Artificial scarcity describes the scarcity of items even though either the technology and production capacity exists to create an abundance, as well as the use of intellectual property laws to create scarcity where otherwise there would not be. The most common causes are monopoly pricing structures, such as those enabled by intellectual property rights or by high fixed costs in a particular marketplace. The inefficiency associated with artificial scarcity is formally known as a deadweight loss.
In a capitalist system, an enterprise is judged to be successful and efficient if it is profitable. To obtain maximum profits, producers may be restricting production rather than ensuring the maximum utilisation of resources. This strategy of restricting production by firms in order to obtain profits in a capitalist system or mixed economy is known as creating artificial scarcity.
Artificial scarcity essentially describes situations where the producer of a product treats an item as scarce even though the producer would not lose the item in the event of someone else possessing it. Ideas and digital information are prime examples of non-scarce products given artificial scarcity, as illustrated in the following quote:
If you have an apple and I have an apple and we exchange apples then you and I will still each have one apple. But if you have an idea and I have an idea and we exchange these ideas, then each of us will have two ideas.—Phi Kappa Phi Journal
Even though ideas, as illustrated above, are non-scarce, they are often treated as intellectual property, and are allotted artificial scarcity.
Economic actions that create artificial scarcity
Arguments for and against
Economic liberals argue that mechanisms that cause artificial scarcity are favourable to society as a whole since they encourage creativity.
Artificial scarcity is said to be necessary to promote the development of goods. In the example of digital information, it may be free to copy information ad infinitum, but it requires a significant investment to develop the information in the first place. In the example of the pharmaceutical industry, production of drugs is fairly cheap to execute on a large scale, but new drugs are very expensive. This is because the initial investment to develop a drug is generally billions of dollars, due to strict regulation. Typically, drug companies have profit margins much higher than this initial investment, but the high payoff also attracts many companies to compete, increasing the pace of drug development. A feature of many economies is also time limit in patent rights; after a set number of years enjoying an artificial scarcity, the patent wears off and cheap generic versions of a product enter the market. Thus, the drug developer gets a return on investment, and other companies subsequently compete to lower prices.
An economic liberal argument against artificial scarcity is that, in the absence of artificial scarcity, businesses and individuals would create tools based on their own need (demand). For example, if a business had a strong need for a voice recognition program, they would pay to have the program developed to suit their needs. The business would profit not on the program, but on the resulting boost in efficiency caused by the program. The subsequent abundance of the program would lower operating costs for the developer as well as other businesses using the new program. Lower costs for businesses result in lower prices in the competitive free market. Lower prices from suppliers would also raise profits for the original developer. In abundance, businesses would continue to pay to improve the program to best suit their own needs, and increase profits. Over time, the original business makes a return on investment, and the final consumer has access to a program that suits their needs better than any one program developer can predict. This is the common rationale behind open-source software, such as Mozilla Firefox.
Social liberals, socialists, and anarchists argue that artificial scarcity is beneficial for the producer, but unfavourable towards the consumer, as it enables the producer to capitalise off ideas and products that are otherwise not property in the physical sense.
Socialists extend their argument to include "socially wasteful production" such as the production of goods which are seen as "status" goods (e.g., diamonds or expensive cars). This sort of production leads to a situation of artificial scarcity of socially useful goods because a large part of society's resources are being diverted to the production of these goods. For example, capitalism has led to the growth of money-based activities like banking-retailing services, remedial measures to deal with trade union issues, and other such activities to protect capitalism, such as weapons research and the development of security firms; socialists argue that the allocation of resources to these activities is not socially useful.
Some socialists argue that not only artificial scarcity but even the doctrine of scarcity itself is a creation of the capitalist system, because any kind of property was considered a burden for the nomadic lifestyle when civilisation was in the hunter-gatherer stage.
- Phi Kappa Phi (1952). Phi Kappa Phi journal. 32–34. Honor Society of Phi Kappa Phi. p. 45.