Home > Economics in Two Lessons > Economics in Two Lessons

Economics in Two Lessons

June 12th, 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
[unknown.jpg]
?

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.

Categories: Economics in Two Lessons Tags:
  1. Newtownian
    June 12th, 2015 at 19:45 | #1

    The Riksbank Prize links dont seem to work.

  2. Tim Thornton
    June 12th, 2015 at 20:32 | #2

    John, This analysis by Prof Rod O’Donnell of problems associated with the teaching of opportunity cost might be useful to you, http://www.finance.uts.edu.au/research/wpapers/wp163.pdf

  3. Newtownian
    June 12th, 2015 at 21:09 | #3

    http://ineteconomics.org/search/p1?q=&facet%5BcontentType_ss%5D=Video

    I checked the video sites for the root directly above but there is no sign of Mirowski or a video by this name. That said thanks for the site. The commentary looks very informative.

    This seems the sole item on the prize

    http://ineteconomics.org/grants-research-programs/grants/the-nobel-memorial-prize-in-economics-and-its-influence-on-market-liberal-policy-norms-c-1968-2000

  4. jrkrideau
  5. J-D
    June 12th, 2015 at 22:02 | #5

    Franklin emphasises that the opportunity cost of a day spent at leisure is equal to the value that could have been derived from a day of labour; but isn’t it exactly equally true that the opportunity cost of a day spent in labour is equal to the value that could have been derived from a day of leisure?

  6. Same Ordinary Fool
    June 13th, 2015 at 01:19 | #6

    “Benjamin Franklin…” line. The single quotation mark (“) isn’t paired with another.

    “Economists are famous…” paragraph, 2nd line: “members…advocate( )” since plural

  7. nickj
    June 13th, 2015 at 06:55 | #7

    some fallacious reasoning I would like to see debunked: my dogmatic refusal to be an investment banker incurs an opportunity cost of, ooh, let’s say £500k p/a.

  8. Ikonoclast
    June 13th, 2015 at 07:16 | #8

    The opportunity cost concept has genuine validity. I just don’t see that our system has ever applied the concept in practice. Does our system care or take action about the opportunity cost involved in wrecking the climate? No. Does our system care or take action about the opportunity cost involved in having three-quarters of a million people unemployed? No.

    The opportunity cost concept has some personal and some academic validity. It has no applied validity in our system so in that sense it’s a waste of time talking about it. The people would first have to engineer an economic system where the concept was actually applied to general benefit. Otherwise, talking about it is pretty much just an academic exercise.

  9. J-D
    June 13th, 2015 at 09:22 | #9

    @Ikonoclast

    So what you’re saying is that it would be good to move in the direction of a system that takes more account of opportunity costs, but that if we want to do that then it’s a waste of time even to mention opportunity costs.

    That doesn’t sound like good sense to me.

  10. sunshine
    June 13th, 2015 at 09:46 | #10

    Franklin’s observation, cited above, that ‘time is money’

    The language of time is often monetary metaphor. eg; ‘spending ,wasting ,saving ,or investing time’. The language of economics is expanding to cover more and more areas of life previously free from economic metaphorical style. For example the Geelong Cats footy club had a misssion statement pinned up on their dressing room wall, also people often speak of their life as a resource/opportunity which must be fully used/consumed.

    Opportunity cost can be anything from useful tool to ideological weapon. A possibly unavoidable part of thought and daily life (depending on how it is defined).

  11. Ikonoclast
    June 13th, 2015 at 10:42 | #11

    @J-D

    That’s a complete misrepresentation of what I said. I said essentially;

    (1) The current system does not properly count opportunity costs;
    (2) The current system is systemically incapable of properly counting opportunity costs; and
    (3) Therefore the system must be changed before the concept becomes useful.

    J.Q. operates within the current system paradigm. (He has explicitly and avowedly stated this.) Within this paradigm the opportunity costs debate is sterile and academic as this system does not and will never properly deal with opportunity costs. The costs that the majority pay to enrich the few are not accounted for in this system by design, by intent and indeed by the inherent systemic nature of this system itself (corporate-oligarchic capitalism).

  12. hc
    June 13th, 2015 at 10:54 | #12

    The remark about Mirrlees on optimal tax seems inaccurate. Mirrlees assumed a concave utilitarian SWF so he certainly accounted for diminishing marginal utility. All agents had the same utility but different abilities and therefore incomes.

