Living Economics: The Resource Management System

*The game referenced in this article is ‘The Tribez‘ offered by Game Insight UAB.

Economics as we have discussed previously is ultimately the study of how and why people, organizations, and governments create, gather, trade, and divide resources. The study of resource management – taking the resources we have and creating new value.

Macroeconomics (宏观经济学) centers on the bigger picture (macro), assessing how countries and governments create, gather, trade, and divide resources domestically and internationally.

A country’s unique system of managing resources is called their economy. Each country has its own ideals about how the economy should work. The global economy is a much larger, intricate system wherein countries and forces interact – either cooperating or competing in the management of resources internationally.

Countries and governments often face unique issues in resource management compared to businesses and consumers. Significantly, the national government is concerned mostly with managing social resources that can affect millions of people across the country and in nations serving as trading partners.

If the national government wastes its resources or fails to access the resources it needs, the potential damage is inconceivable. Military defense, infrastructure, social welfare . . . many key necessities for the nations’ survival depend on the government having and using its resources efficiently.


The Resource Management cycle is divided into four stages, each with the possibility for disruptions to arise and each having its own issues and concerns.

Below are just a few of the key concepts and questions economists need to consider in their research and discussions.


Create

We have discussed the types of resources previously. Limited or Unlimited, Natural or Man-made. . . . each variety incurs its own issues and needed strategies for resource production.

1) Is a resource ethically moral to produce? ➞ Production may be possible, but is it proper?

“Now, I am become Death, the destroyer of worlds.”

― Robert Oppenheimer (Father of the atomic bomb)

There are some resources that are both highly profitable and highly demanded, but are unethical and dangerous for society to produce. Examples might include prostitution, illegal narcotics, new diseases, and weapons such as the nuclear bomb.

2) Should the creation of the resource be legal?

Piano keys used to be produced with ivory overlays which are generally preferred to modern plastic keys. However, by the 1970s the creation of ivory was more or less illegal due to the impact on the elephant population. Today, although not many prefer them — most pianos are produced using the plastic keys.

Not all resources can be produced legally — either because of bans on the raw materials or the finished good. Generally these bans are the result of ethical interests or concerns over unnecessary consumption of limited / scarce resources.

3) Is creation in the current situation efficient or even possible?

Should Saudi Arabian government invest in the development of the forestry industry given that trees are a limited resource with high production costs? The island of Fiji does not have any diamond mines and are unlikely to find the creation of raw diamonds possible.

Consider the following: Spain is considering the production of Swords (⚔️ ) but has discovered that four other countries have lower costs of production (Italy, Japan, and Mozambique). Should the Spanish companies continue to produce swords even though they are less efficient than the competition?

The Submarine

In this game, the submarine is only available to hunt for underwater treasure where there is ocean nearby. It is not possible to run the submarine without ocean access. Similarly, countries cannot produce resources where the necessarily materials are not available.

4) How to create resources where the supplies are scarce?

South Korea has seen substantial economic and agricultural growth since 1961, but the amount of land mass the country rests on is unchanging. In fact, the amount of land available for farming is declining as the cities grow and expand outwards. As a result, the amount of farming is increasing, but the amount of arable land (farmland) is declining steadily.

Hectares of land available for farming from 1961 to 2018

This leaves both companies and the country in an economic dilemma — with land so scarce, should the country focus on creating crops or creating factory? (*Note this is also part of a “division” stage issue). For every factory a company develops, land that might have been used for farming is erased. For every farm that is developed, there is less land available for factories. So is South Korea going to focus on the production of cars and building factories or the production of food and building farms?


Gather

Gathering involves collecting the resources and transporting either to manufacturers who will develop man-made materials or to retailers who will sell them to consumers. This is where Economics may readily overlap with Supply Chain Management decision-making procedures

1) How difficult or costly is it to gather the resources logistically?

National infrastructure offerings vary by country, the main alternatives are:

  • By Train or Railway
  • By Automobile
  • By Airplane
  • By Ship

Not all options are available in every country; for example, some countries have no railways and land-locked countries may find shipping impossible.

Nor are all options equally convenient or priced. . . . shipping tends to be relatively cheap but slow and with limited destinations available; flight tends to be faster but is more expensive and again has limited destinations.

2) Is it safe to gather or transport the resources?

Some materials require special strategies and plans for safe transportation and storage (e.g. dangerous chemicals, weapons, items not appropriate for exposure to children).

Where the materials need to be imported from abroad, it becomes even more complex as long term transportation becomes necessary and trade barriers arise.

3) Is the transport or gathering of these resources legal?

International supply chains can be particularly difficult due to national differences in shipping and distribution laws. Resources that are legal and available for use in one country may be illegal to transport across international borders. Even domestically, some resources are legal to create and own, but cannot be easily transported (e.g. China bans the shipment of knives or batteries in domestic shipping systems).


