Opportunity cost: A Fabian idea?

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

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

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

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

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

124 thoughts on “Opportunity cost: A Fabian idea?

  1. Though I know little of such economics detail detail I entered his name into Google Scholar out of curiosity. For two of the references I checked the citation list plus “opportunity cost”

    These are the searches. Maybe you will find them useful.

    https://scholar.google.com.au/scholar?q=opportunity+cost&btnG=&hl=en&as_sdt=2005&sciodt=0%2C5&cites=1881960880828334249&scipsc=1

    https://scholar.google.com.au/scholar?q=opportunity+cost&btnG=&hl=en&as_sdt=2005&sciodt=0%2C5&cites=328051890316390299&scipsc=1

  2. Is this essentially the ‘Athens-Jerusalem’ moment (h/t Bruce Littleboy) for political economy during the demise of the Gilded Age? In reaction to ‘Austrian institutionalism’ came forth the likes of Thorstein Veblen, John Kenneth Galbraith and eventually John Rawls. The latter in his 1971 book ‘A Theory of Justice’ made distributive justice the centerpiece of moral philosophy.

  3. Seems to be quite a lot of autobiographical detail on Wieser over 18 pages in a 1926 essay reprinted in the book The Fortunes of Liberalism (the Google Books preview doesn’t let me read all of the chapter, but about 11 pages.)

    http://tinyurl.com/munwy5d

    I have no idea about the reliability of the essay, the book or its editor, of course.

  4. “A whole school of cheerful optimism has been based upon the creed that if every man pursues his own interests in an enlightened manner we shall get the best of possible results, because it will be to his interest to apply his energies when they are “most useful to others”. Yes, but what others? The answer is, “those who already have most of everything else that they want”. This automatic action of the economic forces is at the service of every man exactly in inverse proportion to the urgency of his wants. The very fact that he is in want of everything prevents his giving much for anything, and makes his command of the economic forces light. The very fact that he has abundance of all things enables him to give largely of valued things for the gratification of the slightest impulse, for he is only checking impulses equally slight. The weight that his passing whim can throw into the economic scale is heavier than that which his neighbour can pit against it to save his life.” P.H. Wicksteed, The Common Sense of Political Economy, Vol.1, p.191 [1910].

  5. This blog http://socialdemocracy21stcentury.blogspot.com.au/2010/10/friedrich-von-wieser-and-eugen-von.html refers to the Baron von Weiser as a Fabian supporter.

    “And now for what might be a bombshell for some people. Two of the first generation of Austrian economists were clearly supporters of Fabian socialism. Yes, you heard me right: they were advocates of early 20th century Fabian socialism.

    “First, let’s start with Eugen von Philippovich von Philippsberg (1858–1917).”

    I have edited out Eugen’s bio and blog goes on to say:

    “Baron Friedrich von Wieser (1851–1926), another first generation Austrian economist, was sympathetic to Fabian socialism as well and not hostile to government intervention per se.

    “Friedrich von Wieser was born in 1851, and took a degree from the University of Vienna in 1872. After historical interests, he came to study economics after reading Karl Menger’s Grundsatze (for Wieser’s life, see Schumpeter 1997: 298ff; Schumpeter and Achille Loria 1927). From 1903 he succeeded Menger at the University of Vienna where he taught economics along with his brother-in-law Eugen von Böhm-Bawerk. Friedrich von Wieser was the teacher of Friedrich August von Hayek.

    “A. O. Ebenstein, in his Friedrich Hayek: A Biography (Chicago, 2003), provides a good summary of von Wieser’s economics:

    “Wieser was more corporatist and intervention-minded than Böhm-Bawerk and Menger. Hayek recalled that when he was a student, he was ‘very much aware that there were two traditions’ in the Austrian school — the ‘Böhm-Bawerk tradition and the Wieser tradition. Wieser was slightly tainted with Fabian socialist sympathies.

    “Hayek observed of his later relationship with Mises, who ‘represented the Böhm-Bawerk tradition,’ that ‘I perhaps most profited from his teaching because I came to him as a trained economist, trained in a parallel branch of Austrian economics from which he gradually, but never completely, won me over” (Ebenstein 2003: 26).