    Mirrlees did favour redistribution but saw that this had to be trade-off against effort reductions by high income earners – the standard equity/efficiency tradeoff that Rawls and others recognised as a reason for not favouring equality. In fact for those on the top tax bracket Mirrlees maximised the income that could be transferred from them net of substitution effect losses due to their reduced effort.

  13. Mick
    June 13th, 2015 at 15:30 | #13

    With opportunity cost of any kind, we’re dealing in the realm of counterfactuals – one must accept modal realism if there is a ‘strong’ form of opportunity cost (cf. logician David K Lewis)

  14. J-D
    June 13th, 2015 at 19:34 | #14

    @Ikonoclast

    Since you just used the concept yourself, I don’t see how it makes sense for you to say the concept is not useful.

  15. Ikonoclast
    June 13th, 2015 at 19:48 | #15

    @Mick

    That’s an interesting point of view. I feel torn between modal realism (I feel socialism is as possible as capitalism for example) and another point of view of mine which says some alternate possible realities are not immediately possible from this our current stepping off point. This is why I say the idea of economic opportunity costs is not particularly useful to us under really existing capitalism. This is because really existing capitalism operates to deliberately shut off and exclude a lot of possibilities for the many in favour of a surfeit of opportunity and possibilities for the few.

    Talking about opportunity cost is just academic within a system systemically (and systematically) opposed to democratising opportunity. If one is not prepared to countenance a transformation away from a system of anti-opportunity then one speaks merely hypothetically and hypocritically about opportunity costs.

  16. Ikonoclast
    June 13th, 2015 at 20:03 | #16

    @J-D

    Sigh, I said it is not useful within this system. Since it is clear I support a different kind of possible political economy system where (as I contend) fuller social-democratic assessments of opportunity costs would be possible then it clearly does make sense for me to talk about the concept. What I am arguing is that it does not make very much sense for supporters of really existing capitalism to talk about opportunity cost. This of course is a political-economic opinion on my part. I know many will not agree.

    What I find interesting is that so many people today seem to think capitalism is the end point of all political-economic progress and development. I guess both the rulers and many of the ruled in all earlier systems also could not envisage anything else beyond their own extant system. And yet new systems still arose. How does that happen I wonder? (I have some half-formed theories about this but it’s a tricky arena to think through, maybe full of speculations and not a topic for this blog thread.)

  17. Julie Thomas
    June 14th, 2015 at 08:02 | #17

    The quote from Ben Franklin could have been taken out of context because Ben was famous as an ‘entrepreneur’ and so was not just an ‘old apprentice’. Surely he had a lot of other more useful advice for a young apprentice who aspired to do things differently. After all, young apprentices are not all the same; some are risk takers and others are not.

    Social norms and work when Franklin was handing out this advice were not like our social norms and our work. Franklin seems to be talking about the way an apprentice should behave in a traditional master and apprentice relationship and in circumstances in which there is a clear relationship between the work done and the return on that work.

    That is rarely the case for trades or any other type of work today.

    And if you think about creative work – painting landscapes, writing music or literature – there is no way that ‘day dreaming’ is a waste of time; what looks like day dreaming is often productive. This is also the case for scientists, who it is reported often experience valuable ‘insights’ while day-dreaming, napping or sleeping. And probably for entrepreneurs. Creativity needs dreaming time.

    Even before there were economists there were people who disapproved of people doing what they wanted to do rather than what somebody else thought they should be doing. People just like to disapprove of other people.

    For example, there was this bloke Castiglione, who way back in the late Renaissance was irritated by Leonardo da Vinci who didn’t think of the opportunity cost when he spent his time on non-artistic pursuits. According to Castiglione, Leonardo squandered his talent at painting on “useless” things such as plans for machines and practical devices like weirs and locks and gates for local communities around Milan.

    And day dreaming or standing around apparently doing nothing was something that da Vinci did, according to seventeen year old Matteo Bandello who was a da Vinci contemporary.

    He writes that: “Many a time I have seen Leonardo go to work early in the morning and climb up the scaffolding, because the” Last Supper” is somewhat above ground level; and he would work there from sunrise until the dusk of evening, never laying down the brush, but continuing to paint without remembering to eat or drink. Then there be two, three or four days without his touching the work, yet each day he would spend one or two hours just looking, considering and examining it, criticizing the figures to himself.