Trade

Trade is the exchange of one resource for another, and it is here that governments spend the majority of their focus.

Countries need to ensure that necessities and good resources are efficiently and properly traded, but also that dangerous or undesired resources are successfully prohibited.

The line between resources that are desirable for trade and those that are undesirable is not always as simple as legal versus illegal goods. There are many situations where a resource is both useful and legal, but is not necessarily a resource governments with to trade domestically or internationally. Examples might include the trade of weapons to underage minors or the sale of key national resources to foreign consumers.

In 2008, mainland China experienced a major business scandal when a dangerous chemical (Melanine) was found inside the baby formula of Chinese producer Sanlu. Consumers rapidly shifted to purchasing formula from foreign distributors instead, but this has left those countries with a sustained shortage and rising prices for local parents. In response, countries have established various trade barriers limiting the global trade of baby formula. Hong Kong has discussed (and since implemented) both quotas (limit on the number that can be shipped or purchased) and tariffs (taxes on products exported out of the country) (BBC). Australia has established a quota limiting purchases to two bottles per visit (Wall Street Journal).

1) What resources does the country need and is the country supplying them itself?

Does the national have the resources needed for a self-sustaining economy or is international trade a necessity. Some countries (China, United States) are relatively lucky and have substantial factor endowments (domestic resources) making international trade a possibility but not a necessity for survival. This provides the country with more control over resource management and greater input into trade discussions.

Sometimes countries do not need a resource, but there are key reasons for looking abroad for trading partners. The opportunity to build better political relationships, increase competition in the market, find products with lower costs, increase variety in the marketplace are all attractive incentives for considering the increase of trade.

2) If the product is undesirable, which form of trade barrier will be most successful?

In the event that a country wishes to decrease the production or sale of a resource, there are various economic strategies it may pursue. The most obvious is an outright ban where the product is simply outlawed. This is generally the strategy taken with items like drugs, prostitution, and other highly dangerous or extremely undesirable resources.

From 1920 – 1933, the United States (along with several other countries) banned the sale of alcohol in a period known as Prohibition. While it did substantially decrease the sale of beer and other beverages (US National Library of Medicine), it also created a substantial black market. The same has been true of drugs and prostitutions. When a resource is outlawed, but demand remains — a black market tends to arise and the sale shifts underground.

Thus, some countries choose to establish higher taxes or quotas to limit trade rather than a blanket prohibition. This is a decision countries must make only after careful economic consideration of the supply, the demand, and the probability of trade consequences.

3) Should the government incentivize or encourage certain businesses or industries discriminatorily.

Governments have the ability to protect or destroy businesses at will and can easily influence the trading process. Some economic perspectives (capitalism, laissez faire) argue for less government intervention in the economy; others (socialism, communism, fascism, totalitarianism) argue for greater government intervention. Within a planned economy — the entire process is controlled by government forces dictating to the last unit what is allowed for trade. Other economies prefer to leave what is traded up to the buyers and sellers.

Some economies permit the government to offer monetary benefits to certain “key industries” or “vulnerable companies” — for example proving money to new or small firms. Most countries offer special tax advantages to foreign consumers exporting goods abroad (tax free). This raises the debate of fairness versus economic profitability; should the government discriminate in the aid offered to certain consumers and producers?

Key terms that arise in this area of economic decision-making are:

  • Mercantilism ➔ An old economic theory that countries should sell (export) more than they buy (import) to maintain a trade surplus.
  • Protectionism ➔ An economic strategy stemming from mercantilist ideals wherein the government offers special protections and incentives for domestic producers while erecting barriers against foreign companies.
  • Free Trade ➔ The economic strategy conflicting with mercantilism and protectionism wherein the government eliminates trade barriers and treats domestic and international firms the same legally.
  • Isolationism ➔ An economic strategy where the country completely prohibits trade with foreign countries or companies, keeping its resource management system entirely domestic.

4) Can the Government Simply Take the Resources it Needs from Private Owners

Faceting Shop which produces Jewels

In the example above, there are four equally important and significant needs for jewels in this country.

  • 1) The Candy Store needs the jewels to invest in some new machines. It will then be able to create more jewels at one time with the Standard Deal.
  • 2) The Faceting Shop needs the jewels to produce its jewelry.
  • 3) The Government needs jewels to repair the Wishing Fountain. This will improve the social happiness and bring in new tourists.
  • 4) The Military (also Government) needs jewels to repair the idol and clear away the mists nearby. Only then can it see where enemies are coming from and defeat them.

The government itself is both a consumer and producer of resources. It consumes the factors of production (capital, labor, land) alongside goods and services (computers, vehicles, legal services). In turn, the government produces social resources (utilities, education, infrastructure, national defense).

