Economics in Two Lessons (draft excerpt)

by John Quiggin on June 12, 2015

I’m still redrafting the opening section of my book, on the concept of opportunity cost. Some applications to specific problems coming soon, I promise. In the meantime, comments and criticism, including editorial corrections and nitpicks, much appreciated.

Opportunity cost




What is opportunity cost?

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.



Benjamin Franklin, From his Advice to a Young Tradesman from an Old One” (1746)

Two roads diverged in a wood, and I—
I took the one less traveled by,
And that has made all the difference.

Robert Frost, The Road Not Taken, 1916

Economists are famous for disagreeing among themselves. Keynesians argue with monetarists about fiscal policy. Members of the Chicago School, including a string of Nobel Memorial Prizewinners1, advocates unfettered free markets, while the case for government intervention in the economy is championed by economists such as Paul Krugman, Amartya Sen and Joseph Stiglitz, all of whom have also been awarded the Prize. As George Bernard Shaw is supposed to have observed, ‘If all the economists in the world were laid end to end, they still wouldn’t reach a conclusion.’

And yet, there is an economic way of thinking that separates any serious economist, regardless of their views on policy, from just about anyone who has not studied economics. The centrepiece of this way of thinking is the concept of opportunity cost. This key idea comes up in the first few weeks of any Economics 101 course, and the definition is easy enough to memorise and restate. Learning to think in terms of opportunity cost takes a lot longer, and many students (including some who go on to become professional economists) never do so.

On the other hand, some people, such as Benjamin Franklin get the idea without any formal training. Franklin’s observation, cited above, that ‘time is money’ has become such a truism that it is often taken to be a traditional proverb rather than the acute observation it was when he made it. Franklin’s explanation points to a far broader point, which forms the basis of the central idea in economics: opportunity cost.

The idea of opportunity cost is inseparably bound up with choice. When we make a choice between alternatives choosing one implies forgoing the other. To paraphrase Robert Frost, the opportunity cost of walking down one road is whatever would have been found on the road not taken. It is this road not travelled, and not any monetary measure, that is most properly regarded as the cost of our choice.

To sum up:
The opportunity cost of anything of value is what you must give up to get it.

This is an idea that seems simple enough when it is first presented, but turns out to be unexpectedly subtle. The lesson of opportunity cost is easy to state, but hard to learn. A large part of any good course in introductory economics consists of attempts to lead students to an understanding of the idea.

Let’s consider some examples, starting with some simple (in fact, simplistic) textbook cases. For people who are largely self-sufficient producers, or who trade mainly through barter, opportunity cost can be described in simple terms. This is why introductory economics courses spend so much time worrying about Robinson Crusoe, alone on his island, or engaged in barter transactions with Friday.

If Crusoe spends a day fishing, when the best alternative was to pick coconuts, the opportunity cost of the fish he eats for dinner is the coconut he might have enjoyed if he had spent the day foraging on land instead.

Alternatively, perhaps, Crusoe might have traded his fish to Friday in return for, say, some roast goat. If the trade goes ahead, then Crusoe’s opportunity cost for his goat dinner is the fish he traded. For Friday, the reverse is true. He gets fish for dinner, and the opportunity cost is the goat.

Of course, these examples are oversimplified, and conceal a range of complexities. A couple are worth mentioning straight away. First, Crusoe can’t know for sure what will happen if he goes foraging for coconuts instead of fishing. The problem of uncertainty is inescapable and, often, intractable. Second, in discussing barter, we haven’t said how Crusoe comes to have the fish, and Friday the goat. We’ll look at both of these issues, and the complexities they raise, later on.

Introducing money complicates the problem even more, and provides plenty of opportunities for fallacious reasoning. The lesson of opportunity cost is that, contrary to the popular view, economics is not ‘all about money’. In fact, the lesson of opportunity cost is harder to learn, the more accustomed you are to thinking about costs and benefits in monetary terms. The principle of opportunity cost is relevant to decisions of all kinds, whether or not there is any monetary cost associated with those decisions.

Sometimes, as we will see, the money price of a good or service is a good measure of its opportunity cost. But very often, as Franklin points out, it is not. The sixpence spent on idle diversion is only part of the opportunity cost of a day off. And even adding the foregone earnings of five shillings may not capture the entire cost. Perhaps the hard working tradesman might have built up goodwill, leading to future demand for his services; this is also part of the opportunity cost.

Opportunity cost is equally relevant to public policy. This is obvious in relation to decisions to provide some particular good or service to the public. In making such a decision, governments forgo opportunities, including alternative expenditure items, cuts in taxation or reductions in public debt (allowing for higher spending in the future). The opportunity cost of a particular item of public expenditure is the value of the best available alternative.

Sometimes, the way in which choices are presented makes it appear that an attractive good can be obtained at no cost. However, a careful consideration of the alternatives usually shows that there is an opportunity cost involved. As we go on, we will see numerous examples of this.

