Let’s talk about scarcity: what it is and how it relates to dollars, gold, and bitcoin.
Let’s start with the definition. Scarcity is the gap between the limited supply of various resources and the limitless human shortage. The principle of scarcity is a central concept in economics. Thomas Sowell, an economist at the Hoover Institute, defines economics as:
“The investigation of the allocation of scarce resources with alternative uses.”
There are two different types of scarcity: relative scarcity and absolute scarcity
We’ll talk about relative scarcity first, and we’ll use gold, a relatively scarce commodity, to illustrate this. When the demand for gold suddenly spikes, the price of gold rises, but given the higher prices, gold miners will work overtime and upgrade all of their equipment to produce as much gold as possible because profit margins will drop higher than they normally are. But if the gold diggers extract more gold and increase the supply, the price of gold will decrease as supply and demand reach their original equilibrium. In general, this means that relatively scarce goods have no fixed supply. So if demand increases, then supply will eventually increase to meet demand.
Okay now let’s go in absolute scarcity, and we’ll use the Mona Lisa as our example. If the demand for the Mona Lisa increases, so will the price. However, the supply will not increase as it is impossible to make another Mona Lisa. The original creator, Leonardo Da Vinci, is dead, so he cannot make another exact replica of the painting. Nobody can. So the price will stay until the demand for the painting drops. This means that if there is an absolute scarcity, there is a finite, fixed supply of a good. When the demand for an item increases, there is no additional supply response to meet that increased demand. This means that the supply is completely inelastic. You can’t do more regardless of the increasing demand. The only issue that can change is price.
The dollar is not scarce because central banks can print it at any time
In economic crises, when people don’t have a lot of money, the demand for the dollar increases. Central banks therefore print money in circulation so that the money supply can meet the new increased demand for money. Bitcoin, on the other hand, is absolutely in short supply. The number of bitcoins in circulation will never exceed 21 million, according to the protocol. So when the demand for bitcoin increases, there is only one variable that can change to ensure that the demand and supply for bitcoin are in equilibrium, and that is price. While absolute scarcity is what makes Bitcoin so valuable, it is the same property that tends to make price volatile.
To sum up:
- The dollar: not scarce, created at will – “The US Federal Reserve has an infinite amount of cash” – Neel Kashkari, Chairman of the Fed in Minneapolis
- Gold: Relative Scarcity – Gold is only scarce in relation to the amount of energy that is put into mining. If we gave everyone a shovel and told them to start mining, we would flood the market with a lot more gold and make the price go down.
- Bitcoin: Absolute Scarcity – No matter how much energy is put into mining Bitcoin, the rate of issue and the limited supply remain the same.
The big question is why does it matter what kind of money an economy uses?
Put simply, the scarcer a currency is, the more conducive it is to economic growth. Economic growth is the creation of new products and services in an economy, and the best way to stimulate it is through savings and investment. Inflation, which we get under a currency that is not scarce, reduces the effectiveness of saving and investing because we lose our purchasing power.
So when you see the headlines about stimulus packages being passed, understand that they are printing money to get it done.
In fact, 20% of the US dollar was printed in 2020 alone. All of this money printing causes inflation and stifles economic growth. Bitcoin gives us the opportunity to take government out of the equation and build a more solid economy.
This is a guest post by Siby Suriyan. The opinions expressed are solely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.