HOBBES: Do you have an idea for your story yet?
CALVIN: You can't just turn on creativity like a faucet. You have to be in the right mood.
HOBBES: What mood would that be?
CALVIN: Last-minute panic.
When online gaming company Zynga went public in the US a few years ago, it warned investors of a weird problem it was having. "Many of our employees may be able to receive significant proceeds from sales of our equity in the public markets after our initial public offering, which may reduce their motivation to continue to work for us," it wrote. Employees were so well paid they were getting lazy.
Mae West said "having too much of a good thing can be wonderful." But it can also be a curse. Scarcity has benefits that managers, investors, and everyday people habitually ignore.
The blessing of scarcity
In their book Scarcity: Why Having Too Little Means So Much, Sendhil Mullainathan and Eldar Shafir write:
"When scarcity captures the mind, we become more attentive and efficient. There are many situations in our lives where maintaining focus can be challenging. We procrastinate at work because we keep getting distracted. We buy overpriced items at the grocery store because our minds are elsewhere. A tight deadline or a shortage of cash focuses us on the task at hand. With our minds riveted, we are less prone to careless error. This makes perfect sense: scarcity captures us because it is important, worthy of our attention."
Nassim Taleb writes about the same idea in his book Antifragile: "The record shows that, for society, the richer we become, the harder it gets to live within our means. Abundance is harder for us to handle than scarcity."
Accelerator down… where are the brakes?
That's pretty much the story of the last three decades. In 2002, Alan Greenspan told the US Congress that "children, dogs, cats, and moose are getting credit cards." It was record abundance, where nearly anyone could buy nearly anything, but it nearly ruined the US economy. It took 10% unemployment and a 50% market crash — widespread scarcity — to get people to cut up credit cards, sell the stuff they never used, and start saving money again.
The US meltdown might be the most memorable example, but Australians were far from immune. Back in 1983, the Australian household savings ratio was over 15% of disposable income. By the late 1990s, it was under 5%, and the first decade of the new century bought us a saving rate at or below zero on four separate occasions.
The prosperity of the early 2000s gave us some of the dumbest financial behaviour ever seen, while the pain of the last five years brought out some of the smartest, most rational behaviour witnessed in decades. Our savings rate, for example, went from zero to almost 13% in the space of two years.
The mother of invention
It's hard to accept that people act smarter and more efficient when the economy is weak, because no one wants a weak economy. But it's often the case, especially among businesses. Necessity is the mother of invention, and there's evidence that entrepreneurship increases during recessions.
The supermarket and laundromat were both created during the Great Depression as solutions to a weak economy. Penicillin didn't go into widespread use in the medical field until World War II necessitated near-frantic scientific development. "The excess energy released from overreaction to setbacks is what innovates!" Taleb writes.
This has obvious limits. The working poor have been criticised as lazy and unwilling to take responsibility for their own success. But as Ezra Klein wrote a few years ago, these critics "don't seem to realise how difficult it is to focus on college when you're also working full time, how much planning it takes to reliably commute to work without a car, or the agonising choices faced by families in which both parents work and a child falls ill. The working poor haven't abdicated responsibility for their lives. They're drowning in it." The poor devote so much effort to keeping their heads above water that they can't spare a second to think about how to get ahead, and scarcity of time creates a scarcity of opportunity.
Foolish takeaway
But for most of us, life is pretty good right now. And it's getting better, with scarcity on the decline. Take these recent US headlines: "Household Net Worth Hits Record High," and "U.S. Regains All Jobs Lost in Recession." That's great news – for Americans and for the global economy. For better or worse, the US is the global customer of last resort. I don't want to go back to where we were before. But there were benefits of the downturn we may miss.