    “I have also seen him (as the fancy took him) leave in the middle of the day when the sun was in Leo from the Crote Vecchia, where he was working on his stupendous clay Horse and he would come straight to Delle Grazie and he would climb the scaffolding, seize a brush, apply a brush stroke or two to one of the figures and suddenly leave and go elsewhere.

  18. J-D
    June 14th, 2015 at 10:35 | #18

    @Ikonoclast

    Change is a continuous process, not a discontinuous one. Radical transformations only ever take place incrementally. Classification into systems is essential for the convenience of human understanding, but the boundaries we draw between categories are not features of reality independent of our perceptions.

  19. Julie Thomas
    June 14th, 2015 at 11:10 | #19

    @J-D

    “Radical transformations only ever take place incrementally.”

    So non-linearity and phase transitions are not real things? Paradigm shifts are not as dramatic as they sound?

  20. jungney
    June 14th, 2015 at 12:51 | #20

    In over thirty years of work as an RN I saw plenty of people come to understand the notion of opportunity cost but only when on their death bed. No-one ever declared “I wish I had spent more time at the office”. In other words how do you calculate the opportunity cost of our tradesman working for eight hours or spending the same eight hours in deep, skilled, meditation with a view to freeing themselves from the ordinary burdens of existence? Or playing with his kids? It seems to me that the economic activity is not and never will be commensurate with other human activities and it is purposeless to try and compare or even find a measure of comparison between economic activity and non-economic activity.

  21. Ikonoclast
    June 14th, 2015 at 15:18 | #21

    @Julie Thomas

    You are quite correct, thanks Julie. You saved me from a long rebuttal as you put the case very elegantly and succinctly. Indeed, in political-economic affairs there are more than enough examples of rapid, radical transformations. We call them revolutions. J-D is going to have to revise a lot of history to make his case.

  22. Ikonoclast
    June 14th, 2015 at 15:22 | #22

    @jungney

    Yes, economists tend to suffer from the belief that everything can be reduced to economics. All disciplines can suffer from reductionist tendencies of course. The key is to know or at least judge where useful reduction ends and fruitless and misleading reduction begins.

  23. ZM
    June 14th, 2015 at 15:44 | #23

    Julie Thomas,

    “Social norms and work when Franklin was handing out this advice were not like our social norms and our work.”

    The historian Jill Lepore wrote a book the other year about the very different life of Benjamin Franklin’s sister Jane, Book Of Ages: The Life and Opinions of Jane Franklin. They had different opportunities due to gender, and her life was more constrained and she entered as a teenager into an unhappy marriage, but Benjamin Franklin also taught her to write.

    “”Her days were days of flesh.” That’s just one of a multitude of striking observations that Jill Lepore makes about Jane Franklin, the baby sister of Ben. What Lepore means by that line of near-poetry is that Jane Franklin’s life, beginning at age 17 when she gave birth to the first of her 12 children, was one of nursing, lugging pails of night soil, butchering chickens, cooking and scrubbing.

    “I am in the middle of a grate wash,” she once wrote in a letter. The crumbly green and white soap Jane would have used for that “grate wash” was from an old Franklin family recipe. When Ben was serving as America’s diplomat to France, he liked to present his aristocratic hosts with cakes of that homemade soap that Jane sent to him from her tiny house in Boston.

    And, yet, she had a skill that set her apart: She could write. Lepore says that though girls in Massachusetts at the time were routinely taught to read, only gentleman’s daughters could do more than scrawl their names, if that. It was big brother Ben who taught Jane to write and, thus, enabled their lifelong animated correspondence.

    In contrast to her brother’s voluminous output, Jane Franklin wrote but one book: It’s called Book of Ages (hence Lepore’s title), and it consists of 16 little pages of hand-stitched paper on which Jane recorded the births and deaths of her children. Lepore calls it: “a litany of grief.”

    By the time the Revolutionary War erupted in Boston, Jane was a 63-year-old widow. She fled before the ransacking British Army, carrying her Book of Ages and her brother Ben’s letters in a trunk. While Franklin devoted his intellectual and diplomatic skills to the Revolutionary cause, Jane spent years wandering, staying with friends and scattered family. “I am Grown such a Vagrant,” she wrote.