    “In other words, there was a split in the Austrian school in the 1920s between (1) the classical liberal wing of Eugen von Böhm-Bawerk/Mises (which evolved into modern American libertarianism), and (2) the wing of von Wieser, whose members (or at least some of them) were leaning towards Fabian socialism, and was clearly becoming more like modern progressive liberalism or social democracy (see also Shearmur 1996: 29). According to Hayek, Friedrich von Wieser was proud of his work justifying progressive taxation – a viewpoint far indeed from modern American Austrians. “

  6. And this blog from a libertarian point of view is a bit amusing

    http://www.austriancenter.com/blog/2014/09/04/rehabilitating-friedrich-von-wieser-as-an-austrian-economist/#.VWQ1ztKeDGc

    The blog begins with the same quote that you have posted JQ, however the author has deconstructed the paragraph differently.

    “This reasoning seems pretty flawed and it is actually quite hard to understand how an economist trained in the Austrian school could come up with a passage like that. The quote is full of value judgements as well as reasoning that is very likely to be faulty in itself.

    “But I would suggest that we should, at least for the time being, disregard the mistakes Wieser might have made in his reasoning (“Let him who is without sin cast the first stone”, right?) and focus instead on the very important contributions of this outstanding Austrian scholar.

    “I would like to strike a blow for Professor Wieser and show that the engagement with the ideas of this original thinker is still worth the effort. He might have been a little sloppy in some elements of his political economy and possibly cannot be classified as a libertarian, but his contributions to both sociology and economics are very sound, still constitute contemporary definitions and partly still fuel current debates.”

    It turns out that the good libertarian thing about Wieser, was that

    “economic change was brought about by “the heroic intervention of individual men who appear as leaders toward new economic shores”, which is very similar to Schumpeter’s description of the function of the entrepreneur. One might suspect that the ideas of the latter economist might not have turned out the way and might not have obtained just the popularity they have done with Wieser’s influence.”

    hmmm I think this is a far better thought that Wieser had.

    “At the core of Wieser’s thinking, especially in his later years, was the conviction that economics should view its subject area not as an idealized construct, but rather as a social process. He impressively demonstrated this in his great treatise Theory of Social Economy (Theorie der gesellschaftlichen Wirtschaft), in which he carried out an examination of the influence of social forces on economic production and how the latter could influence the social structure of a society. ”

    “Throughout his magnum opus Wieser acknowledged, like any good Austrian economist would, competition as one of the most important forces in any economy.

    Wieser wrote that “… competition … exercises so great an effect as, even under modern conditions, to entitle it to be classed among the most important social economic forces … It performs […] the functions of personal selection; peasant against peasant, master-mechanic against master-mechanic, large entrepreneur against large entrepreneur, each is weighed and measured, approved or condemned in the fiere struggle of competitive conflict … No economic order, without suffering very great disadvantages, may dispense with the use, in one way or another, of the supreme power of competition towards social success.”

    “We can see from this quote just how rooted in the Austrian tradition Wieser’s understanding of social processes is. While rejecting the formal neoclassical model of perfect competition and equilibrium- theorizing, Wieser meticulously carves out the social function of competition and the economic blessings that it brings upon societies.”

    The problem with competition is that there are always losers and human beings do not function well in environments in which they always are losers. It is cooperation that creates beneficial social structures in societies that can ensure that all members of the society are able to ‘compete’ in the economy in a way that provides all with self-respect.

  7. And here is a google book that you can down load for free but don’t bother. The book is “The Austrian School of Economics: History of Its Ideas, Ambassadors, and Institutions” by
    Eugen Maria Schulak and Herbert Unterköfler: Translated by Arlene Oost-Zinner. It is not flattering toward Wieser

    http://books.googleusercontent.com/books/content?req=AKW5QadAfZl9ChcSfbtD-JUr7Fd5f4EHNemvNdFwZvqxjFoM62A4bMZDHKyF1a7zRttPDkf8pGrgu5yU6qBaWBhMHEpslQPaIKdvLNa2dhhonqJa3Vv6ebOjk-dI6v9WQHC8kJi4dFXm3bjJkZx6OnpcTylIthqRudiBrn3B7Zh1xaP6f1Z0k4Eakp2meqtY8XMcXfC3HXa4TANe07pf6sBNz1XXHvvJschPUqtMDG1CFhYODbChNcD4ltsSqTEx4ECJIqdL5wsgdmNZr1-LLVtsUP9h7TXOow

    Sorry I should use the link thing I know…and quotes

    “Come the end of his academic career, like (a) learned narcissist whose cognitive paths circled around his own ego ………, Wieser’s reflections on his own intellectual development took up only slightly less space than all of his references to other authors put together.

