Scarcity Fallacy

As an absolute concept, economic scarcity of a resource implies only that it is not available in limitless supply. Furthermore, if no person demands even a scarce resource, it has no value. A scarce resource under demand is property. No degree of difficulty in producing the resource is implied.

Scarcity may also refer to the relative availabity of some property. For a given supply, increasing demand implies decreasing availability (increasing scarcity). However, increasing demand tends to increase production, and thereby availability. Similarly, for a given demand, increasing supply implies increasing availability (decreasing scarcity). However increasing supply tends to decrease production, and thereby availability. These negative feedbacks stabalize availability and correspondingly price.

A single coin has fixed supply. There is a theory that the fixed supply of Bitcoin is the source of its value. As with Bitcoin, there is a fixed supply of the Mona Lisa, only one is possible. The theory implies that this is the source of value for the famed work of art. However there are countless unique works of art with no demand, and therefore no value. Bitcoin cannot increase in value only because of absolute scarcity. To the contrary, it necessarily becomes more scarce as it becomes more highly valued. Prevalence is not an important monetary property except as it pertains to portability and divisibility.

An aspect of the theory is that Bitcoin’s fixed supply is the source of its utility because it ensures non-increasing availability. However, this requires non-decreasing demand. Bitcoin is unique in the realm of property in that the cost of transferring it inherently increases with demand to do so. This effectively creates the same negative demand feedback seen in property without fixed supply.

Unlike the Mona Lisa, it is also subject to effective substitution. Given that non-decreasing demand is not assured the theory is invalid. As is common with economic fallacies, the error stems in part from considering just one side of the supply-demand relation.

Another cause of the error is a misinterpretation of the behavior of commodity monies. Because of its lower prevalence on the surface of the Earth, gold has remained more portable in common scenarios than more prevalent materials such as iron and salt. However the portability of electronic money is independent of the number of units in existence. Apart from sufficient divisibility, the total number of Bitcoin units is entirely arbitrary and therefore unrelated to its utility.

Another cause of the error is a misinterpretation of the behavior of state monies. Through anti-counterfeit laws the state controls the supply of its money by restricting competition. It can therefore collect an inflation tax by expanding supply without consuming as much capital in production, increasing the ratio of money to capital. Without restricted competition supply would expand through market forces, in response to demand, eliminating the tax. In other words the money would behave as a prevalent commodity, with poor portability (at least until renumerated by the state). Poor portability is often an actual consequence of hyperinflation.

Scarcity is a function of both supply and demand and therefore cannot be inherent in a money, even with fixed supply. Both commodity money and Bitcoin eliminate the inflation tax, though commodity money is subject to the negative feedback of monetary inflation and Bitcoin is subject to the negative feedback of fee pressure.