    Lepore says that if Franklin, in his poses and writing, “meant to be Everyman, [Jane] is everyone else.””

    http://www.npr.org/2013/10/10/231431080/meet-bens-sister-jane-historys-forgotten-franklin

  24. Jordan from Croatia
    June 14th, 2015 at 16:34 | #24

    Opportunity cost of everyone not working 24/7 is stupefining.
    Opportunity cost of everyone not working as a banker (which brings best remuneration) is alao stupefinig.

    Logical conclusion of using opportunity cost to its extreme is that everyone ahould work 24/7 and be a banker. How stupid people are not to think with opportunity cost in mind?

    Another point is: idle time carry opportunity cost of unearnd wage,
    Working carry opportunity cost of not idling (relaxing, fammilly nurturing and pleasure).
    What way of thinking will you choose? It is a purely ideological prefference. Using negative conotation word like “idle” in place of familly nurturing word can produce ideological prefference, or side picking.

    It is obvious that using the term opportunity cost carry with it your own ideological prefference and angling for imposing your worldview upon others. Very convinient tool for any autoritarian.

  25. Julie Thomas
    June 14th, 2015 at 18:42 | #25

    @Ikonoclast

    I wouldn’t use the word ‘revolution’, you know how emotional some people become when they hear that word and they stop listening while they indulge themselves in feeling righteously indignant that anyone could possibly even talk about such a bad thing.

    The new word that is being used is ‘evolution’.

    But I’m thinking ‘phase transition’ as in nonlinear dynamics.

    I like to imagine that ‘complex systems’ and all the associated concepts and terminology can and will be useful for understanding ‘complexity’ at lots of different levels and applications.

    Admittedly the research is a bit lame at the moment when applied to systems that involve people and our behaviour but why wouldn’t it be a useful framework for categorising the patterns we see in our own individual and collective behaviour?

  26. June 14th, 2015 at 21:22 | #26

    Is there a need talk about the ‘macro foundations’ of opportunity cost? After all, the policy system, the distribution of wealth all determine my best alternative option.

  27. Ikonoclast
    June 14th, 2015 at 23:16 | #27

    @Julie Thomas

    Yes, point taken. I have experimented with using “transformation” rather than “revolution” but it sounds like I am channeling management-speak.

    You are quite right. Political economy is essentially about complex systems. The interesting part to me is that it is about formal systems interacting with real systems. But I must write much or nothing at all about such a complex topic… and I am too tired now.

  28. Nevil Kingston-Brown
    June 15th, 2015 at 10:46 | #28

    * The notion that the existing distribution of resources should be taken as given is not just a product of the Austrians but goes back to Pareto (as you have mentioned in another extract) and is characteristic of post-Marshall neo-classical economics generally. Depending on which economic historian you go to, this was a reaction to either the Ricardian Socialists/Marxists or to the Georgists, both of whom stressed the effects that distribution had on the overall shape of the economy. The neo-Ricardians/Sraffians are the only school I’m aware of which still study this angle without getting into “theories of value” aspects. However since Piketty it seems to be getting a new lease of empirical if not theoretical life.
    * I think footnote 2 deserves more expansion – I’ve never come across the idea that Austrians have a theoretical place for market stabilizing governments before.

  29. jungney
    June 15th, 2015 at 13:59 | #29

    I had no idea that much introductory economics used Robinson Crusoe as your prototypical opportunity cost example. There’s the problem with using literature instead of science to explore what ought to be rational ground. It is a fantasy, well written to be sure, but a figment of the author’s imagination. A quick and dirty google of “Robinson Crusoe + imperial (or) colonial + fantasy” brings up enough postcolonial literary debunkings to keep a team busy reading for an afternoon. The role of Crusoe in justifying British colonialism can be seen from the sheer number off pantomime plays that were produced in the late Victorian age. Crusoe was the most popular pantomime after Dick Whittington. The fact that entry level economics derives from panto material needs to be more widely known and subject to scorn and derision.

  30. J-D
    June 15th, 2015 at 15:48 | #30

    @Julie Thomas

    Phase transitions take place in thermodynamic systems. We are discussing economic systems.

  31. J-D
    June 15th, 2015 at 15:52 | #31

    @Ikonoclast

    Rapidity is not the same thing as discontinuity. In revolutions change takes place rapidly, but it is still the case that the elements of the new system replace the elements of the old system over a period of time, not all in one instant.

  32. Collin Street
    June 15th, 2015 at 15:57 | #32

    > Phase transitions take place in thermodynamic systems.

