protect ing forests. Moves to reduce ((waste" by reducing the use of paper and other wood products will be counter productive for people who desire large amounts of forests for their esthetic value since such action will reduce the number of trees being grown. Tree producers respond to economic incentives just as other producers do. Thus, the more wood products used, the more trees will be produced. The more trees produced, the more land required for tree pro duction and the larger the forest acreage. People who like to see trees growing are working against their own self-interest when they dis courage the use of forest products.

Another simplistic solution, bans on the use of cereals in feeding live stock or forced reductions in meat consumption, will likewise not ac complish the intended goal. Jean Mayer, the famed nutritionist, has suggested, for example, that America could release enough grain to feed 60 million people by reducing meat consumption by 10 percent. Measures to reduce grain fed to live stock or to reduce meat consump tion, however, are unlikely to be effective in providing food to the world's hungry people. The ham burger not eaten in the United States will not miraculously appear in the hands of a hungry person in another land. How about the use of nonrenewable resources including oil, coal, and the like? It is in the own er's interest at any point in time to exploit these resources in such a way as to maximize the wealth, or value of these resources. As non renewable resources are used, in creasing scarcity will be reflected in two ways. First, the price -will be bid up as the resources become progres sively scarcer. When this happens consumers are induced to economize on the use of the resources. The market provides an effective system of rationing scarce resources both at a given time and over time.

Shortages Created When prices are arbitrarily held down by government as in the case of natural gas, a shortage is created or exacerbated. The natural gas crunch in January 1977 can be traced directly to current and past government price controls. These price controls have kept prices arti ficially low and have given incorrect signals to gas producers and con sumers. Low consumer prices have encouraged the ((wasteful" use of gas by discouraging the use of home insulation, alternative fuel sources, lower thermostat settings, and so on. Low producer prices, at the same time, have reduced the incen tives of suppliers of natural gas and served to decrease production. In addition to involving less gov ernment intervention and red tape, 750 THE FREEMAN December price rationing provides a far more predictable method of restricting energy resource use when con trasted with administrative decrees such as mandatory standards for home insulation and auto mileage.

When price increases, people will economize in different ways depend ing upon their own subjective evaluations. If the price of home heating fuel increases, for example, some people will reduce the temper ature in all rooms, some will apply more insulation, some will close off rooms, and so forth. When mandatory conservation standards are imposed, on the other hand, there is little latitude left for individual ingenuity. Everyone is forced to meet the same standard even though people having different tastes and preferences would economize in different ways if left free to do so; or alternatively, indi vidual ingenuity is now channeled to the circumvention of the mandat ory standards rather than to the solution of the problem for which those standards were allegedly im posed. There is no way mandatory stan dards can cater to the diversity of individual tastes or take into ac count the differences existing in lit erally millions of different circum stances. The fundamental inequity of treating people in unequal cir cumstances the same way is ig nored. Why, for example, should the homeowner with children now away from home be forced to insulate his entire house though heating and using only half the house? In this and numerous other examples it is easy to see how the individual homeowner can make an accommo dation much easier to higher prices than to mandatory standards which cannot reflect different tastes and circumstances.

As nonrenewable resources are exhausted, increasing scarcity is re flected in a second way. As price is bid up, the development of substi tute resources is encouraged. The cotton price support program insti tuted in the 1930's, for example, encouraged the development of nylon and other substitutes none of which were predictable when cotton prices were increased. Similarly, in creases in prices of fossil fuel will serve to increase the development of new energy sources. Higher fossil fuel prices serve both to make al ternative fuel sources currently available more profitable and to en courage the development of energy sources not currently available. Conflicts Minimized Finally, the market mInImizes conflicts when compared with non market rationing methods. The market is based on voluntary ex change so that all parties gain when a market transaction takes place. There is little basis for concern or 1978 AUSTERITY, WASTE, AND NEED 751 antagonism when everyone can pur chase all of a product he desires at a specified price.