1 The Economics Prize is not one of the original Nobel Prizes, and its full name is The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. Philip Mirowski has some interesting remarks on how the prize came into existence http://ineteconomics.org/video/30-ways-be-economist/philip-mirowski-why-there-nobel-memorial-prize-economics
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The idea of opportunity cost*

(Skippable section)
The idea of opportunity cost is a natural consequence of modernity. In a traditional society, most economic decisions are made on the basis of custom, or of fixed obligations (what Marx called ‘motley feudal ties’). The central idea of tradition is to do whatever has been done before. In a modern society, we are faced with new choices all the time, regarding how to spend our household income, how to manage the business of production and how to determine public policy.

We have already seen what may be the first presentation of the idea of opportunity cost, due to Benjamin Franklin. Franklin presented the idea as a piece of practical wisdom, naturally applicable in a modern commercial society, and particularly for the ‘tradesman’ (the term then encompassed shopkeepers as well as self-employed craftsmen) to whom his advice was addressed. But it is equally applicable to anyone making the complex choices entailed by modern life.

The first economic theorist to use the idea of opportunity cost (though not the name) was David Ricardo. Ricardo’s theory of comparative advantage in trade (discussed in more detail later) marked a substantial advance on the assumption that trade was determined by differences in the labor time required for the production of goods in different countries. As Ricardo observed, what mattered was the opportunity cost of producing one good, expressed in terms of the other.

Frederic Bastiat was the first to deploy the idea of opportunity cost (though not the name) as a polemical weapon. Bastiat demolished spurious arguments for a variety of proposals to assist particular industry by pointing out that the proponents had focused on the benefits of the path they proposed without taking account of the opportunity costs of the (unseen) path not taken.

Both Ricardo and Bastiat are well-known names in the history of economic thought. The same cannot be said of Friedrich von Wieser, the Austrian economist who coined the term ‘opportunity cost’, (German Opportunitätskosten) along with the equally notable term ‘marginal utility’. Along with Carl Menger, and Eugen Bohm von Bawerk, Wieser was one of the founders of the ‘Austrian School’ of economics.

For Wieser, the concept of opportunity cost was applicable, not only to decisions made in markets but also to the distribution of wealth and resources for the community as a whole. A highly unequal distribution of wealth means that the luxury consumption of the rich takes precedence over the basic needs of the poor. As Wieser sharply observes

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.

Wieser used this idea to justify a progressive income tax.
The idea of opportunity cost was brought into the mainstream of economics by Austrian and Austrian-influenced economists, most notably FA Hayek, Ludwig von Mises and Lionel Robbins. Unfortunately, all three were dogmatic advocates of the free market, who stripped Wieser’s idea of its egalitarian implications

Mainstream economists largely accepted Robbins’ dictum that interpersonal comparisons of wellbeing should be rejected as ‘unscientific’, and sought to rebuild welfare economics without reference to such concepts as marginal utility (another term coined by Wieser). By the time theorists such as Peter Diamond and James Mirrlees returned to the problem of optimal tax in the 1970s, the link to Wieser’s work and to the concept of opportunity cost was lost.

Meanwhile, rather than applying the opportunity cost concept to the actual problems of economics, Wieser’s students Hayek and Mises pursued a far less fruitful aspect of his work: the sterile 19th century controversy over the “theory of value”. By subordinating economic analysis to dogmatic ‘market fundamentalism’, Hayek and Mises drove the Austrian school of economics into a blind alley from which it has never escaped.2






1 The Economics Prize is not one of the original Nobel Prizes, and its full name is The Bank of Sweden Prize in in Economic Sciences in Memory of Alfred Nobel. Philip Mirowski has some interesting remarks on how the prize came into existence http://ineteconomics.org/video/30-ways-be-economist/philip-mirowski-why-there-nobel-memorial-prize-economics
2 As I observed in my book Zombie Economics, the same is true of another innovation of the Austrian School, their business cycle theory, based on bubbles and busts in investment. The model implied that governments could potentially stabilise the cycle with beneficial effects, but Hayek and Mises were unwilling to accept the implications of their own theory. Instead, they advocated a contractionist response to the Great Depression, which had disastrous results wherever it was implemented.

{ 46 comments }

1

Bruce Wilder 06.12.15 at 10:04 am

. . . reductions in public debt (allowing for higher spending in the future)

Debts would seem to be a example of how monetary factors can confuse us with regard to opportunity cost.

The idea that the public debt is a constraint on public spending is certainly going to be controversial. In an era when pointless austerity is pressed on countries experiencing depression, it seems almost to invite incendiary comments.

2

Peter T 06.12.15 at 10:31 am

This exposition leaves me feeling that I’m missing something. As a central element in a major discipline “opportunity cost” as laid out here seems – weak? That one can only do whatever one can do would be an obvious truth to medieval peasants as well as moderns (if we pick the spinach today we’ll have to eat kale tomorrow; if we spend today mending the well coping, then the repairs to the cowshed will have to wait and so on). Is every holiday a “cost” in terms of what one might have earned? Or is every working day a “cost” in terms of the leisure one might have enjoyed? Did Ben Franklin, while enjoying the ladies of Paris, count the livres he might otherwise have gained?

