Opportunity cost: a Fabian idea?

by John Quiggin on May 26, 2015

As part of the research for Economics in Two Lessons, I’m looking in to the history of some of the ideas I’m talking about, including Pareto optimality, externalities and of course opportunity cost. I’m undecided as to whether I’ll include this material, perhaps as starred (skip if you feel like it) sections, or in an Appendix. Suggestions on this point are welcome.

My research on the intellectual history of opportunity cost has so far gone no further than Wikipedia, which attributes the term to Friedrich von Wieser, an Austrian economist in both the national (he was Minister for Finance there in 1917) and theoretical senses. Turning to the article on von Wieser, I was surprised to read that he put forward an argument very similar to mine regarding the relationship between opportunity cost and the distribution of wealth

Instead of the things that would be more useful, there are things that pay better. The greater the difference in wealth, the more striking are the anomalies of production. The economy provides luxury to the capricious and greedy, while it is deaf to the needs of the miserable and poor. It is therefore the distribution of wealth that decides what will be produced, and leads to a consumer of a more anti-economic variety: a consumer wastes on unnecessary, guilty enjoyment that which could have served to heal the wounds of poverty. —Friedrich von Wieser, Der Wert Natürliche (The Natural Value), 1914.

It turns out, even more surprisingly to me, that von Wieser was linked to a Viennese group of Fabians.

I’m still trying to digest this, and work out where to go next with it. Can anyone point to useful information about von Wieser?

{ 37 comments }

1

Val 05.26.15 at 6:06 am

I really have not had time to follow these posts as closely as I would have liked to, because they do take some serious consideration, but assuming that at least part of your intended audience is intelligent non-economists, I have what I think is a valid query (or two).

One, I can’t work out what is the question to which “opportunity cost” is the answer. And two, as a non-economist, if “opportunity cost” is the answer, I’m not sure I would like the question.

(can’t help thinking of Hitchhikers’ Guide to the Galaxy here, but it’s a serious question, probably along the lines of ‘I always thought there was something wrong with the universe/economics’)

Expanding a bit more so as not to be just negative, when I returned to the study of history in the 1980s, and we were looking at some economic history type questions, one of the questions we were asked as a starting point in one essay was “what is work?” [with further questions about work and reward following the white invasion of Australia]. That’s the kind of question I think is really useful because it requires you to question the everyday, ground your definition in your own experience, and yet also make it broad enough to encompass completely different historical periods, cultures and discourses.

2

Corey Robin 05.26.15 at 6:30 am

Bruce Caldwell has a lot of useful and interesting information on von Wieser in his *Hayek’s Challenge*. (Wieser was one of Hayek’s teachers.) Also, Caldwell has good footnotes to follow up on for more sources on von Wieser. Also, fun side note. Von Wieser said this of the theory of marginal utility in 1891: “The most momentous consequence of the theory is, I take it, that it is false, with the socialists, to impute to labor alone the entire productive return.”

3

John Quiggin 05.26.15 at 7:12 am

@Corey Thanks for this. I’ll chase up the Caldwell reference.

On the side note, what set me back on my heels was the contrast between the remark you cite (exactly what I expected to find Wieser saying) and the remark quoted in the OP (exactly not).

I’m feeling that there may be something big here about why the Austrian School ran into a swamp, my tentative answer being that Hayek and Mises allowed their extreme free-market policy convictions to deform their theoretical analysis. Certainly, that’s what happened with Austrian business cycle theory.

http://johnquiggin.com/2009/05/03/austrian-business-cycle-theory/

4

LK 05.26.15 at 7:24 am

For basic bibliography in English on Friedrich von Wieser, see:

Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism, Ludwig von Mises Institute, Auburn, Ala.

Schumpeter, J. and J. B. Achille Loria, 1927. “Obituary: Friedrich von Wieser,” Economic Journal 37.146: 328–335.