    They take place in any system modellable with nonlinear equations, because they’re a property of the maths rather than the subject being modelled [if the model is correct/useful there aren’t any properties of the subject that matter that aren’t represented in the maths, for the obvious reason that “representing everything important” is precisely what the the maths is supposed to do.]

  33. Jim Birch
    June 15th, 2015 at 16:03 | #33

    Well, I’m still surprised by the animosity to the concept of opportunity costs.

    The value of opportunity cost is in actually getting the numbers on the options. The idea that the concept of opportunity cost implies we should all be working as investment bankers 24×7 (etc) is absurd. For one thing, it wouldn’t work, but that’s not the real problem. The idea of working less to enjoy other benefits like time with the kids is also an opportunity cost argument, albeit one that includes includes more values than money. Doing an opportunity cost calculation doesn’t mean that you have to choose the option with the most dollars it just means that you actually know what you are doing and what you aren’t.

    The same applies in public policy. Contrary to some of the fears that have been expressed, I’m pretty sure that opportunity cost calculations would support a lot of policies that are nominally left wing. (Maybe that’s why I chose them.) CO2 policy is a clear one but I would love to see an opportunity cost calculation for the “Stop the boats” policy. Maybe I’m too rational but I can’t see that many Australian would actually want to pay for an extremely expensive policy that achieves very little. Instead, we have a dismal fog of tribal divisions, moralising, and narratives. Choose that and your are also conceding it to your enemies. Opportunity costs can be your friend. Worse case, you find that you are doing or advocating something that doesn’t really work, and you give it up.

  34. Julie Thomas
    June 15th, 2015 at 16:29 | #34

    @J-D

    Yes phase transitions do occur in thermo-dynamic systems and we are discussing economic systems; but I still don’t get your point.

    Never the twain shall meet?

    You could google phase transitions and human behaviour and see if you can find anything interesting.

  35. J-D
    June 15th, 2015 at 16:43 | #35

    @Collin Street

    When a political system is modelled with nonlinear equations — or indeed with mathematical equations of any kind — please do let me know.

  36. J-D
    June 15th, 2015 at 16:48 | #36

    @Julie Thomas

    The first hit I get tells me this:

    ‘In short, the need for information about the details of processes occurring in the critical period is far greater in the biological case than in most cases of physical interest (where the critical region is often unobservable).’

    What do you make of that?

  37. Julie Thomas
    June 15th, 2015 at 17:12 | #37

    @Jim Birch

    I don’t think it is hostility to the concept; the concept is fine in it’s place. Several people have explained this in different ways. But the concept is not ‘rigorous’; it only makes sense in limited circumstances and for and with people who understand this particular way of thinking. That way of thinking is not universal even among white Australians.

    It is not stupidity that prevents many people from understanding how they are supposed to be thinking about their choices; it is familiarity with these concepts.

    You may be able to say that one does not have to choose the option that brings the most dollars but where would one hear that message in this economy? The overwhelming message to everyone is that they should climb the ladder and aspire to be better off than others.

    It’s a good thing that opportunity cost can be used to support “left wing’ policies and it should be used that way, but I don’t understand why you don’t think it is a good idea to critique a concept with the intention that it could be improved upon?

  38. Julie Thomas
    June 15th, 2015 at 17:16 | #38

    @J-D

    It’s a difficult thing to do but there are people who are finding the challenge worthwhile.

    This paragraph from the abstract in my first hit.

    “Scheffer et al.’s (2009) recent review is a case in point. The authors identify ‘early warning signals’ such as critical slowing down in simple nonlinear models and suggest these may now be helpful in predicting upcoming transitions (‘tipping points’ in the modern idiom) in ‘real systems’ such as the climate, ecosystems and financial markets.

    http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2866541/

  39. Collin Street
    June 15th, 2015 at 17:31 | #39

    > When a political system

    Politics? I thought…

    > We are discussing economic systems.

    The word for what you’re doing here is “goalpost shifting”.

  40. J-D
    June 15th, 2015 at 18:24 | #40

    @Julie Thomas

    I’m sorry? ‘It’s a difficult thing to do’? What is a difficult thing to do?

    And are you unable to make anything of the sentence I quoted from the first hit I got?