A “cost” implies something that is at least potentially measurable. Is the “cost” of an idle day the relatively certain foregone wages? Or any of an infinite range of other possibilities? Ben’s tradesman might have been working; or he might have been developing the patronage that would lead to a prosperous political career, or flying the kite that would lead to scientific fame and thence to riches, or….

Certainly good decision-making should take in as wide a range of alternatives as is feasible. But, in life, we have to choose, and often choose quickly. Indeed, a large part of most strategic games is devoted to restricting the opponent’s range of choice and their time to consider. But can the paths not taken be accurately considered as a “cost”?

3

Lee A. Arnold 06.12.15 at 11:24 am

As far as I can find out, the term “opportunity cost” was NOT coined by Wieser. Please do not rely upon Wikipedia without double-checking.

The term “opportunity cost” was coined by D.I. Green in, “Pain and Opportunity Cost”, the Quarterly Journal of Economics, January 1894. (source: Joseph A. Schumpeter, History of Economic Analysis, p. 917 footnote).

That was 20 years before Wieser.

Everything I can find on Wieser says he coined the term “opportunity cost” in his book, Theory of Social Economy (Theorie der gesellschaftlichen Wirtschaft) in 1914.

4

Mdc 06.12.15 at 12:25 pm

Since your point is that opportunity costs are not, fundamentally, about money, maybe you could propose here a revision of the maxim ‘time is money’ (which I’ve always bristled at). Better to say, ‘time is…?’

5

Elias 06.12.15 at 12:38 pm

“For people who are largely self-sufficient producers, or who trade mainly through barter…”

Aren’t we yet a bit more skeptical towards this barter fiction, after the discussion sparked by D. Graeber’s book Debt: The First 5,000 Years? My guess is that a significant number of people will find the “Robinson Crusoe engaged in barter transactions with Friday” phrase misleading: it obscures the fact that, most probably, Robinson Crusoe would be engaged in gift exchanges with Friday.

6

Olle J. 06.12.15 at 12:43 pm

Regarding footnote 1. Most of the actual work (as far as I know) was done by my next door office neighbor Gabriel Söderberg, who was mentioned in the video iirc. He published a chapter about it in his dissertation that unfortunately is not available online [whining rant that is unintelligible for people outside of Swedish academia]. As far as I know, Mirowski is not involved any more. However, Avner Offer (and Gabriel) is about to publish a book about that is derived from the project: http://www.ehs.org.uk/press/from-social-democracy-to-market-liberalism-how-the-nobel-prize-in-economics-has-influenced-policy-debates

7

david 06.12.15 at 12:48 pm

Peter T@2:

No, I don’t think you’re missing something. Opportunity costs are not actually a major methodological element outside of lay pedagogy, as has been observed. At the level of an individual decision-maker, it’s only interesting as a device for weighing decisions “at the margin” (i.e. assuming you are at the budget frontier to begin with). Most real-life decisions of interest are not made at the frontier, but rather about something that might move you closer to the frontier as well, so it’s not useful.

This confusion is parodied in this passage, widely distributed to undergrads:

Beyond transforming Mankiw’s semantic deathtrap into simplicity itself, this translation has the advantage of establishing a connection between Principle #1 (Choices are bad) and Principle #2 (Choices are really bad).

To continue to deepen the reader’s understanding of why choices are bad — really bad — let’s return to our previous example, in which somebody offers you a choice between a Snickers bar and a package of M&Ms. Suppose, for the sake of argument, that you take the M&Ms. According to Mankiw, the cost of those M&Ms is the Snickers bar that you had to give up to get the M&Ms. Your gain from this situation — what economists call “economic profit” — is therefore the difference between the value you gain from getting the M&Ms (say, $.75) and the value you lose from giving up the Snickers bar (say, $.40). In other words, your economic profit is only $.35. Although you value the M&Ms at $.75, having the choice of the Snickers bar reduces your gain by $.40. Hence Principle #2: Choices are really bad.

Indeed, the more choices you have, the worse off you are. The worst situation of all would be somebody coming up to you and offering you a choice between two identical packages of M&Ms. Since choosing one package (which you value at $.75) means giving up the other package (which you also value at $.75), your economic profit is exactly zero! So being offered a choice between two identical packages of M&Ms is in fact equivalent to being offered nothing.

Now, a lay person might be forgiven for thinking that being offered a choice between two identical packages of M&Ms is in fact equivalent to being offered a single package of M&Ms. But economists know better. Being offered a single package of M&M effectively means having to choose between a package of M&Ms (which you value at $.75) and nothing (which you value at $0). Choosing the M&Ms gives you an economic profit of $.75, which is $.75 more than your economic profit when you are offered a choice between two identical packages of M&Ms.