I’ve written more on Friedrich von Wieser here:
http://socialdemocracy21stcentury.blogspot.com/2013/07/friedrich-von-wieser-on-progressive.html

http://socialdemocracy21stcentury.blogspot.com/2010/10/friedrich-von-wieser-and-eugen-von.html

5

LK 05.26.15 at 9:14 am

It also strikes me that you might be interested in the early history of the Austrian school, since by the 1920s there were 2 wings: a (1) Classical liberal wing and (2) progressive liberal wing:

http://socialdemocracy21stcentury.blogspot.com/2013/04/axel-leijonhufvud-interviews-hayek-on.html

http://socialdemocracy21stcentury.blogspot.com/2013/06/vaughn-on-early-history-of-austrian.html

http://socialdemocracy21stcentury.blogspot.com/2012/08/rescuing-menger-from-austrians.html

http://socialdemocracy21stcentury.blogspot.com/2013/11/the-early-austrians-and-walrasianism.html
—————-
Even the founder of the Austrian school Carl Menger was not so dogmatic as later Austrians.

The modern Austrian school stems from the Classical liberal tradition of Eugen von Böhm-Bawerk, Hayek and Mises and runs to the extreme insanity of Rothbard’s anarcho-capitalism.

The modern Austrians, however, have lost sight of the fact that there was a progressive liberal/mildly social democratic wing of their school in the early 20th century which included:
(1) Eugen von Philippovich, a leader of Austrian social liberalism;
(2) Friedrich von Wieser;
(3) the early Hayek (but *not* the Hayek of the later 1920s and after), and
(4) Richard von Strigl.

Anyway, I would also point readers in general to “Debunking Austrian economics 101” post on my blog, which includes a number of posts on the history of the school:

http://socialdemocracy21stcentury.blogspot.com/p/blog-page.html

6

rino economist 05.26.15 at 9:15 am

There is a chapter on Wieser in George Stigler’s early book “Production and Distribution Theories”, and also a number of references to Wieser in Schumpeter’s History of Economic Analysis. Both books also discuss opportunity / alternative cost.

For Val 1, you might find the chapter on “costs and production” in Stigler’s Theory of Price worth looking at: Stigler writes very well, he had an atypical interest in the history of economic thought, and he usually tried to find real-world instances of abstract economic concepts.

7

david 05.26.15 at 9:49 am

von Wieser is at this point (1910s) still playing fast and loose between opportunity costs for an individual objective function, and opportunity costs for a social planner – whose alternative costs? – but he can’t really be blamed here because a clear general vs partial equilibrium distinction hadn’t emerged in the literary form (would wait until Lionel Robbins, 1930s) or an axiomatic form (Arrow, Debreu, 1950s). Also: no clear capital theory.

(1910-1930 was a bad time to be emphasizing distributional impacts on the allocation of factor inputs, anyway. Mass prosperity at the time meant electrification and commoditization and railways, mobilizing capital and labour through the state; the binding constraint was organizational capability toward coordination. This would remain true until the end of the postwar boom – no matter how rich you are, everyone drinks the same Coca-Cola, as Warhol said. The distributional point is conceptually consistent but hard to relate to until the boom ended.)

8

Robert 05.26.15 at 10:51 am

I think of Philip Wicksteed’s “The Common Sense of Political Economy” as compatible with Austrian economics because of its emphasis on opportunity cost. I forget why I am of this view.

William Smart’s, “An Introduction to the Theory of Value” is another early book introducing the British to the Austrian school of economics. One aspect of their thought I had trouble absorbing was early Austrian views on utility theory. It seems like they have an extra layer of abstraction, not present in mid 20th century utility theory. One ranks ultimate goals. Then one ranks goods based on which goals they contribute to. And then that second ranking is the basis for prices. And the goals and goods being ranked are measured in a discrete space, such that prices are only found up to an interval.

9

Robert 05.26.15 at 10:55 am

By the way, I have a low opinion of Henry Hazlitt. He didn’t know enough about economics for it to be worth bothering to refute at this late date. But if you loose this focus, your book becomes closer to John Cassidy’s “How Markets Fail.”

