Energy and resources


3. Every economic activity uses energy and resources that might have sustained other economic activity.

Almost everything we do involves time and possibly effort that could have been spent doing something else. The activities we choose displace the ones we could have done in their place. When we buy something, it is at the expense of other things we might have bought with the money. Economic production uses the investment and materials which might otherwise have gone to produce something else.

When government engages in an economic activity, it uses the resources that might otherwise have sustained other activities. Government does not add economic activity; it diverts it from some outputs into others. The money government uses for its activities, whether acquired from taxes, borrowing or inflation, takes resources that could have been used elsewhere, and inhibits the economic output they might have generated.

Governments sometimes claim that their 'stimulus' puts into production resources that would otherwise have gone unused, and therefore boosts the overall performance of the economy. In fact, though, there are rarely "idle resources" which governments can bring to play their part in production. When people choose to save instead of spend, for example, unless savings are kept in tin boxes under the bed, they are normally used for investment by the institutions people choose to save with. Instead of being economically idle, savings are normally used to buy different (producer) goods rather than the consumer goods they might have bought if the money had been spent. What the government 'stimulus' does is to generate production in areas where there was insufficient demand in the real economy to achieve this. The result is to send false signals that lead to misallocation of resources and distortion of the economy.

There are corollaries of the idea that one economic activity takes place at the expense of another. We speak of "opportunity cost" to indicate what the money to finance an activity might otherwise have bought, such as the interest it could have earned. We speak of "crowding out" to highlight how government spending reduces the private consumption or investment which could have taken place otherwise. A government construction project uses thousands of inputs such as labourers, concrete, metals, transport, etc., most of which would otherwise have been used in other projects, quite apart from the money it diverted from the private sector.

The observation means that no economic activity stands alone. It meshes into the rest of an economy in motion, and must be seen in the light of the activities which might have happened instead.

This is part of Dr Pirie's ongoing series: Philosophical Observations on Economics.