(as a prompt for the student to reflect why minimizing “opportunity cost” is different from setting the rate of change of utility to zero. The rest of EC10 then works off the latter, and opportunity cost disappears into the conceptual dustbin, never to be seen again)

To link back to Bastiat and “what is not seen”, one needs to toss in a Fisherian gen-eq production possibility frontier and a Wicksellian methodological assumption of full employment in order to generalize from individual to social choice; there’s a lot of additional historical baggage here. And even as polemic, it still has remarkably little to do with modern econ. A fair account would need to explain the vast general equilibrium Edgeworthian project, its failure, the switch to set-theoretic methodological approaches with continuums of agents rather than individual Crusoes and Fridays…

I continue to question the wisdom of trying to refute polemic, but eh.

8

areanimator 06.12.15 at 12:53 pm

Mdc @ 4, may I suggest the fictional Russian con artist Ostap Bender’s maxim “Time we have is money we don’t have”?

9

david 06.12.15 at 1:03 pm

On the draft: you may notice that Hazlitt’s own pamphlet cites virtually no theoretical economists, in attack or support. von Mises, Bastiat, and Hayek all suggested reading at the end of the book, but the names never appear in the chapters itself.

This is good practice – as Hazlitt notes in his own preface, any fair attack would require careful qualification that readers are not actually interested in. But, more importantly, I don’t think readers are actually interested in theory. What they want is red meat, which Hazlitt provided in full (for a conservative reader in 1946). New Dealers are selfish liars and hypocrites! Yeah! The TVA sucks! Yeah!

But these targets have to be carefully limited. Maybe you have an interesting and subtle theory of the Sveriges Riksbank prize, but the readers who care by and large already know about it and you can only piss them off with noncommittal fudging, and the readers who don’t have no reason to be engaged with a diversion (however brief) on its origins. There’s no point. It just smells of prevarication.

10

djr 06.12.15 at 1:20 pm

If it’s true that “The opportunity cost of anything of value is what you must give up to get it,” then is opportunity cost just another name for cost? If so, I think you should say so explicitly. The idea of opportunity cost seems to be that there is more to cost than the money or whatever you hand over in exchange for goods and services. But the opportunity cost of something, at least as you present it here, is the entire cost, not something additional to the money paid.

Another small criticism: at first this seems written in a kind of “for dummies” way (which is a good thing, in my book) but then you throw in the word ‘intractable.’ Will your target audience know what this means? I’m not so sure. (Also, now I think of it, will they know that Friday is a person’s name?)

And what are the politics of your target audience? I’m not sure how conservatives will react to your quoting Marx (when you aren’t otherwise talking about him) and calling advocacy of free markets “unfortunate” without immediately giving a reason to agree with this verdict. Better, I would think, to present yourself as neutral and then show (not say) that Hayek et al. are wrong. Otherwise you might find yourself preaching to no one but the choir.

11

reason 06.12.15 at 2:24 pm

Peter T
or is the interesting (if probably incorrect line from Don Maclean’s Crossroads) relevant

….
They walk one road to set them free
And find they’ve gone the wrong direction.
But there’s no need for turning back
Cause all roads lead to where I stand;
And I believe I’ll walk them all
No matter what I may have planned.”

12

reason 06.12.15 at 2:26 pm

P.S. I think the above bit of whimsy does have some relevance. I remember thinking that the argument that high earners will work harder if you reward them more (and statistically they do), is probably only true in the short run. In the longer run, they retire earlier.

13

Brian 06.12.15 at 6:30 pm

I immediately started thinking of when I laid down a rule that nobody was allowed to work after 8:30 PM. Staff could play games after that, but anyone trying to work would be sent home. The reason was that people were working 12-15 hours a day and accomplishing negative work. People can’t concentrate that long for more than a week or two as a rule. Productivity went up, way up, after that.

I also thought about the phenomenon that occurs in stressed brains. The hippocampus will shrink under years of stress. After 20 years it can be 1/3rd of its youthful size. Something similar is true for the frontal cortex. It literally kills the brain. This leads directly to what I call executive syndrome. The hardest-charging executives are brain-damaged by the time they get to the top of the organization. Executive suite expectations of insane hours, lack of sleep, etc. that are common in more than a few organizations, guarantee brain damaged decision making.

Assessing the economic impact of those things has not been attempted.

I know that’s orthogonal to opportunity cost, but I think the opportunity cost discussion segues naturally into these and other areas. For instance, an attempt to relate the concept of opportunity cost to ecologies and ecological niches. One could, for instance, concentrate on nitrogen, which has an energy cost and then look at the myriad strategies that different creatures in an ecosystem use for obtaining and using nitrogen. (One can also look at the price of goods in grocery stores and see that cost correlates quite well to nitrogen content.) Chemically fixed nitrogen is, for terrestrial (and most aquatic) species, the most expensive nutrient content. Life will go to great lengths to get it.

What I am getting at here is that different creatures (plants are both sources and sinks) have different methods of solving their opportunity cost problem as it relates to nitrogen. So there is not one way, and I think that a naive reader could easily get the impression that one can or should search for the single best choice.