  41. Julie Thomas
    June 15th, 2015 at 18:28 | #41

    @Collin Street

    It’s a good thing that somebody understands what J-D is doing. 🙂

  42. Julie Thomas
    June 15th, 2015 at 18:37 | #42

    @J-D

    You are sorry? What about me?

    I’m very sorry but it is difficult for me to make anything out of the sentence that you quoted from the first hit you got.

    We are both sorry and this is so boring. I’ll go away so you can feel that you have made your point. OK?

  43. June 15th, 2015 at 20:19 | #43

    … the ‘tradesman’ (the term then [emphasis added] encompassed shopkeepers as well as self-employed craftsmen) …

    That bit in brackets only reflects Australian and perhaps some other usages. British usage still covers shopkeepers, and has dropped using “tradesman” for “craftsman”; however, it is now rather archaic, as it is or recently was mainly used to cover people making deliveries of goods and services to homes, which is now unusual: butchers, bakers, milkmen, even itinerant knife grinders (which is closer to “craftsman”). You can still see houses with signs reading “tradesman’s entrance” worked into the mosaic (say) at a side gate.

    There are still typos, e.g. “forgoing” (which I take it is a typo rather than a spelling error or eccentricity as “foregone” occurs in the text).

  44. J-D
    June 15th, 2015 at 21:39 | #44

    @Julie Thomas

    What I make out of that sentence is this: that in the physical world there are sometimes transitions which take place so rapidly that it is impracticable to observe conditions during the period of transition, so that what we are able to observe exhibits a discontinuity and for practical purposes can be understood as such; but that in the biological world (which includes the human world) transitions take place over a longer time and that in order to understand what’s going on it’s important to observe the processes of transition and not to understand what we’re observing as a discontinuity.

  45. ZM
    June 15th, 2015 at 22:03 | #45

    J-D,

    There is an interesting digression about social change and rivers changing their courses near the start of Montaigne’s Of Cannibals, his essay on race, culture, and colonialism.

    “It should seem, that in this great body, there are two sorts of motions, the one natural, and the other febrific, as there are in ours.

    When I consider the impression that our river of Dordoigne has made in my time, on the right bank of its descent, and that in twenty years it has gained so much, and undermined the foundations of so many houses, I perceive it to be an extraordinary agitation: for had it always followed this course, or were hereafter to do it, the aspect of the world would be totally changed.

    But rivers alter their course, sometimes beating against the one side, and sometimes the other, and sometimes quietly keeping the channel. I do not speak of sudden inundations, the causes of which everybody understands.

    In Medoc, by the seashore, the Sieur d’Arsac, my brother, sees an estate he had there, buried under the sands which the sea vomits before it: where the tops of some houses are yet to be seen, and where his rents and domains are converted into pitiful barren pasturage. The inhabitants of this place affirm, that of late years the sea has driven so vehemently upon them, that they have lost above four leagues of land. These sands are her harbingers: and we now see great heaps of moving sand, that march half a league before her, and occupy the land.”

    At a talk on climate change and buddhism I went to last year, one speaker said she imagined climate change like the European ships coming to Australia. I don’t quite agree with this metaphor for us, as we are causing climate change, but the Indigenous people did not cause the European ships to come to Australia.

    But you can see that was an example of change where on the one side — the Indigenous — it was sudden and would have seemed to have no reason; and on the other — the European — we can trace reasons such as the Renaissance, technological developments, and wanting to (re)establish great Empires after the decline of the Roman.

    But when Montaigne wrote at the very beginning stages of colonialism, colonialism too probably seemed a great sudden change in the European cultures that were initiating it.

  46. J-D
    June 16th, 2015 at 08:35 | #46

    @ZM

    Yes, that is interesting.

    Even if the Indigenous people understood little or nothing of the causes of European colonisation, it took place over a long enough period of time for them to observe the process in stages, not as an apparently instantaneous occurrence.

  47. Julie Thomas
    June 16th, 2015 at 09:11 | #47

    @J-D

    Well done. If you read the literature, you might be able to see that your admonitions are a thing that people researching and theorising in this area do understand.

    “in the physical world there are sometimes transitions which take place so rapidly that it is impracticable to observe conditions during the period of transition”

    Impractical? Are you are assuming that there is not a chance that we can develop ways and means that one can use to measure the instability that precedes transitions?

    “in order to understand what’s going on it’s important to observe the processes of transition and not to understand what we’re observing as a discontinuity.”

    Yes observation of the processes is important. Did I not say that?

