Like Paul and Paciolo Inc., societies can be said to make choices. It's a figure of speech we use all the time, speaking of the "American" decision to go to war with Iraq or the "French" decision to ban British beef. But it's important to remember that it is a figure of speech. Paul and Paciolo, or Paciolo's managers and owners, do make decisions. But a whole society will contain people who disagree with a decision, and without one voice, therefore, the whole society cannot be said to have "made" it. The rule may be the majority, a bureaucrat, or a dictator who decides everything down to a ban on chewing gum (Singapore, oddly, though a market society, has this arrangement). If some disagree, it is the majority, or the bureaucrat, or the dictator, whose will is being expressed. In a famous remark that got her into lots of trouble Margaret Thatcher, the British prime minister from 1979 to 1990, said that "There is no such thing as society: there are individual men and women, and there are families." She meant that what matters, what is "real," are individuals such as Boy George and Tony Blair, not some imagined community called "the United Kingdom."
A social choice is said to be a choice made by some social entity, such as a community, a city, a state, or a country. It's a figure of speech, useful or not, and contains the political opinion that, contrary to Margaret Thatcher, a single-voiced "society" does exist.
The production possibilities curve
The economic theory of this so-called social choice, developed in the 1930s and 1940s in economics, copies the logic of personal or business choice. During the crises that capitalism faced in those terrifying decades the economists wanted to talk of a unified, single-voiced "society." If you're fighting a war to the death against fascist Germany, Italy, and Japan you naturally want to think of the nation as a "society" having goals like a single person. A social entity such as the nation was said therefore to have "tastes" and "constraints."
Economists sharply disagree with each other about whether such talk makes a lot of sense, most particularly the analogy of "social" with personal tastes. After all, you like chocolate ice cream. He likes vanilla. She likes peach. Talking about the social taste for ice cream buries the differences. Someone's tastes get overridden, ignored, if The Society decides to offer only chocolate ice cream. The economists who object to "social choice," such as the Nobel laureate James Buchanan (b. ****), prefer to think of public choices---how much to spend on bombing Germany in 1944, whether or not to offer free health care to all American children---under a standard of everyone agreeing. The decision must be unanimous, a word which means in Latin "one-spirited." Economists call it the "Pareto criterion," after the Italian economist Vilfredo Pareto (1848-1923) who stressed it, following the Swedish economist Knut Wicksell (1851-1926).
It's much less controversial to say that a nation, like a person, a nation faces resource constraints in trying to indulge those controversial "social tastes." You can add up individual income/expenditure statements to make a national income statement. You can add up individual constraints on what can be done to make a national constraint on what can be done.
A nation for example can never commit as many resources to defense and non-defense priorities as it would like. Resources are scarce and the nation must choose. In 1953 President Dwight D. Eisenhower described what he saw as the excessive cost of U.S. commitments to military defense, using this very way of thinking: "Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, and the hopes of its children."
In order to make prudent choices-producing, say, more food at the cost of fewer guns-the political leaders of a nation would like to have the "national account" similar to the "private accounts" used by a perfectly prudent individual like Paul or by businesses like his father's. Chapter 24 will present the accounts in amazing detail. But here we use a closely related but simpler method called the production possibilities curve, known familiarly to its many economist friends as the "PPC." It shows what a person or a nation can consume, what they can (economists shiver with disgust at the word) "afford." It might as well be called the consumption possibility curve. The "curve" is the line distinguishing Can from Can't. You can't have more and more and more of both guns for defense and food for children. Scarcity sets a limit. The limit is the production possibility curve.
Figure 2.5 The production possibilities curve
Caption Figure 2.5: The production possibilities curve shows the limits of consumption of two kinds of goods. At any one time-under a given resource constraint-society can't have more of everything. In order to get more food, it must give up some defense.
Imagine a "society" made up of literally one person. That would certainly solve the problem of adding up the tastes of two, three, four, . . . 300,000,000 people! Call the one person Robinson Crusoe. The reference is to Daniel Defoe's famous novel.
Crusoe needs food but also a defense against potential intruders. His time is limited. The production possibilities curve shows the limited choices a society (of one or more) can make from among the things it is capable of producing. Crusoe can acquire at most a certain level of defense, at the point marked "Most Defense" in the diagram. At this point he is getting no food at all because he is devoting all of his time and other resources to defense.
Caption: Daniel Defoe (c. 1660 - 1731), British author, political partisan, and journalist, with an economic frame of mind.