(Nitrogen cycling is, I think, an interesting (though imperfect) analog to money as well. Nitrogen is in such oversupply in the atmosphere it may as well be infinite. It takes energy to fix it into a form that is useful and enters into exchange in the biosphere. So it is both virtually infinite like fiat money, and it is limited in supply due to barriers, but more can always be created.)

(Nitpick – ‘advocates’ should be ‘advocate’.

14

T 06.12.15 at 7:20 pm

John,
You may be interested in this survey of economists attending the ASSA meetings in 2005. They didn’t do so well as a group. http://www2.gsu.edu/~wwwcec/docs/ferrarotaylorbep.pdf

Please Circle the Best Answer to the Following Question:
You won a free ticket to see an Eric Clapton concert (which
has no resale value). Bob Dylan is performing on the same night
and is your next-best alternative activity. Tickets to see Dylan cost
$40. On any given day, you would be willing to pay up to $50 to
see Dylan. Assume there are no other costs of seeing either
performer. Based on this information, what is the opportunity cost
of seeing Eric Clapton?
A. $0
B. $10
C. $40
D. $50

15

CJColucci 06.12.15 at 7:35 pm

And yet, there is an economic way of thinking that separates any serious economist, regardless of their views on policy, from just about anyone who has not studied economics.

Editorial nit-pick. In trying, commendably, to avoid sexism (though I’d bet that almost all the economists you’ll mention will be men), the subject-verb agreement breaks down. I’d suggest “separates all serious economists instead. Or does this reflect the different handling of collectives between American and Commonwealth English?

16

CJColucci 06.12.15 at 7:36 pm

I don’t know why the last several words were struck through.

17

Colin Danby 06.12.15 at 8:41 pm

Great overall. I might suggest skipping the skippable bit, because “The idea of opportunity cost is a natural consequence of modernity. In a traditional society…” is tautologous. I.e. I would suggest that in most times & places there’s a combination of customary or “traditional” behavior, and genuine choosing. In that case, that paragraph boils down to saying that opportunity cost applies to decisions.

Spotting the fallacy in the quoted bit in @6 might be a good classroom exercise.

18

Chris Warren 06.12.15 at 10:51 pm

T

Isn’t a bit hard to determine this as we don’t know how much you would be willing to pay to see Eric Clapton.

If this was $100, then (because the ticket is free) this would be the opportunity cost of seeing Dylan????

Can you really work with opportunity costs if you do not have equal cost-benefit information for both choices?????

19

Brian 06.12.15 at 11:40 pm

I agree. Avoid trigger-words like “Marx”. This isn’t an economic class. It’s communicating with the public.

20

T 06.12.15 at 11:41 pm

@6 The video of the block quote starts at 1:20 but watch the whole thing. Yoram Bauman is a funny guy (for an economist.)

21

john c. halasz 06.12.15 at 11:49 pm

@18:

The answer is $10. I figured that out easily, but the point was most “trained” economists got the answer wrong. But the solution isn’t that cost/benefit analysis must be extended counter-factually to all the available alternatives. It’s rather that the framing of costs/benefits in such terms is largely meaningless.

22

Bruce Wilder 06.13.15 at 12:44 am

It is a deliberately stilted framing, which assigns an unwarranted numéraire to the counterfactual and subjective value of attending the Dylan concert and imposes other artificial restrictions on the choice, to produce the designated “best” answer. The best answer is that it is a stupid question.

23

T 06.13.15 at 1:42 am

John —
Isn’t opportunity cost typically parsed relative to the next best alternative rather than “what you must give up’? Or is that implicit?
Also, I’m not so sure that opportunity cost is a product of modernity as compared to traditional societies? Don’t you just need choice at the margin as you said in production, consumption, or policy? What society has none of those?

24

Val 06.13.15 at 3:01 am

I read as far as Robinson Crusoe and thought: oh no, he’s back! The normative individual as an adult white male with no caring responsibilities and no social ties (except the native servant he acquires later) and “free choice” about how he makes use of his environment.

I don’t think you should totally abandon “methodological individualism” as you called it in an earlier post, but I think it would be good if it wasn’t the main basis. Individualism is an aspect of reality, a subjective experience that as I see it coincides with ‘external’ reality to the degree that the skin constitutes a felt border (sorry that sounds like a term in embroidery or something). However we are actually part of community and ecology, and I think basing your account on individualism as the starting point obscures that.

Wouldn’t it be appropriate as an Australian economist to start with a description of the day to day economy of a small tribal group in Indigenous society prior to white invasion? Then you could discuss the difference between a sharing economy and an exchange economy (I think sharing is a better description than gift here), and the difference between people who see themselves as part of an ecological system, and people who see land and its products as something to be used for human benefit (utility, whatever you want to call it)?

I suspect this is probably completely out there stuff for a mainstream economist, but I like to throw these ideas in to the mix. It would be useful for bringing environmental/climate change consideration in too.