10

Robert 05.26.15 at 10:59 am

By the way, G. B. Shaw and Wicksteed argued over Marx’s theory of value, with both thinking of themselves as progressive at the time. Shaw championed Marx’s theory against the new-fangled marginal theory, but realized he did not have the math to make his case. Wicksteed rejected the labor theory of value.

11

Val 05.26.15 at 12:08 pm

Ring economist @6
Thanks for the kind thought. I don’t really have time to read anything much other than for my thesis at present, which is probably why I put this rather basic question here – it might have been more appropriate to JQ’s preface section which I haven’t read yet – but also what I’m trying to get at is probably a bit different, discourse- wise. Anyway I will try to read that chapter sometime and see what it’s like.

12

Val 05.26.15 at 12:09 pm

Sorry “rino” – small print, bad light, spell check etc

13

Martin 05.26.15 at 12:18 pm

Just a minor comment: Wikipedia got the title of Wieser’s book wrong – “Der Wert Natürliche” has the word order backwards, which should be the same as in English, “Der Natürliche Wert.” In fact I found that the actual title is “Der natürliche Werth,” which contains old orthographic convention in the “-th” spelling.

14

Plume 05.26.15 at 2:31 pm

JQ,

Regarding your OP. I, too, am amazed by that statement by von Wieser. It’s spot on, and I just wouldn’t have thought the Austrians capable of that. Good catch.

I really like the idea of having “skip over” sections that, hopefully, few will skip over. In them, I would love to see you detail alternative criticisms of your main sections, from previously marginalized economists/economic schools. In a recent book, Richard Wolff shows, for example, side by side, Marxist, Keynesian and Neoclassical models in theory and to some degree practice . . . in his Contending Economic Theories. Given this is (obviously) not the intention of your book, perhaps you could do a far more selective juxtaposition toward the end of it?

15

Plume 05.26.15 at 2:31 pm

16

Z 05.26.15 at 3:00 pm

The quote was surprising to me as well, especially since Wieser seemed to have prided himself for using marginal utility to justify the institution of state-administered progressive taxation while at the same time ensuring inequalities would remain untouched.

But surely WWI and the Russian Revolution are the elephants in the room here, in terms of ideological evolution, so it is perhaps not surprising that someone convinced that inequalities were wasteful in 1914 would see the preservation of “historically transmitted inequalit[ies]” as a desirable feature of socio-economical institutions in 1927.

17

Mr Punch 05.26.15 at 4:07 pm

I know nothing of Wieser, but … his point about income distribution affecting production is very interesting in the current context of globalization. The most disruptive economic force today may be not technology but the emergence of a huge, relatively low-income market in China (and elsewhere) — and its impact on production with regard to goods and prices as well as location. Among other things, this sheds light on the difficulty of measuring changes in US living standards, as middle- and lower-income Americans derive more benefit from their relative wealth in global terms even as they lose ground domestically.

18

Lee A. Arnold 05.26.15 at 4:24 pm

A brief passage in Schumpeter’s History of Economic Analysis pp. 913-917 details the Austrian development of marginal analysis, which they understood to explain distribution too. However, the Austrians did not use the price of the product, they used the consumer’s marginal utility, which came out of their barter theory. (Remember that in those days people thought that utility might be a measurable psychic quantity.) They solved the fundamental problems of allocation and distribution, but via a problematic theory of the “imputation” (Wieser’s word) of the consumer’s satisfaction to choices in production. But it had an interesting fall out:

“Discussion of the marginal utilities of means of production in the spirit of the theory of imputation easily leads to the recognition of the relevance to these marginal utilities of the elements of complementarity and substitutability of factors and of their alternative uses. By this route the Austrian [Menger?] arrived at what has been called the alternative-use or opportunity theory of cost–the philosophy of the cost phenomenon that may be expressed by the adage: What a thing really costs is the sacrifice of the utility of those other things which we could have had from the resources that went into the one we did produce.

