Choice is an important element in economic thinking if there are scarce resources and infinite wants. Places that are booming will have to make choices, as the resources needed to sustain development will be in high demand but not freely in supply. In residential development, the use of materials may have been formed by an economic choice based on the cost – such as due to the high price of steel in production methods. In essence, choice is generated because scarce resources cannot meet infinite wants. Classic economic textbooks would say that choices are necessary because there are insufficient resources to satisfy all human wants. This is also why the discipline of economics is, on occasion, referred to as the ‘science of choices’.
In exploring the key economic questions further, the question of ‘for whom to produce goods and services’ is important. There will be a choice made by society as to whose wants will be satisfied and whose will be left unsatisfied. This is because different people and organisations at different periods of time make choices. These choices could be made both individually and collectively by different stakeholders such as consumers, businesses, unions and governments. For example, governments could decide to control and incentivise the level of development on Brownfield sites by investing in regeneration and renewal for those areas previously experiencing an industrial decline. This, in turn, would aid less prosperous and declining regions and provide the potential to satisfy some of the wants of disadvantaged places and people that would have not been satisfied without a redistribution of resources.
The level of influence in choice by these people and organisations differs among economies. In the regeneration and renewal example, market intervention to act as a catalyst for a redistribution of resources will only be possible if a nation’s government has the political will and resources available to enable such a course of action. This raises questions as to whether there is always a choice in society. For a particular city, there may not appear to be a free choice with respect to a household choice of school, healthcare, employment, housing, safety and local environmental quality. Some disadvantaged households could claim that they incur multiple hindrances, possibly so much so that economic and community constraints inhibit the choice to move to a more prosperous location. Ultimately, it can be argued that there is a choice made by society to enable those without a choice to have one. The availability of one vote per person is a solid foundation on which lies free democratic choice in western political systems.
Economically speaking, rather than politically, the opportunity cost is one concept that can be used to demonstrate how economic choices are made. Opportunity cost is seen as the cost of forgone alternatives. As an example, the opportunity cost of public money being put into a public road is the cost forgone in providing more public funding to schools. In short, more roads will mean a choice to have fewer schools, a £/$500 million motorway extension has an opportunity cost of a £/$500 million publically funded school. The opportunity cost is the £/$ 500 million school cost forgone. Choices, therefore, involve alternative courses of action that are decided upon, and these alternatives may not simply be one or the other but alternatives that could be ranked in best preference. A more precise measurement of opportunity cost could therefore be the sacrifice of the best alternative choice. If the next best alternative to building a road is to maintain the land as wetland, the opportunity cost of building the road is the sacrifice of the wetland. To place some sort of value on the opportunity cost of sacrificing a wetland, some economic tools will need to be used, such as cost-benefit analysis.
So the questions of choice with regards to what, how and to whom goods and services are produced are attributed to the fundamental basic economic problems. However, these major questions take differing magnitudes and focus depending on the economic scale of enquiry – such as the microeconomic or macroeconomic scale. Theory of microeconomics and macroeconomics and their application to development issues will now be unpacked to demonstrate the varying nature of the enquiry that can be covered. As a definition, microeconomics engages with the branch of economics that studies the economy of consumers, households or individual firms. This is different to macroeconomics, which, by definition, is the branch of economics concerned with aggregates, such as national income, consumption and investment. For development, microeconomics would focus on, say, disaggregate household consumption of fuel within a particular city, whereas macroeconomics would focus on the aggregate national output of completed construction projects.
Microeconomics concentrates at a more disaggregate scale and can therefore provide specific detail on products, the methods used, distribution and efficiency. The specific products can be analysed with regard to what and how much of particular items are being produced. This could be how many cars are manufactured at a specific plant in a city. The methods used could entail the way in which the assembly line is organised at such a manufacturing plant, which may affect the flexibility of employment practices. Distribution of goods and services can be analysed under microeconomics, and especially as to how they are divided as a proportion to different strata of society – such as analysis of who has access to the consumption of car use. With regards to efficiency, this type of microeconomic analysis can begin to provide a better understanding of whether these production decisions, which have been made, are giving good outputs considering the inputs into the process. Using the city car-manufacturing example, do the factors of production going into the process (land site, skilled and unskilled labourers, capital – machinery, entrepreneurship – CEO) provide a greater value in outputs such as added site value, a living wage, capital returns or company profits.