Crusoe of course wants a good many things, not just two. He might want clothing or time to pray or the ability to build a dug-out canoe to get off the wretched island. But think of our "Food" here as simply "All Goods Other Than Defense." If Crusoe chose to spend all of his limited resources on producing food, he would achieve the other extreme point, labeled "Most Food." (Remember that "resources" are not only "natural resources," but all the means of producing food, which includes farm labor and truckers and grocery stores.) But the more food he chooses, the more defense he will have to give up. In other words, the production of food has an opportunity cost in terms of defense, and vice versa. There is a clear "tradeoff" between the two.
Let's measure food in pounds, with "Most Food" being 600 pounds per year. And let's measure the defense provided by his stockade in "nights of undisturbed sleep." If he spends every day strengthening the stockade, that will be 365 peaceful nights a year. If he goes for Most Food, he won't have a single undisturbed night of sleep all year long. The opportunity cost of the 600 pounds of food is 365 peaceful nights.
Being a sensible fellow, Crusoe will choose what he regards as the best point on the production possibilities curve. That's where "taste" comes in. That is, the location of the best point from his point of view will depend on his tastes - in other words, the relative value he places on food and defense.
The PPC tells us nothing about Crusoe's tastes. So it can't tell us which point (which combination of food and defense) he would choose. What we can say, however, is that a prudent Crusoe would not choose a point inside the curve, such as the "inefficient" point labeled "I." He would not want to waste time and other resources by leaving the stockade gate unlatched or by letting some food spoil. As Crusoe himself put it, "I recovered myself with this satisfactory reflection that I had lost no time, nor abated any diligence." He would rather do the prudent thing, working hard and choosing a combination of food and defense that is right on the curve (like Point P).
Crusoe's situation is analogous to that of a well-functioning society. Adam Smith who said, "What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom." Such a society will choose what it regards as the best point on its production possibilities curve. It will want to avoid points inside the curve like point "I" because such a point represents an inefficient (that is, wasteful) use of resources. When the society's resources, its means, are not being fully utilized, the society can increase the production of one good without giving up any of the other good. Opportunity cost is suspended---as long as the society is inside its PPC. Economists call such a situation "mass unemployment" or just "gross inefficiency." If by some mysterious process---a process we are going to reveal to you in this book!--- a society of 300 million people were to behave like Crusoe, it too would seek to operate at a point on its production possibilities curve. This would mean that it was using all of its resources, including its labor force, efficiently.
Note the curvature of the production possibilities curve, bulging outward. It tells you that if Crusoe wants a little more food, the Defense he has to give up steadily rises. until he's producing all Food and no Defense. Notice, in other words, what happens to the slope, the rise over the run, as Crusoe moves down the PPC from Most Defense to Most Food. As he devotes more and more of his resources to Food production, the opportunity cost of producing food goes up.
Look at Figure 2.6. At point A, virtually all of Crusoe's resources are dedicated to the production of Defense. At this point if he wants an additional ten pounds of food it costs him only five undisturbed nights to get it. At point B, however, it costs him twenty undisturbed nights to produce the additional ten pounds of food. The curvature of the PPC describes this worsening of the trade-off between Defense and Food as Crusoe moves toward the Food Only end of the curve.
Figure 2.6 The curvature of the PPC indicates changing "marginal" opportunity costs
Caption Fig. 2.6: The bowed shape of the production possibilities curve implies that the trade-off between Defense and Food changes as Crusoe moves toward either end. If he starts at point A, with most of his resources dedicated to the building of stockades, he can produce an additional ten pounds of Food at the expense of only five nights of undisturbed sleep. If he's gotten over to point B, though, the cost of an additional ten pounds of Food has gone up to twenty undisturbed nights. Specializing in one thing is expensive in the opportunity cost of the other things.
Figure 2.7 shows how the addition of resources to Crusoe's economy will shift the entire production possibilities curve outward. Now he can have "more of everything," at any rate until he bumps into the new, higher PPC. When Friday joins Crusoe---in the novel, Friday, who escaped from cannibals, becomes Crusoe's servant---the entire society, which now consists of two workers instead of one, is able to produce more Defense and more Food. This is a deep point, actually, and shows why economists are not as alarmed about world population increase as most other people are. As we'll explain in the chapters on foreign trade, within broad limits the more the merrier. More people can specialize and trade and make each other rich.
Figure 2.7 An increase in resources shifts the PPC outward
When Friday joins Crusoe's society, the production possibilities increase: the society will be able to produce more of Defense as well as Food. Consequently, the curve shifts outward. (Because he cannot produce more than 365 nights of undisturbed sleep, the upper limit for Defense remains the same.)
Concept Check 9: What would it mean to say "The U.S. economy is currently operating inside its production possibilities curve"?