

Dan Nixon.


The rise and rise of psychology in economics

Over recent decades there’s been a step change in the use of ideas from psychology in economics research.

The vast literature on behavioural economics, for example, has challenged the core assumptions of an entirely rational, self-interested account of human behaviour.  Much, too, has been written on the economics of happiness and how we might improve on GDP per capita as a measure of progress.  Even aside from research, the way we consume things (ie our economic activity) has become increasingly psychological over time:  as basic needs are met with greater ease, the argument goes, we consume “ideas” (such as information in blogs) more than “stuff”.

Far less has been written about the psychological aspect of scarcity. Yet this could have big implications, given the central role that scarcity plays in economic theory.

Scarcity and “the economic problem”

Many economics textbooks define the subject as “the study of how society uses scarce resources” in a world in which we have “unlimited wants” (Samuelson & Nordhaus (2009); see also Mankiw (2015)).  Scarcity, then, is arguably the central concept of economics, underpinning the existence of all markets.

Not that this focus on scarcity is without its critics.  Some have questioned whether excess makes more sense as the fundamental problem for social scientists to investigate.  Many environmental economists, meanwhile, challenge how well capitalist economies (and mainstream economics) deal with the scarcity of the planet’s natural capital in the face of ecological degradation.


When it comes to thinking about scarcity from a psychological angle, Mullainathan & Shafir (2013) note that if you are poor and struggling to make ends meet then you have no choice but to pay close attention to how you are going to pay for the next meal, bill or rent payment.  Having to think carefully about money all the time acts like a tax on your brain – leaving you with less bandwidth to use for other purposes, such as learning new skills.  This, they go on to argue, helps to explain why the poor stay poor.

While they make a powerful point, they treat many inherently psychological things (like desires, preferences and utility) pretty much in line with standard economic theory – adding to this a psychological dimension to scarcity (albeit an important one).

But I would argue that you could go further than this.

Can we think of scarcity in entirely psychological terms?

An economist might reason as follows.  Individuals maximise their utility.  Their desires are taken as given and their preferences are revealed by what they choose to consume.  Resources are scarce, and this is why we cannot all have everything that we would like.


From the perspective of psychology, however, you might get a pretty different account of what’s going on.  Much has been written about the psychology of desires and what makes people happy – and one strand of this work is to take into account people’s subjective experience.

My argument is that a similar approach can be taken to understanding scarcity: that scarcity – and hence the very core of “the economic problem” – at root relates to the question of whether or not we feel we have “enough”. My focus here is on what scarcity means in the context of people who have already achieved a certain level of affluence and whose basic needs have been met (and not, therefore, cases of poverty).

Scarcity construed as a subjective sense of “not having enough” opens the door to an interesting possibility: that, at a psychological level, scarcity could be absent entirely.  We could call this condition an “abundance” mindset.

The question is then:  what constitutes such a mindset and how might we attain it?

The idea of something like an abundance mindset features in a number of spiritual perspectives.  While little has been published in these terms in the academic literature, I think that findings from a few branches of psychology point to the possibility of an abundance mindset – even if they don’t call it that.  And, crucially, they suggest that it’s something we can exercise some control over.

How to develop an abundance mindset: some empirical findings

(i) Being in the moment

One strand of the positive psychology literature links being “in the moment” to a sense of having enough. The concept of flow, for instance, is characterised by “complete absorption in what one does”.   A professional basketball player who is completely in the zone, performing to the peak of his or her ability, would be an example of this.  What’s interesting is that when you are so engrossed in what you’re doing, “other needs become negligible”.  In other words, scarcity is absent.

People who practise mindfulness offer another good example.  As I argued in a previous post, there is evidence that more mindful people can cultivate a stronger sense of having “enough”, as a result of paying attention to the present moment and viewing the world less through the lens of desires and expectations.


(ii) Interpreting our environments

Other studies focus on how we choose to view ourselves and our environments.   The main idea here can be traced back to Epictetus, who argued that what matters is not what happens to us, but how we interpret what happens.  It is easy to see how this could be interpreted in terms of an abundance mindset.

While testing this sort of existential theory is tricky, scientific studies do support the general idea.  For instance, people with an optimistic outlook – something which can be learned – report higher well-being.  Admittedly, a sense of scarcity may not be entirely absent if you view the glass as half full.  But you would expect to be closer to having an abundance mindset here than if you always view the glass half empty.

Does economics provide an adequate framework for studying scarcity?

To answer this – and bearing in mind wider debates about rethinking economics and new frameworks for teaching it – consider the following thought experiment.  Two students go to university; one studies economics, the other psychology.  Both students encounter the problem of scarcity but, as we’ve seen, the two disciplines point to very different responses to this problem (mindsets versus consumption).

The notion of an abundance mindset need not call into question the assumptions underpinning economic theory (although it could do).  But where it gets really tricky is when we add to this the empirical findings about people with another mindset that’s much more aligned to the caricature of a person that you might get from economic theory.   Looking at this, Tim Kasser reviews studies of people who strongly orient towards values such as money and possessions.  And revealingly, he finds that this group reports lower subjective well-being.  In other words, even where our natural inclination is to try to satisfy our material desires, it’s unclear that this is the response that serves us best.

Psychological approaches to scarcity, with some empirical grounding, therefore appear not just different to economic ones, but somewhat contradictory to them.  This raises the question:  is the way that scarcity is taught in economics too simplistic?