25

Chris Warren 06.13.15 at 5:15 am

Brian

In fact words like “Marx” may be the start of your education.

26

Brian 06.13.15 at 6:06 am

“In fact words like “Marx” may be the start of your education.:
Oi vey. Chris, do you actually think that virtually anyone who reads Crooked Timber isn’t well versed in Marx?

Here’s a little education for you. Marx got his communist living idea because it was, in his time well known and obvious because of the many religious communes in the USA in the 200 years prior. It was fashionable. And Karl was a bad scholar, because the data was in and it was already clear. Secular communism didn’t work in any of the experiments it was tried. In a religious context, there is a very high level of social capital. In a secular one it’s lower. All of that was forgotten in another generation, and even in Marx’ time it was unfashionable in academia to be religious. But because of that poor scholarship, and his megalomania, Karl Marx screwed up the next century horrifically.

The word Marx is a trigger word for a huge segment of society. There is a reason for that. It didn’t work. It murdered millions of people and unleashed hells on earth on a scale I sincerely hope we will never see again. For those who went through those hells, Marx is even more disreputable to most than he is among right-wingers in the West.

Let me give you one little example from a near time. Around the time of Kent State, in Tbilisi, now Republic of Georgia, a few thousand students gathered to denounce Stalin. Kruschev had done it when they were children. Security forces surrounded the students in a park downtown near the river. Three days later, there were no survivors. They fought bravely with their hands and rocks. But they all died. Bodies floated into the Caspian for weeks. That was there Kent State. Even now, people look around furtively and speak in hushed voices when they talk about it.

It won’t help John’s book communicate with the unwashed masses. And there is no need to use it I think.

27

John Quiggin 06.13.15 at 6:56 am

Thanks very much for all these useful comments. A few quick responses.

Lee Arnold: I’ve now read DI Green, and he appears to impute the idea, if not the term, to Wieser’s 1889 Natural Value. I’ll need more work to get this right.

Peter T: The obvious test is comparative advantage, which follows directly from opportunity cost reasoning, but is, I think highly counterintuitive to people who don’t think in opportunity cost terms

Colin: I think you’re putting up a substantive claim similar to that of Peter T, and with which I disagree, rather than a reason for skipping the skippable sections. But I’m still in two minds here.

mdc: I’ll try to rework along these lines, giving more stress to the fact that Franklin was only half-right here

T: I’m well aware of this. At least some of the subjects claim they were verballed (Oz police terminology for reporting a verbal confession that may or may not have been made),

Val: I’m certainly going to make this point: you might want to look back at my post on Locke, which will be going into the book in some form

28

Val 06.13.15 at 7:14 am

@ 26
Your version of the Tbilisi massacre is somewhat different from Wikipedia’s https://en.m.wikipedia.org/wiki/April_9_tragedy

The Wikipedia version suggests the Soviet soldiers killed two demonstrators and another 18 were crushed in the attempt to flee. This was the responsibility of the soldiers as they had blocked exits and were also using gas, however it is somewhat different from your suggestion that they killed thousands of protestors. If the Wikipedia account is correct, the massacre is worse than Kent State because of the people who died trying to escape, but not worse in terms of the number of protestors directly killed by soldiers. Do you contest the Wikipedia account?

29

UserGoogol 06.13.15 at 7:22 am

CCJColucci: “They” can be a singular gender-neutral pronoun in both American and British English. Admittedly, it’s a somewhat controversial usage, but in one form or another it’s been around since Shakespeare.

30

Val 06.13.15 at 7:38 am

@26
I see now that there was another massacre at Tbilisi in 1956 https://en.m.wikipedia.org/wiki/9_March_1956_massacre_in_Tbilisi when Kruschev was in power. Wikipedia says estimates of the numbers killed ranged from dozens to hundreds, but says the protestors were protesting in support of Stalin and against Kruschev in fact. It seems like you may be thinking of both massacres, but one was in 1956 and one in 1989, while Kent State was in 1970, so it was rather confusing.

I always thought when studying Russian history that it was violent and that governments tended to be very repressive, both before and after the revolution. I don’t see that you can blame Marx for this.

31

ZM 06.13.15 at 7:44 am

Brian,

“I know that’s orthogonal to opportunity cost, but I think the opportunity cost discussion segues naturally into these and other areas. For instance, an attempt to relate the concept of opportunity cost to ecologies and ecological niches”

for an assignment I read a book on ecological economics. The maths were too difficult for me but I think opportunity cost could sum up one of the graphs, which looked at how the present generations’ consumption of resources necessarily negatively impacted on the resources available for future generations to consume.

So the opportunity cost is not experienced only by the individual consumer but the impact of the decision affects others.

You could look at that opportunity cost impact shared amongst the present generation too, in terms of high consumption by some people causes low consumption ie. poverty for others, due to limited amounts of resources and consumer goods

32

Chris Warren 06.13.15 at 8:12 am

Brian

That was not a sensible response.