    But why is it not important to understand discontinuities in complex systems?

    And about the indigenous people. Surely the stories of the unexpected encounters that did occur between blackfellas and the whitefellas indicate that there were quite a lot of indigenous people who certainly did experience white colonisation as an instantaneous occurrence that called into question their world view?

    Do you have some sort of emotional resistance to the idea of using complex systems as a way of conceptualising the world as we know it?

  48. J-D
    June 16th, 2015 at 11:26 | #48

    @Julie Thomas

    The point I was trying to focus on was this: it hinders understanding to think of human history as if it passes from one system to another radically distinct one without paying attention to the intermediate period of transition.

    For all I know you agree with that point. It seems a lot like it. But it seemed to me when I first got on to this topic that it was a point that Ikonoclast was missing.

  49. Julie Thomas
    June 16th, 2015 at 18:03 | #49

    @J-D

    Perhaps it does hinder understanding of human history to look for discontinuous change.

    I don’t think that was what my comment or Ikonoclast’s response what about. I was suggesting that using the word revolution to describe the changes that happen in society was not a good idea.

    Perhaps phase transition is a bit too weird but why ignore the other suggestion that paradigm shift would be another ‘discontinuous’ change that seems to be happening more and more often in science?

    Have you heard of Peter Turchin? He is doing some interesting work using complex systems theory to understand history.

  50. J-D
    June 16th, 2015 at 18:46 | #50

    @Julie Thomas

    It seemed to me (although the possibility always exists that I misunderstood) that Ikonoclast was suggesting that it makes sense to talk about opportunity cost in the context of a system that takes proper account of opportunity costs, but that it does not make sense to talk about opportunity cost in the context of a system that does not take proper account of opportunity costs, and I still stand by my point that (in this context) it hinders understanding to think of the two systems (or hypothetical systems) as separated by a discontinuity, instead of thinking of them as linked by a process (or hypothetical process) of transition, characterised by intermediate conditions.

    It’s possible (likely, even) that in the physical sciences there are cases where the transitional state is passed through with such inconceivable rapidity that nothing sensible can be said about it. But in human affairs there aren’t.

  51. Evaggelos
    June 17th, 2015 at 18:49 | #51

    What’s funny is that you must choose between two introductions, to talk about opportunity cost!!!!!! Haven’t studied economics so, from that point of view: first piece is informative, with an attitude. Second piece is, let’s say, the “socialists point of view”. If you ask me, you can use both pieces, as long as they appear in different books. So, the question is: which is your target group?

  52. Julie Thomas
    June 17th, 2015 at 19:54 | #52

    @J-D

    Sure, no worries. Whatever.

    No motivated cognition going on at all or shifting goal posts.

    You have now clarified what you meant to say; it is “human affairs” that “nothing sensible” can be said about and phase transition has become “inconceivable rapidity” and it is clear that I erred in suggesting that you might have been ‘wrong’.

    Obviously I was wrong to assume as I did that it was a totally different position you were taking in your original statement.

    Can we leave it there?

  53. J-D
    June 17th, 2015 at 20:26 | #53

    @Julie Thomas

    Obviously I have not made my meaning clear to you. I did not write and did not mean that nothing sensible can be said about human affairs, and the same is true of your other most recent interpretations. I am more than happy to continue my efforts to clarify my meaning, but obviously there’s no point if you’re not interested in understanding my meaning. Your call.

  54. Megan
    June 17th, 2015 at 23:24 | #54

    Why am I thinking of the Tar Baby from Br’er Rabbit?

  55. Julie Thomas
    June 18th, 2015 at 07:28 | #55

    @J-D

    Perhaps I am not motivated to understand what you meant in this particular issue?

    Is that a problem for you – it is not a problem for me as I have accepted that there are many things I don’t understand and probably never will but I’m okay with that.

    And I really thought I had been calling it. It’s over. Let go. Move on.

  56. J-D
    June 18th, 2015 at 08:18 | #56

    @Julie Thomas

    Of course if you don’t want to understand my meaning there’s no point in my trying to explain it to you. There’s also no particular reason why you should try to understand my meaning. I have no problem with that. If you want to let go and move on you have been at all times completely free to do so — there’s nothing I could do to stop you and I’ve never made the attempt. You don’t need my permission in order to suit yourself, but just in case it would please you to have it, here it is.

Comments are closed.