Critique

The scarcity theory suffers from a fatal ambiguity. When it was originally formulated in relation to consumption, scarcity was correctly defined with respect to demand. As the theory was extended to cover production, scarcity came to be defined as a technological relationship. As the ratio of two factors declines, the factor in the numerator becomes relatively scarce. The two concepts of scarcity may coincide, but they need not. They may be made identical by special restrictive assumptions, but this is artificial. If a country is technologically capital abundant (K/L high), it may nevertheless be economically labour-abundant when tastes in the two countries are different or if there is permanently high unemployment. Thus, it will try to export labour, not capital, in terms of commodities. Also, the theory is in difficulties when more than two factors of production are involved. The third main point of confusion is that the scarcity theory with respect to factors of production was developed for single industries. Thus, the composition effect was not noticed. Any real-world economy is composed of different industries that may vary substantially in their capital intensity.