If you want to count the dead – start with American colonialism and don’t stop counting until you pass through two capitalist world wars including Hiroshima and Nagasaki, and then Korea, Indonesia, Chile and Vietnam. Add in the deaths handed-out by the British to bolster their artificial plundering – China, India, Africa and Australia.

Then top it off with Iraq, Libya and Syria, and don’t forget Kwangju.

Marx is not to be identified with what happened under Cold War conditions.

That is your first lesson.

33

ZM 06.13.15 at 8:50 am

Brian,

“What I am getting at here is that different creatures (plants are both sources and sinks) have different methods of solving their opportunity cost problem as it relates to nitrogen. So there is not one way, and I think that a naive reader could easily get the impression that one can or should search for the single best choice.”

Actually humans have made a great mess of the nitrogen and phosphorus cycles. This is scientifically recognised as unsustainable and as one other things humans have done that are harming Earth’s life support systems.

They are one way the present generations is harming the future generations through pushing the planetary boundaries :

“Nitrogen and phosphorus flows to the biosphere and oceans
The biogeochemical cycles of nitrogen and phosphorus have been radically changed by humans as a result of many industrial and agricultural processes. Nitrogen and phosphorus are both essential elements for plant growth, so fertilizer production and application is the main concern. Human activities now convert more atmospheric nitrogen into reactive forms than all of the Earth’s terrestrial processes combined. Much of this new reactive nitrogen is emitted to the atmosphere in various forms rather than taken up by crops. When it is rained out, it pollutes waterways and coastal zones or accumulates in the terrestrial biosphere. Similarly, a relatively small proportion of phosphorus fertilizers applied to food production systems is taken up by plants; much of the phosphorus mobilized by humans also ends up in aquatic systems. These can become oxygen-starved as bacteria consume the blooms of algae that grow in response to the high nutrient supply. A significant fraction of the applied nitrogen and phosphorus makes its way to the sea, and can push marine and aquatic systems across ecological thresholds of their own. One regional-scale example of this effect is the decline in the shrimp catch in the Gulf of Mexico’s ‘dead zone’ caused by fertilizer transported in rivers from the US Midwest”

http://www.stockholmresilience.org/21/research/research-programmes/planetary-boundaries/planetary-boundaries/about-the-research/the-nine-planetary-boundaries.html

34

Francis 06.13.15 at 2:05 pm

The section title “The idea of opportunity cost” should read “The history of the idea of opportunity cost”.

(It’s also a little dogmatic. You clearly think that Hayek was wrong. But I think textbooks work a little better when the author shows why, rather than simply tells.)

“On any given day, you would be willing to pay up to $50 to see Dylan.” It seems that this question is coherent only in the context of each artist being available on that day only. Then by going to the Clapton concern, our person in question is giving up – forever – an experience valued at $50. Per DQ’s definition above, the opportunity cost is $50. This loss is offset by (a) the retained cash and (b) the value of the Clapton concert.

Because if Dylan and/or Clapton are in town later that week and/or maybe next year, then it seems to me that the question gets a lot more complex.

But I think the question is really definitional – is ‘opportunity cost’ defined as (a) the personal value of the foregone experience; or (b) the market value of the foregone experience; or (c) the difference between the two.

(If $10 is the ‘right’ answer, that would be weird to me. Opportunity costs would exist only in the differences between market and personal values? That doesn’t appear to be a terribly useful concept.)

35

Lee A. Arnold 06.13.15 at 2:23 pm

My thought as well. Is it because the “opportunity cost” is now defined as the “consumer surplus” of the unchosen alternative?

Or is it because they don’t end up paying for EITHER concert, so the “opportunity cost” of seeing Clapton is the same as the “consumer surplus” of seeing Dylan?

36

Lee A. Arnold 06.13.15 at 2:30 pm

JQ #27: “I’ll need more work to get this right.”

Perhaps something like: After centuries of writers who expressed the general idea, Wieser was the first to define the concept as an analytical procedure, and so far as we know, 5 years later Green coined the name for it, after reading Wieser.

37

Ben 06.13.15 at 2:40 pm

The Franklin quote reminded me of a much earlier one by another wise elder.

Seneca, “On the Happy Life” (c A.D. 58)

First, therefore, we must seek what it is that we are aiming at; then we must look about for the road by which we can reach it most quickly, and on the journey itself, if only we are on the right path, we shall discover how much of the distance we overcome each day, and how much nearer we are to the goal toward which we are urged by a natural desire.

But so long as we wander aimlessly, having no guide, and following only the noise and discordant cries of those who call us in different directions, life will be consumed in making mistakes – life that is brief even if we should strive day and night for sound wisdom.

Let us, therefore, decide both upon the goal and upon the way, and not fail to find some experienced guide who has explored the region towards which we are advancing; for the conditions of this journey are different from those of most travel. On most journeys some well-recognized road and inquiries made of the inhabitants of the region prevent you from going astray; but on this one all the best beaten and the most frequented paths are the most deceptive.

