Shortages

In the 1950's, economists Alchian, Arrow, and Capron wrote a paper discussing the existence of a shortage of scientist/engineers in America.

What exactly does a shortage mean? For economists, it's essentially a matter of price not being able to adjust to clear the market. If apples cost 10 cents each but not everyone wanting to buy apples at this price is able to do so, then there is a shortage of apples. In a properly functioning market, this should not happen -- the price of apples should rise until the market clears. Only price controls can prevent this from happening! The government can cure shortages by not interfering with the market.

The layman usually has another meaning in mind. A dramatic increase in the price of apples might lead to a shortage of apples at the old "normal" price. While people are concerned with the "proper" price of apples, economists understand prices as simple market-clearing mechanisms and therefore pretend not to share the intuition that there are proper prices and improper prices. For example, the authors mock the idea of a proper price by discussing those who claim that there is a shortage of servants (instead of realizing that servants are now able to command much higher wages on the market -- hurray!) Such an example is only partially useful rhetorically, because it avoids confrontation with the idea that a dramatic increase in the price of food might be morally problematic.

People who refer to shortages may also believe that engineers are socially undervalued. Not surprisingly the authors find this claim dubious. They are responsive to the notion that competition with the Soviet Union dictates that we increase our supply of engineers, but do a good job pointing out the limits of that logic.

The authors do allow for "dynamic shortages," where institutional factors and market inefficiencies lead to prices adjusting slowly (but in the right direction). They acknowledge possible market inefficiencies due to uncertainty, myopia, monopsonies (the government has considerable market power as a major employer of engineers), and externalities. The monopsony effect is probably particularly relevant -- a large employer of engineers is more exposed to wage increases and therefore more reluctant to provide them. There is also the fact that while greater demand for engineers drives up their wages and serves as a signal that more workers should become engineers, there is a considerable time lag due to the long training period.

There is a discussion of how engineers decide how much education to puruse. It seems misguided to me -- at one point the authors suggest that wages for MSc engineers should be the same as wages for PhD engineers, accounting for education costs (including time), but this would only be true for marginal engineers and even then it would only be true if the PhD didn't serve a useful signalling function (not everyone might have the "choice" to pursue a PhD, constrained only by earnings).

This paper is very long (over 100 pages) and it would be possible to go into a lot more detail, but that doesn't seem like a particularly good use of time. I note the authors discomfort with actively suggesting to children that engineering is a good career (clearly indicating an "inaction is morally more excusable than action" worldview) although the points they make regarding the hidden costs of more engineers are good (more engineers = fewer doctors, all things being equal).

The authors emphasize two reasons why prices should be allowed to fluctuate in a free market. (1) Prices serve as a signal to encourage greater production. (2) Fluctuating prices ensure that resources are allocated efficiently (put to their most produtive use).