Macroeconomics takes a bigger, broad-brush picture by aggregating many microeconomic concepts and concentrating on wider market forces. Three key macroeconomic concepts involve utilisation of resources, the influence of inflation and the importance of capacity. With regards to utilisation, the issue centred on is whether resources are actually being used. There could be a situation where labour, for instance, is being under-utilised and, as part of the wider macroeconomic picture, could be having detrimental economic consequences for society. Unemployment and lay-offs at a car plant in a major industrial area may make microeconomic sense in terms of efficiency but could be a significant macro-economic cost in terms of wasted labour, benefit costs and costs to socioeconomic well-being for potential future productivity.
Inflation as a macroeconomic concept looks at what are the causes and consequences of the change in the purchasing power of money. Inflation, more specifically, is the overall general upward price movement of goods and services in an economy, usually measured by a Consumer Price Index (e.g. in the UK) and the Retail Price Index (in the US as the Consumer Price Index and the Producer Price Index). If there is an upward movement in the price of goods and services it will mean that the currency used (e.g. pound or dollar) would have less value because fewer items in the same standard basket of household goods would be able to be purchased. To use an example from the built environment, if the price of houses began to increase, it would mean (ceterus paribus – other things remaining equal) that fewer houses could be bought for the same amount of money – in effect, relative to house prices, money has lost some of its value or purchasing power. For those that previously owned property, they will have gained some of the rewards from house-price increase, which will balance out against any relative losses in the purchasing power of money.
Capacity is the third key theme of concern for macroeconomics and takes into consideration a wider view – what is the economic capacity for growth of goods and services. The economic output of some cities will vary in terms of how much product or service can be generated given the factors of production available. For instance, there is a current capacity for a city to manufacture goods such as bicycles and computers, or provide services such as housing maintenance. Taken at an aggregate, macroeconomic scale, the capacity for a city to enable skilled service production, say in terms of web development, will depend on the number of available skilled workers available in that city. Macroeconomic considerations, therefore, can look at themes such as utilisation, inflation and capacity; at wider geographical scales higher than the firm or household but also lower than national boundary scales such as at the city scale.
Output at the city scale is often measured in terms of GVA (gross value added), which is an aggregate productivity metric that measures the difference between output and intermediate consumption. GVA provides a currency value for the amount of goods and services that have been produced, less the cost of all inputs and raw materials that are directly attributable to that production. In essence, GVA can reveal, at a city scale (but also at a microeconomic scale for an individual firm), how much money the products or services contributed towards meeting companies’ fixed costs and providing opportunity for a bottom-line profit.
As in the example of GVA for urban areas, measures of value can be of concern to both microeconomics and macroeconomics. Alternative economic scales of enquiry can be used within the discipline, especially as we have demonstrated that some economic phenomena can affect both microeconomic concerns, such as the effect of inflation on a good or service for a firm, as well as the impact of inflation on a wider national economy. A further economic scale of enquiry is what has been termed the ‘meso-economic’ scale of enquiry. Meso-economics is a term that is used to describe the study of economic arrangements that are not based either on the microeconomics of buying and selling and supply and demand, nor on the macro-economic reasoning of aggregate totals of demand. It, therefore, takes more of a structured approach, but one that is possible to measure, and dates from the 1980s where it was questioned whether there would ever be a bridge between the two main economic paradigms in mainstream economics.
To use a meso-economic example in development issues, it would involve analysis of unemployment in an urban area. Here, for example, information asymmetry, where one party has more or better-quality information than the other party, is used to gain better employment prospects, contrary to normal economic reasoning where actors gain by increasing the rate of dissemination of information. Information and knowledge as wealth and power are discussed in terms of behaviours between the different parties, rather than microeconomic analysis of supply and demand of information, or what the aggregate totals of this supply and demand are for a bounded subject of enquiry such as a city or a nation. The cooperative and competitive (or even evolutionary) nature of a city’s actors and organisation, determining what natural resources will be utilised, could therefore be one area of meso-economic sustainable development enquiry.
A full and formated version of this post can be cited ‘Chapter 4: The basic economic problem in shared spaces’ in Squires, G. (2013). Urban and Environmental Economics. Routledge