“Sporadically, this theory of cost had turned up in the past, especially in J. S. Mill’s Principles, but only to explain special cases which failed to fit into the older schemata. As a general theory and as an explanation of the fundamental social meaning of cost–both in capitalist and in socialist society–it was NEW. There should be no doubt that it makes a much better theory of distribution…” (History of Economic Analysis, p. 917)

Schumpeter locates the origination of the term in a footnote:

“The…term is due to D.I. Green, ‘Pain Cost and Opportunity Cost,’ Quarterly Journal of Economics, January 1894, and has gained wide currency in the United States owing to the vigorous sponsorship of Professor Knight. The most exhaustive treatment of this whole set of problems is to be found in H.J. Davenport’s Value and Distribution (1908), who preferred the equivalent term Displacement Cost.” (p. 917)

19

Lee A. Arnold 05.26.15 at 4:24 pm

Schumpeter on the Austrians, socialism, Wieser, and Pareto:

“Now the Austrians were in the habit of using the model of a Crusoe economy for the purpose of explaining certain fundamental properties of economic behavior. Therefore, it was particularly easy for them to realize that there was nothing specifically capitalist about their basic concept of value and its derivates such as cost and imputed returns: these concepts are really elements of a completely general economic logic, of a theory of economic behavior that may be made to stand out more clearly in a model of a centrally directed socialist economy than it can in the capitalist garb in which it presents itself to the observer whose historical or contemporaneous experience is with a capitalist world. For instance, when we are trying to describe how Crusoe allocates his scarce resources in order to maximize the satisfaction of his wants or, in other words, to formulate the rules he follows in transforming these resources into objects that will satisfy his wants, we discover immediately that his economy may be characterized by certain ‘coefficients of transformation’ which fill the same function that prices fill in competitive capitalism. If we consider a socialist economy, it is still more obvious that, for instance, maximization of satisfaction requires that the ratio of marginal utilities for each pair of consumers’ goods must be identical for all comrades; that in every line, production must be so organized as to make the technologically optimum use of all means of production, and that the marginal value productivity of all scarce means must be the same in all their uses or, at all events, must in every case be at least as great as it would be in any other. But all this amounts to saying is that any attempt to develop a general logic of economic behavior will automatically yield a theory of the socialist economy as a byproduct. The first to realize this explicitly was von Wieser (Natural Value, 1st German ed., 1889). Pareto, in the second volume of his Cours (1897), excelled Wieser in clearness and skill of presentation, if not in insight, and has more claim than any other individual to being considered as the originator of the modern pure theory of the socialist economy…” (History of Economic Analysis, p. 987)

20

TM 05.26.15 at 5:37 pm

I fixed the book title on wikipedia (Der natürliche Werth). Apparently, according to wikipedia, Wieser coined not only the term “opportunity cost” but also “marginal utility”. Maybe there’s a reason why he’s almost forgotten in the profession despite these fundamental contributions?

21

TM 05.26.15 at 5:42 pm

Also btw, the book quoted by JQ appeared 1889, not 1914.

22

john c. halasz 05.26.15 at 6:57 pm

Well, Leon Walras was himself a “socialist” of sorts. The main strain of Austrian socialism, before and after the war, were the Austro-Marxists, who were largely Kantian in orientation and lodged between the reformist social democratic and revolutionary wings, somewhat along the lines of what would come to be called “Eurocommunism”.

23

Corey Robin 05.26.15 at 8:46 pm

Just stumbled across this from Ben Franklin, by the way. From his “Advice to a Young Tradesman” (1746): “Remember that Time is Money. He that can earn Ten Shillings a Day by his Labour, and goes abroad, or sits idle one half of that Day, tho’ he spends but Sixpence during his Diversion or Idleness, ought not to reckon That the only Expence; he has really spent or rather thrown away Five Shillings besides.”

24

Lee A. Arnold 05.26.15 at 10:19 pm

To repeat, Schumpeter wrote that the term “opportunity cost” was coined in 1894 by D.I. Green in the Quarterly Journal of Economics. (History of Economic Analysis, p. 917 footnote).

