Summary: Scarcity is an economic term that describes the mindset people develop when they have many needs and not enough resources to meet those needs. When people operate out of a scarcity mindset, it can greatly impair their decision-making abilities.
Originators: Lionel Robbins (1898-1984), Sendhil Mullainathan (1972 to Present), Eldar Shafir (1959 to Present)
Keywords: paucity, poverty, scarcity mindset, resources, allocation of resources, cognitive load, goal-setting, short-term goals, long-term goals, finances, financial wellbeing, attention, effort, tunneling
Lionel Robbins was the first person to discuss the field of economics using the concept of scarcity of resources. In his article, An Essay on the Nature and Significance of Economic Science, Lionel stated, “Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses."[i]
The concept of scarcity has been further developed since then. Key research on the topic of scarcity has recently been completely by the behavioral scientists Sendhil Mullainathan and Eldar Shafir.
Perhaps the most pertinent example of scarcity is found in people who live in poverty. Research has found that living in a state of poverty impairs peoples’ decision-making abilities. This is because poverty leads to a scarcity mindset that negatively changes the way a person thinks, plans, and operates. Research has shown two main ways in which this happens.
First, living in a state of scarcity, “imposes a cognitive load that saps attention and reduces effort."[ii] Researchers studied low-income and high-income individuals who were faced with a large expense such as a car repair. They found that low-income individuals performed worse on an unrelated reasoning task when they were considering this repair than when they didn’t have additional expenses to consider. On the other hand, high-income individuals performed equally well on the task, whether they were considering an expense or not. The researchers hypothesized that this occurred because the high-income individuals did not have to worry about not being able to pay the expense, and therefore did not have to allocate any of their attention away from the reasoning task.
Second, living in a state of scarcity impairs peoples’ ability to make and carry out healthy long-term goals.[iii] The cognitive load described above leads to bad decision making. People become focused on present, short-term goals such as how to deal with immediate expenses. This is called tunneling – the brain becomes so focused on a particular short-term problem that it can’t focus on anything else.
People who engage in tunneling may make bad financial decisions such as playing the lottery or borrowing too much money. These bad decisions, that they hope will help them deal with the short-term problem of paying for a bill, can lead people into worse situations than they were in before.
From Scarcity to Abundance
Scarcity is also present in other situations such as when workers are not given enough resources to do their jobs or in the aftermath of a natural disaster when there aren’t enough goods to go around. Sometimes people even live out of a scarcity mindset when there are plenty resources to go around. When people make decisions from a scarcity mindset, they hoard resources, only think of themselves, and live with a lot of anxiety.
Steven Covey is a businessman who wrote a book entitled The Seven Habits of Highly Effective People. In the context of business, Covey encourages people to embrace an abundance mentality over a scarcity mentality as they make decisions about their lives and careers.[iv] People with an abundance mentality make decisions out of a mindset that there is enough to go around. They are more generous with their resources, more gracious when other people succeed, and less anxious that they will miss out. They make decisions out of a belief that there is enough to go around.
[i] Robbins, L. (1932). An essay on the nature and significance of economic science. London: Macmillan, First Edition. Retrieved from https://mises.org/library/essay-nature-and-significance-economic-science
[ii] Mani, A., Mullainathan, S., Shafirt, E., Zhai, J. (2013). Poverty impedes cognitive function. Science, 351(6149), 976-980.
[iii] Shah, A. K., Mullainathan, S., & Shafir, E., (2012). Some consequences of having too little. Science, 338(6107), 682-685.
[iv] Covey, S. (2004). The seven habits of highly effective people: Powerful lessons in personal change. NY, New York: Free Press.