Economics is often presented as a neutral science of allocation, yet rarely do economists ask what must already be in place before allocation itself becomes intelligible. Not scarcity alone, but the social recognition of scarcity; not choice alone, but the legitimacy of choosing — these constitute the silent foundations upon which economic reasoning rests. Only when we take such foundations seriously can we understand economics as more than a technical apparatus for managing prices and quantities. Allocation presupposes not merely limited resources, but a shared framework of beliefs, norms and institutional commitments within which limits are identified, ranked and rendered socially acceptable.

At first glance, scarcity appears to be a brute fact of nature. Resources are finite; human wants are not. If this exhausted the problem, economics would reduce to a form of engineering: the optimization of given inputs under physical constraints. Were scarcity merely natural, differences in economic outcomes could largely be traced to technology or endowment.

Yet scarcity as it is actually lived is institutional before it is material. What is scarce, for whom it is scarce and by what means scarcity is alleviated or intensified are questions answered not by nature but by social organization. No society encounters limits without simultaneously interpreting them through shared narratives and rules. Land becomes scarce through legally enforced ownership; labor becomes scarce through credentialing and norms of skill; capital becomes scarce through conventions governing credit and risk.

Economics, therefore, begins not where resources end, but where rules, beliefs and expectations begin.

Rationality and the limits of abstraction

This institutional and psychological mediation complicates the canonical image of the rational agent maximizing utility. That image holds undeniable power. By abstracting from context, it renders complex behavior analytically tractable and allows systematic comparison across settings. Yet incomplete it remains, insofar as it treats preferences as given and constraints as exogenous.

Embedded within this abstraction lies a philosophical decision: to bracket the social formation of desire and the moral framing of constraint. Such bracketing is methodologically convenient, but it is not neutral. It risks mistaking historically contingent norms about work, consumption, risk-taking or fairness, for universal features of human behavior. What appears as “choice” in formal models may in practice reflect conformity to social expectations; what appears as “preference” may be the residue of identity, persuasion and trust.

The limitations of this framework become sharper when individual rationality is aggregated into collective outcomes. That rational actions may culminate in irrational aggregates is no paradox, but a structural property of economies governed by interaction and belief. Booms, panics and prolonged stagnations arise not despite rational calculation, but because such calculation is conditioned on expectations about others. Expectations and outcomes are so tightly interwoven that causality becomes reflexive. Under such conditions, equilibrium is not a stable endpoint but a fragile configuration, perpetually exposed to shifts in confidence.

It is precisely here that institutions enter not as peripheral details but as constitutive elements of economic order. Markets do not precede law; law precedes markets. Only where contracts are credibly enforced, property rights are recognized and money is trusted does exchange acquire durability over time. Absent such institutional scaffolding, prices lose informational content and incentives dissolve into opportunism. What often appears as spontaneous coordination is, in reality, sustained cooperation supported by shared norms and collective enforcement.

A clear illustration of this logic can be found in sovereign bond markets. Government debt is frequently modeled as a financial claim priced according to objective fundamentals. Yet investors’ willingness to hold sovereign debt hinges critically on institutional credibility. When such credibility is taken for granted, borrowing costs may remain low even under high debt burdens; when it is questioned, interest rates can spike abruptly. What becomes scarce in such moments is trust. Market reactions often labeled irrational are better understood as rational responses to uncertainty about institutional narratives.

This example also clarifies why distribution cannot be relegated to the margins of economic analysis. Economic outcomes are evaluated not only by efficiency but by perceived fairness. When gains and losses are systematically skewed, legitimacy erodes, compliance weakens and efficiency itself deteriorates. Equity and efficiency are thus deeply intertwined. Inequality functions as a structural variable shaping macroeconomic stability and political consent.

What is economics?

Contemporary challenges render these insights unavoidable. Climate change confronts economics with irreversible and temporally displaced constraints. To discount the future is analytically elegant; to justify it normatively is deeply contested. Here, optimization yields to judgment: The issue is not how to maximize aggregate welfare, but whose welfare counts, and across which temporal horizon.

Technological transformation poses a parallel challenge. As productivity becomes detached from human labor, the wage-based mechanism of distribution loses coherence. Economics must therefore confront questions long treated as external: the valuation of care, unpaid work and social contribution.

What, then, is economics? It is neither mere mathematics nor disguised ideology. It is a disciplined inquiry into how societies coordinate belief and behavior under constraint, how they balance efficiency with legitimacy and how they render scarcity compatible with collective life. Only by integrating institutions, narratives and moral judgment can economics fulfill its promise as a science of social order.

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.