A few pages before that, Schumpeter describes the Austrian development of value theory and its incorporation of distribution, and immediately follows with some idea of Wieser’s contribution, and of the fate of that contribution among the others:

“…Menger went on to say that means of production–or, as he called them, ‘goods of higher order’–come within the concept of economic goods by virtue of the fact that they also yield consumers’ satisfaction, though only indirectly, through helping to produce things that do satisfy consumers’ wants directly. Let us pause for a moment to consider the meaning of this analytic device that looks so simple or even trite and was nevertheless a genuine stroke of genius. [Footnote here: In embryonic form this device had already been used by Gossen.] It enables us to treat such things as iron or cement or fertilizers–and also all services of natural agents and labor that are not directly consumed–as incomplete consumable goods, and thereby extends the range of the principle of marginal utility over the whole area of production and ‘distribution’. The requisites or factors or agents of production are assigned use values: they acquire their INDICES OF ECONOMIC SIGNIFICANCE [J.A.S. uses italics] and hence their exchange values, from the same marginal utility principle that provides the indices of economic significance and hence explains the exchange values of consumable goods. But those exchange vales or relative prices of the factors constitute the costs of production for the producing firms. This means, on the one hand, that the marginal utility principle now covers the cost phenomenon and in consequence also the logic of the allocation of resources (structure of production), hence the ‘supply side’ of the economic problem SO FAR AS ALL THIS IS DETERMINED BY ECONOMIC CONSIDERATIONS. And it means, on the other hand, in as much as costs to firms are incomes to households, the same marginal principle, with the same proviso, automatically covers the phenomena of income formation or of ‘distribution’, which really ceases to be a distinct topic, though it may, of course, still be treated separately for the sake of exposition. The whole of the organon of pure economics thus finds itself unified in the light of a single principle–in a sense in which it had never been before.

“Much of the problems that arise from this set-up can be discussed only on a level on which Walras rules supreme. But, though I believe that Jevons should be credited with a vision of the facts above and if so holds priority, the credit for having worked out that theory systematically, on the plane on which we are moving now, should go to the Austrians and particularly to Menger, whose Grundsätze contain all the details. Professor Stigler, indeed, pointed out many a ‘hiatus’ in Menger’s treatment, and rightly attributed them to his preoccupation with the threshold problems of the valuation of directly consumable goods. This accounts in fact for the impression that he was neglecting cost aspects. But on Stigler’s own showing, Menger had all the essential results. Nor must we forget that the Grundsätze was, in a sense quite different from that applicable to Marshall’s Principles, intended to be but an introduction. Actually, it was left for Wieser to work out the Austrian theory of cost and distribution explicitly. But he was the worst technician of the three great Austrians. And objections to methods that were peculiar to him crowded upon his readers–and especially Wicksell–as to impair the effect of what was really a great performance. Böhm-Bawerk expounded, developed, and defended the Mengerian theory of value. But in this field he neither had nor asserted claims to originality. The best formulation of the Austrian doctrine was presented later on by Wicksell.” (History of Economic Analysis, p. 912-913)

25

Tim Dymond 05.26.15 at 11:17 pm

This link isn’t so much about Wieser, but to John’s other point: ‘I’m feeling that there may be something big here about why the Austrian School ran into a swamp, my tentative answer being that Hayek and Mises allowed their extreme free-market policy convictions to deform their theoretical analysis.’

Have you read Andrew Gamble’s ‘Hayek: The Iron Cage of Liberty’? It tackles the distinction between Hayek as social scientist and as ideologue.

http://www.polity.co.uk/book.asp?ref=9780745607450

26

jake the antisoshul soshulist 05.27.15 at 1:31 pm

As a non-economist, and a not very knowledgeable one, I get lost in the thicket of terminology. Something that jumped out at me was the comment the “free markets”
outperform central planning. I am a great believer in asking the right question (almost always, the correct question is why, though “what do you mean by that” is also a good question). What is meant by “outperform”? Also what is meant by “free market” and
“central planning”. But then, I tend to think of “free markets” as a chimera.