    “In his Theorie der gesellschafilichen Wirtschafi (19 14), although remaining formally within the boundaries of methodological individualism, he nevertheless created an image of the individual which was more like feeble caricature than self-determining and rebellious actor, as described by Carl Menger.

    “Wieser saw people as thoroughly “tamed” creatures: “Even the sense of self … is bred by the forces of society and is thus oriented in way which is no longer purely personal.”

    “As an economist, Wieser built upon strongly qualified subjectivism. His “value calculation” failed due to his notion of imputation. The following generations of the Austrian School would largely consider him not part of their camp, but rather as belonging to the Lausanne School, which can be traced back to Léon Walras (cf. Mises 1978/2009, p. 28; Schumpeter 1954, p. 848; Hoppe and Salerno 1999, p. ???).

  8. Opportunity cost seems fraught with subtlety. In a highly constrained mathematical model, it is the value of the next best thing, as I understand it. In a real life situation, what it means to someone who has barely enough to survive the week, and no certainty of income anyway, is I imagine vastly different to someone living in sumptuous wealth, considering whether to purchase a holiday island or an aircraft carrier, or perhaps a 50 carat diamond. The choices available in one case are literally a matter of life and death, while in the other case it is about indulging conspicuous consumption of no relevance to three square meals and a bed. Furthermore, all of the choices which are available to the impoverished soul are also available to the one who is surfeit of riches galore, and more. One soul has a narrow range of opportunities, while the other soul is spoilt for choice. Whether that has any bearing on the definition of opportunity cost or not, I’m admittedly a bit thick on appreciating.

  9. There is a translation of his book “Natural Value” free to read here

    http://praxeology.net/FW-NV.htm

    Wiesner’s idea of natural value seems to me something like David Graebers idea of transaction value something like he describes here:

    ““DG: We can’t know for certain, but it’s important to understand that this is the real question, not “How did money arise from barter?” Rather, how did that broad sense of “I owe you one” that neighbours might have with one another become quantified?

    “How, in particular, was it known that 12 copper plates were worth exactly two healthy calves or so many furs, or what have you? This is something of a mystery. After all, in many parts of the world, if someone praises something of yours, it’s still impossible not to offer it to them.

    “If they show up later with a gift for you that’s woefully inadequate, you might make fun of them as a cheapskate, but you’re unlikely to come up with a mathematical formula for exactly how cheap they are. The evidence we have points, instead, to the primacy of violence. This plays out in many senses, but is most obviously the case when you look at legal systems.

    “Even where there are no markets, there are often elaborate systems of what is equivalent to what is used for determining fi nes. So, if someone is cheap, you might mock them, but if they then take offence and kill you, or you lose your eye or some such, then there’s a very exact system of compensation: 12 copper plates for an eye, and if he doesn’t have copper plates, that’s when people are maximally likely to stickle and demand exact equivalents—because they’re really just looking for an excuse to come to blows.

    “This also seems to be how what I call “social currencies”—things like wampum, bead money, Solomon Island feather money, etc.—is most likely to get converted into money that can be used for market transactions. ”

    If you pay “bride wealth” to a woman’s family to compensate them for their sacrifi ce in giving her up for marriage, well, you’re not buying a woman, and you certainly can’t resell her. Instead, you’re recognizing that you owe a debt that you can’t really pay.

    “However, once slavery enters in, when it’s possible to literally buy a woman as a wife or concubine, all this gets more ambiguous.

    “We’re not talking about phenomena limited to faraway exotic islands, either. Early Medieval Welsh and Irish law codes provide some great examples.

    “The Welsh codes map out the precise value of every object to be found in a typical house, from the cauldron to the rafters, even though almost none of that stuff was for sale in markets at the time. It was all for calculating compensation for insults or injuries. In the Irish code, the highest denomination of currency was the slave-girl.”