Nothing, therefore, needs to be more emphasized than the warning that we should not, like sheep, follow the lead of the throng in front of us, travelling, thus, the way that all go and not the way that we ought to go.

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Colin Danby 06.13.15 at 4:48 pm

Thanks, John. To clarify, there seem to be at least four ways to understand “The idea of opportunity cost is a natural consequence of modernity. ”

1. As tautology: modern thinking is rational choosing, tradition is obligations and customs. I.e. a matter of lining up definitions and categories, not a statement about history.

2. As a then/now statement about social history: people used to be tightly bound by tradition and custom but now “we are faced with new choices all the time.” (And/or now “we” choose rationally, and in the past people chose in some other way.) This I doubt.

3. As a statement about intellectual history: only at some point in history did/could certain elite thinkers formalize rational choosing in terms of as opportunity cost.

4. As a statement about the history of policy: that only at some point in history did the concept of opportunity cost, as formalized by elite thinkers, gain influence in government policy debates. (Both you and Hazlitt are interested in teaching a lesson about how policy should be understood and evaluated, no?.)

It’s a commonplace (e.g. grammar) that people can use structures of thought without being aware of their formal properties, so there’s no contradiction between people behaving according to what rational choice and comparative advantage predict they would do, while rejecting or failing to understand the formalizations. This seems especially likely as you shift away from people’s immediate circumstances (and sphere of choice), which they are likely to understand pretty well, to large scale public policy questions.

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T 06.13.15 at 5:33 pm

Colin @37

I took the modernity discussion in the text as an historical statement much in line with Graeber’s claims about debt. Hence my comment @23 (and our apparent agreement that this is likely incorrect.) I think it would require significant exposition to incorporate alternative meanings and it would be a distraction. Unless the reference to modernity is more than a throw-away, it think it creates more problems than it solves. Just seems like a can of worms best left unopened.

40

Chris Warren 06.14.15 at 12:22 am

Lee A. Arnold

” Is it because the “opportunity cost” is now defined as the “consumer surplus” of the unchosen alternative? ”

This is interesting. Spending $40 cash in alternative purchases may have consumer surplus as well. So you can get $40 of comparative benefit by spending – say, $35.

OC of $10 does not indicate what a consumer would do.

41

spectrevsrector 06.14.15 at 12:11 pm

Brian @26:

When I’ve read Marx I’ve found a ‘critique of political economy’ not a blueprint for communism.

Granted, in the popular imagination Marx set out a society that Lenin implemented, but those of us who are ‘well versed in Marx’ don’t have to repeat the fallacy.

42

Icastico 06.15.15 at 4:39 am

The Clapton/Dylan study is so silly. The result only tell us that the problem as worded does not work well as a proxy for “understanding opportunity costs.” The “correct” answer is correct how exactly when people who do understand pick from your choice seemingly at random?

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casmilus 06.16.15 at 11:32 am

Should the OC study be placed in the same file as all the examples of the Base Rate Fallacy? That all they prove is that professionals don’t use all the information available when presented as a formal problem?

44

js. 06.17.15 at 3:27 am

JQ:

I am of the opinion that you should not only not skip the “skippable” section, but that you shouldn’t describe it as “skippable”. I thought it was great. Yes, it’s a bit hand-wavy, but I don’t think that’s really a bad thing in a popular text—esp. if there are notes with sources.

Colin Danby:

As a then/now statement about social history: people used to be tightly bound by tradition and custom but now “we are faced with new choices all the time.” (And/or now “we” choose rationally, and in the past people chose in some other way.) This I doubt.

It’s not going to be an exceptionless true statement, of course. But do you really think it’s that implausible a claim to say that things moved very much in this direction with the advent of modernity (however you date/define that). It seems to me a truism that people (in modern societies) are far less tradition-bound than they were in premodern societies. That, e.g., the pace of social change is much faster now, at least partly because people feel and are much less constrained to believe and act as their parents did (I’m thinking this is a necessary condition of the pace of social change).

Of course, one would need scare quotes around “rational”, I think. But it seems not at all implausible to me that “the market” and concept-cognates play a role in people’s thinking—in everyday life—that would have been impossible a few centuries ago. I almost want to say: how could it be otherwise?

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js. 06.17.15 at 3:35 am

To clarify one thing, @ Colin Danby. I guess you might have a view whereby, yes, people think more in terms of markets and related phenomena now, whereas they used to think more in terms of traditions and customs a few centuries back, but this is all just window-dressing/epiphenomena: the underlying decision making processes are all the same. This is a view I find really strange and problematic, but I don’t have a pithy argument against it. So… I’ll leave it at that.

(Sorry, getting to all this rather late, obviously.)

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Colin Danby 06.19.15 at 5:48 am

js: What you call a truism in 45 is pure tautology.

Anyone can expound the definition of modernity as an ideal type.

Any number of hypotheses about history are “plausible” in the minimal sense that they are not patently idiotic. How shall we figure out if they are true or not?

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