27

marcel proust 05.30.15 at 10:18 pm

An epigram for the frontispiece:

Moral: To understand economics you need to know not only fundamentals but also its nuances. Darwin is in the nuances. When someone preaches “Economics in one lesson,” I advise: Go back for the second lesson.

“An Enjoyable Life Puzzling Over Modern Finance Theory”, Annu. Rev. Financ. Econ. 2009. 1:19–35

http://en.wikiquote.org/wiki/Paul_Samuelson

28

John Quiggin 05.30.15 at 11:19 pm

@27 Marvellous!

29

Chris Warren 06.01.15 at 7:07 am

Opportunity costs seem to have created a bit of kerfuffle on Quiggin’s home blog.

It seems to be a plastic concept that can be adapted according to circumstances assuming a general understanding that you have to give up something in order to gain something.

It does not matter if academic economists offer one particular definition if the rest of humanity uses another.

As society changes, the history or origins of a concept are far less important than the way it is used today. These can depart from who it was meant in the past.

Today, prices are distorted by the injection of finance carrying opportunity “costs”. In order to finance a house purchase workers must pay interest that, firstly, covers a Bank’s alternative gain they could have got buying Government Bonds and then the cost of banking operations, and then profit for the bank.

Of course this ratcheting of price is also caused by a lack of competition in the banking sector.

So when a Bank gets the amount that represents opportunity costs, what is it exactly, that they have done to earn this?

Surely, this is just a form of expropriation by Capital?

If so, little wonder some have tagged it – “Bourgois Economics”

30

Chris Warren 06.01.15 at 7:39 am

john c. halasz

I have my doubts. Walras understood profit as the extra cash a entrepreneur received after materials, overheads and labour were paid. This is covered in “Elements of Pure Economy”, 1977 Reprint, 232.

He relies on wages “remaining substantially unchanged” (Walras 391) even as earnings of capital vary. For Walras wages are determined by a labour market (Walras 223).

However he does state that in a state of equilibrium, “entrepreneurs make neither profit nor loss” which is a socialist principle. But he immediately confuses this with his “opinion” that an entrepreneur should receive income based on fees for his capital plus fees for his work (Walras 225f).

Has anyone really argued that Walras was a socialist?

31

john c. halasz 06.01.15 at 10:55 pm

@30:

I used “scare quotes”. I don’t think his views were entirely consistent. Nonetheless, he did advocate against land rents in a Georgist key. And he was criticizing monopolistic tendencies. Yes, there is a large gap between theoretical intentions and actual realities. But my main point was to question what constitutes “socialist” intentions, rather than outcomes. The Fabians, after all, were strong supporters of British imperialism.

32

Bruce Wilder 06.01.15 at 11:12 pm

Chris Warren @ 29:

[Opportunity cost] seems to be a plastic concept that can be adapted according to circumstances assuming a general understanding that you have to give up something in order to gain something.

It does not matter if academic economists offer one particular definition if the rest of humanity uses another.

Yes, indeed.

Real people have to be practically good economists just to navigate daily life; academic economists do not have to be practical in their ideas at all — pleasing the prejudices of the very rich may be enough.

A practical person has to trade off against an uncertain future, so that money spent today may be money unavailable to spend tomorrow, with no necessary correspondence to actual resources put to use, now or in the future. The economist may choose to abstract away from uncertainty or money as anything more than a mere numéraire. That reasoning in the abstract satisfies some need of ideological propaganda is virtue enough for an academic scribbler, the contradictions inherent in the practical situation can be disregarded. That uncertainty and money turn all the Panglossian conclusions of an economic theory positing general market equilibrium upside down outlines the schizophrenia of neoclassical economics.

33

Chris Warren 06.02.15 at 12:12 am

john c. halasz @31:

Thanks, I should have noticed the quotes.

Point taken.