  10. It is clear that “opportunity cost” has an empirical reality but in its application to political economy it seems to me to become a meaningless abstraction of little or no use.

    Opportunity cost could involve either capital or labour. If I use up my capital or labour for one purpose I cannot use it for another purpose. That is clear enough. If we limit the discussion to capital we must include money capital, productive capital and commodity capital.

    “Capital is a complex and controversial economic category with a peculiar three-fold dimension –
    physical, financial and temporal. It accomplishes the fundamental technical functions of making
    possible future production, inter-temporal resource allocation and the valuation of assets.” – A Critical Marxist Approach to Capital Theory : Duccio Cavalieri.

    Opportunity cost can be clear at the single case, empirical level. If a person is lost on an arid outback track with a broken down 4WD, a jerrycan of potable water and the knowledge that the weekly mail truck will pass in three days time then he can have a wash or he can keep the water to drink over the next three days. He can’t have a wash AND have drinking water as well.

    However, at the economic level it is not clear (at least to me) how the notion of opportunity cost advances my understanding of anything.

    “Capital takes different forms: those of money capital, productive capital and commodity – capital. The determination of its value is a controversial theoretical issue. Capital goods must be valued in money, at their market price, that includes a profit margin, which in turn depends on
    the price of capital. To avoid circular reasoning, the prices of commodities and the social distribution of income must therefore be simultaneously determined. This has been done, by Bortkiewicz and later on by Sraffa and others.” Duccio Cavalieri op. cit.

    “Marx’s idea of capital as a whole (a systemic totality) is logically untenable and should be rejected as a metaphysical concept, a pure abstraction, devoid of empirical content.” – Duccio Cavalieri op. cit.

    By extension, it would seem that the idea of “opportunity cost” as a whole, as an operating systemic totality, within economics, is also a pure and broad abstraction, now devoid of particular empirical content. It has no explanatory power which would take us beyond circular reasoning of the type: “The cost of things is the cost of things”.

    The notion that opportunity costs drive us to put scarce resources to best use at the aggregated economic level is risible. The reality of market failure puts that furphy to rest not to mention issues like inaccurate time discounting and the mass-scrapping of human and economic potential via high unemployment.

    If J.Q. comes to bury “opportunity cost” as a political economy concept and not to praise it then I can agree.

  11. I am in two minds wrt opportunity cost. Progressives often use it to challenge capitalist behaviour. For example, it is often stated that the opportunity cost of nuclear missiles is the number of hospitals the same funds could have constructed.

  12. And what is the opportunity cost for a woman who chooses to reproduce the species rather than use her life to be rational and aspire to have more stuff and more freedom?

  13. What is the opportunity cost for a man who chooses to reproduce the species rather than use his life to be rational and aspire to have more stuff and freedom?

  14. @Ivor

    Traditionally and still today women have suffered a far higher opportunity cost for reproduction than men. The disparity is so great that, as a man, I would be embarrassed to even bring up the notion that men as a whole suffer any opportunity cost in this regard that is even worth talking about. There will be exceptions to the general rule of course.

  15. Do men actually choose to reproduce or is it just a side effect of another want?

    And why would a man choose not to reproduce when there seem to be no economic costs, unless there is a society that enforces his obligations to the child but these societies are few and far between.

    A society is required to force men to pay for their children, I think. The law clearly is not enough; I can tell you this from my experience. 🙂

    Point is, when the masters of economic thought were thinking their deep thoughts about what costs what in an economy and how “men” can be rational and choose the thing with the best opportunity cost out come, did they ever consider that women could freely choose to not to procreate?

  16. @Julie Thomas

    “Do men actually choose to reproduce or is it just a side effect of another want?”

    LOL, all good jokes have an element of truth in them. Yet men too can and do make the overt choice for children. After all, any and every man could get “the snip”. Men who make the choice for children (as opposed to men who incidentally make children) can make that decision for all sorts of reasons commendable and not so commendable and often for several reasons at once. (I nearly said for several reasons “conjoined” but thought I had better avoid the bad pun.)

