The Problem of Economics:
Milton Friedman, like Robbins, is of the strong view that economic problem arises when people try to satisfy their endless wants with limited resources which have alternative uses. These three basic facts of economic life which give rise to problem of economics are now discussed in brief.
Human wants:
Economic problem of mankind owes its origin to the fact that human wants are unlimited. They go on increasing with the (i) rise in standard of living of the people (ii) increase in inventions and knowledge (iii) advertisements influence, (iv) biological requirements (food and water). Another feature of human wants is that all of them are not equally important and urgent. They can be ranked in order of priority. The end of wants of a person comes only with the end of his life in this world.
Scarcity of resources:
The scarcity of resources is a relative term. Scarcity of resources means that all the resources (i) natural (land, water, mineral) (ii) human (manpower) and man made (machinery, technology etc.) are not available in as much quantity as they are needed. Scarcity of resources is in fact the mother of all economic problems. In case the resources were unlimited like the human wants, then no economic problem and no subject of economic problem would have arisen. Economic problem has arisen simply because as one want is satisfied, another appears on the scene. We can liken this to a sea saw which has on the one end finite or limited resources and on the other unlimited or infinite wants.
Scarcity of resources and choice:
The third element which gives rise to economic problem is the allocation of resources which have alternative uses. However, rich a person, a society, a country may be it has to make choice between the alternative uses of scarce resources. For example, an industrialist can use his limited capital for the production of consumer goods, for the production of capital goods, for the purchase of vehicles for transportation of goods and for many other purposes at any point of time. Since the capital can be allocated for more than one uses, the industrialist would invest his capital in that use which gives him the maximum return. The industrialist evaluates the cost and benefit of alternative options and then employs his resources which yield optimum earnings. Thus scarcity of resources having alternative uses necessitates choice which is fundamental to every economic problem.
Basic problems of an economy:
The resources are scarce and human wants are endless. The problem of scarce resources and unlimited wants is faced by all the economies of the world whether they are rich and poor, developed and underdeveloped. All the nations are, therefore, making efforts to achieve maximum efficiency in production and distribution from the scarce resources at their disposal. In achieving this goal they are faced with the following three kinds of problem which are called Basic Problems of an Economy. (i) What to produce? (ii) How do produce? and (iii) For whom to produce.
- What to produce? The problem what to produce is the problem of making a choice between the commodities to be produced. Since the resources at the disposal of a society are scarce, therefore, it has to decide which goods and services are to be produced and in what quantities. The decision about the allocation of resources between the production of consumer goods or capital goods, between guns or butter’ is of utmost importance from the point of view of economic, growth. A nation should allocate the scarce resources in such a way that maximum production is achieved from the limited resources. The objective to be achieved is to satisfy the maximum needs of the people.
- How to produce? The problem of how to produce means which method of production or which combination of resources is to be used for the production of goods. Since the resources are scarce, a nation should use the techniques of production which are most efficient and economical. The society has to choose the least cost combination of producing the goods. For instance, cloth can be produced with either handlooms (labor intensive technique) or power looms (capital intensive technique). The society, depending upon its resources and the state of technology available to it should use the most efficient method of production.
- For whom to produce. For whom to produce means how the output of goods and services produced is to be distributed among the people in a society. Here the resource owners who have contributed to the production of goods in the economy are to be fairly rewarded. The land owner should be paid rent. The workers should get wages. The capitalists are to receive interest and the entrepreneurs are to be rewarded in the form of profit. So deciding about whom to produce requires as to how the reward of each factors of production is determined. The answer to this question is provided by the theory of factor pricing.
We thus conclude that economic problems arise because of the scarcity of resources, ever growing human want and ensuring efficiency in the production and distribution of goods and services.
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