As citizens, our concern is that the government is in fact the most powerful and wealthiest force in a national economy. Governments generally have the unlimited ability to (amongst other things)

  • Create or invest in the development of any resource
  • Destroy or ban the production any resource
  • Forcibly take or consume any resource
  • Prohibit or severely restrict the trade of any resource
  • Limit the size or shape of the market (e.g. break apart monopolistic firms)
  • Increase barriers to international trade
  • Prohibit or encourage foreign direct investment
  • Control the production or supply of monetary resources through finance and banking regulations

Eminent domain is the right of a government to take privately-owned resources for national use. Resources owned by the government are state-owned; companies or industries owned by the government are state-owned enterprises (SOE). When a government sells off one of its resources or operations to a private company or individual, it is called privatization. When the government purchases a private resource or turns a private company into a government-managed operation, it is called nationalization. When the government forcibly takes resources away from private owners without paying adequate compensation, it is called expropriation.

In our example above, this particular government has three options available to it:

  • 1) Some economic systems (Laissez Faire, Capitalism) limit the government’s power to nationalize resources. In this case, the government can go to the jewel manufacturer and offer a price like any other consumer, but the producer can refuse.
  • 2) Forced Nationalization — forcibly take the resource but pay some form of compensation (ideally a fair market price).
  • 3) Expropriation. The government might say furthering military interests is ‘for the good of the nation’ and simply steal the jewels away without compensation.

Regardless of which choice the government selects, the result will have significant impact on the citizens, workers, and companies in this country.


Divide

Dividing resources involves taking resources that are available and deciding how they will be divided amongst the possible uses.

Scarce resources create trade-offs where using a resource for one purpose eliminates the possibility of using the same resource for another purpose.

Remember the arable land mentioned above in South Korea. Land used for producing corn crops cannot also be used for producing wheat crops at the same time.

Money spent on purchasing raw materials cannot also be spent on labor.

Time devoted to studying for classes cannot also be used working in a company.

If resources are devoted to the wrong purpose, it can increase national shortages and scarcity. This can have substantial negative impacts at the national level.

Assume we have limited food available for use, but many reasons we need it. Just two of dozens of possible uses include producing lumber at the lumber mill or stones in the stone processing mill. The problem is when we use 50 Food for lumber, our quantity of food declines. We then have 50 LESS food available for stones.

Governments and companies face similar choices; they have to decide how resources can be divided:

  • Fairly, Without Bias
  • Equally
  • Efficiently
Key TermDefinition
Free TradeAn economic approach where the government eliminates trade barriers and treats domestic and foreign firms the same legally.
ProtectionismAn economic approach where the government offers special protections and incentives for domestic firms while creating trade barriers for foreign firms
Trade SurplusExports are greater than Imports
MercantilismAn economic theory that suggests successful international trade requires a country to export more than they import
Planned EconomyAn economic policy where the government controls production and consumption extremely strictly.
Black MarketA marketplace where resources are traded without legal permission or at unpermitted prices.
TradeThe exchange of one resource for another
Trade BarrierA law or policy that makes trade more difficult in an attempt to decrease the quantity traded
TariffA tax applied to goods traded internationally (sometimes to exports, sometimes to imports)
QuotaA law limiting the quantity of a resource that can be bought or sold.
BanA law prohibiting the sale or purchase of a resource entirely
EconomicsThe study of how and why people, organizations, and governments create, gather, trade, and divide resources.
MacroeconomicsThe study of how countries and governments create, gather, trade, and divide resources domestically and internationally.
EconomyA country’s unique system of managing resources
Global EconomyThe much larger, intricate system wherein countries and forces interact – either cooperating or competing in the management of resources internationally.
ProducerAn individual or organization that manufactures and/or provides resources for others
ConsumerAn individual or organization that uses a resource for their own personal use
BuyerAn individual or organization that purchases or trades for a resource. They may or may not be the consumer.
Eminent DomainThe right of a government to take privately owned resources for national use.
State Owned Enterprise (SOE)A company owned and managed by the government
NationalizationThe changing of a private organization or resource into something owned by the government (state)
ExpropriationThe changing of a private organization into an SOE, but the government does not pay a fair price to the original owner.
PrivatizationThe changing of an SOE or state-owned resource into one owned and managed by private individuals or organizations.
Foreign Direct Investment (FDI)Resources contributed by a foreign country towards operations it owns or invests in abroad.
*does not include exports (when a company only ships products abroad) or licensing (when a company sells its resources abroad but is not involved in the management of those resources)
IsolationismAn economic strategy where the country completely prohibits trade with foreign countries or companies, keeping its resource management system entirely domestic.

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