The situation is much different when rationing is performed by nonmarket methods. The creation of antagonism and conflict is inher ent in nonmarket rationing proce dures since more of a product is de sired than is available at the price arbitrarily held below the market clearing level. In such a situation an individual can legitimately feel that he is in competition with other con sumers for the product whose price is controlled. The equity problems endemic in nonmarket rationing procedures were discussed above. Allegations of antisocial conduct frequently arise where nonmarket allocation procedures are used. Each person has a vested interest in re ductions in consumption by other people when there is a shortage. Individuals consuming more than they cCneed" as perceived by the out side observer are alleged to be wasteful. Since Hwaste" is in the eye of the beholder, efforts to reduce waste must be authoritarian in na ture. Such efforts must be based on the values as perceived by the state and not on the values of individual decision makers.

Blaming Producers Nonmarket allocation procedures also give rise to will-of-the-wisp attempts to determine whether pro ducers are holding back production and whether costs of production are excessive. There will always be a perceived conflict between produc ers and consumers when production is subject to price controls. Consider the action by the Secretary of the Interior in February 1977 to deter mine whether producers of natural gas were cCholdingback production." The allegation was made that pro ducers might be acting against the cCpublicinterest" by holding back on production under the expectation that future prices might be higher. Thus, a producer who reduces the amount of natural gas available for immediate consumption is C(holding back" and is thereby ((antisocial," but a consumer who reduces im mediate consumption practices cCconservation"which is cCsociallydesirable." If a producer were restrict ing production anticipating higher future prices, would such conduct be antisocial? If producers do not follow market signals, they have no way to make production decisions including how much to produce or when to produce.

There are only two ways to allo cate goods and resources-the mar ket and central direction. The mar ket permits people to choose on the basis of relative prices. Since each party gains under voluntary ex change, conflicts are minimized. When economic goods are rationed 752 THE FREEMAN by nonmarket methods, conflicts are inevitable. Since more is desired than is available at the controlled price, measures must be taken to reduce consumption. Austerity mea sures with pleas to eliminate Uwaste" and reduce consumption to the ((needs" level are endemic in nonmarket allocation procedures. Mandatory ((conservation" measures mean that consumers are made poorer by being forced to do without. Conclusions How then ought choices be made in a world of ((finite resources?" Con flicts will be minimized when the rules of the game are such that the marketis mainly relied upon to ra tion goods and the individual citizen bases his decisions on his prefer ences and on relative prices. Admon itions to satisfy essential needs, forego waste, and live in austerity are unlikely to have the effect of feeding the hungry or sheltering the homeless throughout the world.

Forced austerity works against peo ple's willingness to work. If people are prohibited from buying the goods they desire, they will work less and take more of their real income in the form of leisure. What does this mean about the level of living for us as individuals? The attitude that consumers should not be prohibited from acquiring the ((luxury" goods they desire does not mean that we as individuals should follow a pattern of conspicuous con sumption. The question of what goods and services each of us con sumes' is a matter which must be answered by each of us as individ uals. One person cannot identify ((waste" in consumption by another individual except by imposing his own standard of values. There is little question that many of us could benefit from a more austere life style. Yet, moves to impose life styles upon us are at variance with the tenets of a free society. @) IDEAS O;\; LlBEHTY The Ongoing Cost of Liberty THE SEARCH for the maximization of human well-being is a continuing one. Like the search for food, it never ends. We eat today but we will hunger again tomorrow. The cost of liberty is an ongoing cost. It is never paid in full. We achieve some measure of liberty today but we must strive again tomorrow.

Were a totally libertarian society to emerge today, we would have to strive for it again the next day. ROBERT LEFEVRE, Lefevre's Journal, Summer, 1978 Dale. Haywood A HUMAN ACTION TAXONOMY A TAXONOMY is a technique of classification. The zoologist, for exam ple, uses the categories phylum, class, order, family, genus, and species to classify animals. This system of classification makes the zoologist's study more manageable, thus enabling him to ~~peg" correctly any given member in the entire animal kingdom. The student of liberty may also find it useful to have a taxonomy, a taxonomy of human action. In his book, The Law, Frederic Bastiat provides just such a system for classifying human action. With knowledge of this taxonomy, the student of liberty can readily ~~peg" any human action and thus distinguish between actions that promote liberty from actions that erode liberty. I have tried to extract the essence of The Law and put that essence in the form of a diagram-my human action taxonomy.