34

Val 06.02.15 at 1:07 am

@29
Yes indeed about the “kerfuffle”. It would be interesting if JQ would provide us with some clarity on how he understands the concept of opportunity cost, in plain language. At present people on his home blog seem to be switching back and forth between the ‘common-sense’ concept of opportunity costs, as you describe, and an a somewhat obscure and counter-intuitive academic definition provided in a confusing (and possibly confused) academic paper someone linked to.

I for one am beginning to feel like I am in quicksand, or a desolate marsh as described in Lord of the Rings, with this opportunity cost concept.

I also question the concept’s reliance on what I think JQ has previously described as “methodological individualism” but I don’t know if I am going to get any answers there. However maybe another commenter here can help me. The concept of utility is fundamental to mainstream (or orthodox) economics, is that right? And utility as a concept is based on individual choices, right?

I’ve done quite a lot of reading in basic economics (including a very large text for undergraduates which I worked all the way through), and my main supervisor has a background in economic history so gives me a fair bit of guidance, but I still get confused as to what economists are actually talking about, quite frequently. I do suspect the problem isn’t just me :)

35

bianca steele 06.02.15 at 1:32 am

Apropos of really nothing other than, very vaguely, Val’s comment, as someone who has a severe mental block when it comes to economics, and finds her questions really good ones, as a layperson I found the discussion of micro foundations etc. in Daniel Rodgers’ Age of Fracture (though US-centric) to be very instructive and wonder whether John Q’s book might have some point of contact for readers of Rodgers’ and similar books.

36

Chris Warren 06.02.15 at 2:33 am

Quiggin’s bloggers miss the point.

Opportunity cost is the fundamental ideological basis of capitalism.

Owners of capital expect a return on their capital at least equal to that obtained if their funds were placed in a low-risk bank account.

They then deduct this from any accounting profits and declare they are making zero “economic” profits.

So if all capitalists adopt the same logic (which they must) no one will loose market share.

If you get rid of opportunity costs – you get rid of capitalism.

37

mclaren 06.02.15 at 5:00 am

As a non-economist, my comments probably won’t prove useful to specialists, but might serve as a gauge of the general reaction from non-specialists in economists.

Von Wieser’s essential sentiment seems admirable but clearly wrong: he implicitly assumes a zero-sum game, with misallocation of financial resources (income inequality) resulting in misallocation of production. That’s a piss-weak argument, since the “jerb creayyyyyy-tors” could retort that tilting income toward the upper 1% will spur investment, which in turn should increase GDP and productivity, a rising tide lifts all boats, yadda-yadda. It turns out as a matter of empirical fact that this doesn’t happen without a lot of external regulations on the market — which is in fact just a bunch of artificial regulations itself. In short, what economists call a “market” is more like a Sioux ritual of counting coup. It’s a social construction. The details therefore matter a lot.
But the second problem with trying to use opportunity cost is that real opportunity cost, like Kolmogorov Complexity, is inherently impossible to calculate. It’s one of those nice schemes that sounds great in theory and breaks down completely in reality.
What would the opportunity cost of crappier health care have been in Germany in 1899? Around 120 million lives saved, because Klara Hitler’s son would have died in childbirth. Calculate the opportunity cost of crappy health care, I dare you — and make sure you show your work. Hah!
The third problem with von Wieser’s argument is that it assumes a static economic system. In reality, tilting the income distribution toward the top generates so much filthy lucre that the elites use it to corrupt the system, further tilting the income distribution, rinse, wash, repeat. Pretty soon you get lobbyists writing laws and lawmakers dismantling regulations and “markets” become a fig leaf for control fraud.
You’d need a differential equation or set of linked differential equations with greek letters standing for “suffering” and “robbery” and “corruption” and I guaran-fuckin’-tee it would be highly nonlinear. Meaning, lots of boom and bust crashes, and occasional violent revolutions when the system completely breaks down.
Von Wieser seems to recognize none of this, and standard criticisms of standard economic market theory based on von Wieser don’t seem to the point for this reason.
But what do I know, I’m not an economist.

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