Teaching scarcity:  towards a unified theory of choice

The solution I suggest is that for students learning about scarcity, standard consumer theory (as taught to economics undergraduates) should only be part of the picture.  We choose all sorts of things:  among them, courses of action that help us to cultivate greater optimism, mindfulness, flow and so on; and of course we choose all the things we buy and consume.   

It makes sense, therefore, to couch consumer theory within a broader theory of choice:  a framework that could contain both our consumption decisions and decisions that reflect a more psychological response to our desires. 

A unified approach to scarcity might help to resolve some of the contradictions currently apparent across different academic disciplines.  It could also lead to richer, more realistic economic theories: if desires are not always treated as exogenous, for instance, then models might take into account the cases where consuming more is not necessarily the best “response” to the feeling of not having enough.

It’s not that economics textbooks have it all wrong.  But it does strike me that if the findings of all the social and behavioural sciences were brought to bear, we could approach “the economic problem” from a broader perspective that better fits the actual choices that humans face.  This could have implications for economic theory, but also wider debates about what we mean by prosperity and how much is enough.

Dan Nixon works in the Bank’s Stakeholder Communication & Strategy Division.





Filed under New Methodologies

12 responses to “Mind over matter: is scarcity as much about psychology as it is economics?

  1. Shannon Dunphy

    Just as a note, the article starts with a liberal mindset of choice & consumption (i.e. we can buy & consume as freely as we want to) but ends on a rather paternalistic touch which may leave the reader on the impression that regulation is key (‘how much is enough’).

    What the author mentioned about optimistic VS pessimistic mindsets refers directly to findings in behavioural decision science (BDS) which say that framing utility in terms in gains or losses leads to large changes in satisfaction or ‘perceived utility’. So utility in psychological terms is not uniquely determined by each individual’s experience. There are also shared (and non-negligible) effects which have been identified and studied extensively.

  2. Karl Massey

    Thank you Dan.
    Your piece was both interesting and enlightening.

  3. Thank you for this. fyi. The pedagogical equivalent of Rethinking Economics is the network of academic economists known as Reteaching Economics – reteachingeconomics.org

  4. Bill Eadie

    Conveniently set aside the question of poverty, and appears to consider ways of meet individual needs. It might be better to think about how the condition of the community has any effect on our individual satisfaction.

  5. Sean McNichol

    Thank you,. Very enlightening! Could you recommend any further reading?

  6. Martin Williams

    I agree that it’s possible to have an “abundance outlook”, and that certain people do have it – either because it’s their nature, or because their outlook has altered over time. At this time of year, it’s quite normal to be head scratching over what present to get for a relative, often older, who seems to have everything they want, or need. But empirical evidence from the Christmas sales also suggests that the “scarcity outlook” is common enough, even among those who are in no sense poor, to be a decent default assumption for the economic text books. You suggest that an “abundance outlook” may be associated with happiness, and imply that it may be worth cultivating it, and that’s a fair question for an individual. But a large-scale collective “collapse of demand” would produce much bigger challenges for all of us than the rewriting of economics course material, and I haven’t yet seen a convincing story about what realistic and satisfactory new paradigm is available.

  7. Excellent article. It resonates with my life’s experiences, the richer folks I met had so much scarcity around them, while the poorer ones had so much abundance mindset in them that they glowed visibly. They are the ones who served people better, were much more prepared to sacrifice for others. The richer folks appeared with so much scarcity, they had limited things to offer.

  8. J. Stewart

    Could you please be more precise about your definitions? Scarcity is defined as inadequate in quantity in number compared to demand. And how great is demand? According to neoclassical economists, it is assumed to be unlimited. Therefore, neoclassical economist assume resource scarcity and unlimited wants. Therefore, neoclassical economics is all about choice because if people are assumed to want everything and they can’t have everything due to scarcity, then they must choose. And, if people have choice then they deserve the outcome. In this way the responsibility for the outcomes due to the normal, profitable operation of capitalism such as poverty, unemployment, homelessness and income and wage inequality is placed right back on the shoulders of the victims. This is known as blaming the victims and neoclassical economists are very big on this. In fact, their role isn’t scientific, it’s ideological. Their role is to present capitalism as the best of all possible worlds so that no sane person would ever want anything else, e.g., socialism.

  9. A refreshingly different post Dan.

    As to how the abundance mindset translates to teaching economics, beyond perhaps emphasising that,in many senses, ‘wants’ are not unlimited and that economics students should consider a steeper diminishing marginal utility to accommodate the ‘abundance’ mindset, it’s a struggle to see how this can be coherently applied to taught economic theory. Perhaps when teaching consumer choice, it does deserve mention as a a potential endogenous counter to examples where marketing strategies use advertising etc to generate or increase demand for their good or service.

    Additionally, I do think that while being lost in the moment of a ‘flow activity’ may be a state in which ones desires are absent, so is sleep, drug-induced states, drunkness, etc. I think the Stoic example is a better, more realistic example of dealing with a scarcity problem in a more conscious state, but it’s worth noting that the Stoics did desire more/better, and they weren’t devoid of ambition, but they were able to temper the downside of adversity by applying the Stoic mindset.

  10. The rational economic response for an individual would be to pursue the course of action that would maximise lifetime utility (i.e. the time and effort to develop an abundance mindset may outweigh the cost of serial consumption for short term gain for some individuals – those with high marginal revenue product). Behavioural economics has already filled in the obvious flaw in this argument through hyperbolic discounting (and other cognitive biases). Not sure what this adds