    Perhaps society should pay mothers for all their currently unpaid work. That would be a good start. Pregnancy and confinement are work, looking after an infant is work and so on. If you think about it, it is kind of strange that the man gets paid for fabricating widgets at the factory but the woman gets no pay for fabricating human beings, caring for and socialising them.

    I have made widgets in factories and I have cared for and socialised my children as infants and toddlers. (Note: I did this as a member of a couple not as a sole parent.) The factory widget work was a lot easier and even a lot less isolating. All the other kinds of paid work I have done were easier too: from driving heavy machinery to clerical work to computer programming to being a line manager. All were much, much easier than caring for babies and young children. Caring for babies is far harder than anything else most humans do in peace time. If you say otherwise I know you ain’t done it! Full stop, end of story, no correspondence will be entered into.

  17. I meant “If anyone says otherwise”. The “you” in that statement was definitely not directed at Julie Thomas.

  18. It’s odd to hear people poopooing opportunity costs. The alternative to considering opportunity costs is proceeding or continuing with any fashionable initiative or program for which a few desirable outcomes can be spruiked. It seems to me to be central to good governance.

  19. @Jim Birch

    The concept of opportunity cost makes sense in any single empirical example. It can also make sense in the dirigisme (state direction) paradigm which you invoke. Where it does not make sense IMO is in the attempt to make it, as a micro-economic principle, “scale up” to a general general economic principle which will explain market prices, allocation of resources (scarce or otherwise) and/or other emergent phenomena in the economy, or more correctly in the political economy.

    To plagiarise several phrases from Duccio Cavalieri and put them to my own purposes in this context;

    The idea of “opportunity cost” as a systemically uniform factor in economics is logically untenable and should be rejected at this generalised level as a metaphysical concept, a pure abstraction, devoid of empirical content.

  20. My cynical lay persons guess is – Like any kind of economic modelling ‘opportunity cost ‘ can yield a range of outcomes depending on the assumptions and variables put in ;- even if you stick to simple examples and limit your inputs to ones easily expressed in $ . That however doesnt strike down the free market fundamentalists faith as they then say ‘ well the market value is still the best we have as it is a function of everyones best guess – and that is better than any single best guess’ .Fundamentalists in todays context then argue – everything should be marketised/monetised and the government should back off as far as possible. I think market and $value is often only a crude and inappropriate measure ,and that some kind of gov’t is always involved whether anyone likes it or not . Ideally gov’t should be smaller -however circumstances are often less than ideal. Primarily :- I think fundamentalists just like the current set up, so they pretend that if gov’t just retreated a little bit (‘red tape’) and let them rip we would be in a free market nirvana. But there will always be much more government going on in any case than they want to admit.

    As for child rearing -it is often particularly hard the way we do it, and blokes can be desperate to have kids too. Apparently ,according to research, part of the opportunity cost of having kids is lower overall happiness levels .But I suspect there would be some payoff in the contentment or life-meaning department .How to put a $ value on these things? Apparently B Lomborg can put different $ values on the life of everyone in the world so he can work out opportunity costs of action on climate change. Clever !

  21. I agree Ikon, the idea of opportunity cost is far too simplistic and based on assumptions about human nature and human nurture that have no relationship to the real world that exists for women raising children on their own.

    But it is not only the idea of opportunity cost in economics that fails to have any relevance to the way real human beings, women, children and the men that economists disdain, actually function.

    Men like von Wieser – and the more I read his really shallow thoughts the more hilarious it all becomes – thought they were the high point of evolution, considered themselves more intelligent than women and other lesser men and based on this self-serving assessment of themselves as better and more worthwhile human beings they constructed a system that makes no sense to anyone who doesn’t believe that unlimited desire for possessions is something that should be encouraged and should form the basis of a society/economy.

    It seems to me that the assumptions economists make – as Sunshine says – about human nature and society are flawed because they understood nothing except their own ‘male’ nature and assumed that this was the only way that the world ‘should’ be.

    Opportunity cost works if you limit it to a specific transaction involving things but not when it comes to making choices about living one’s life in a real world.

    “Caring for babies is far harder than anything else most humans do in peace time.”

    It is only hard because in our society people are forced to raise children in a nuclear family. If you get to raise children in a community in which other people care for your children as if every child was incredibly valuable it is a doddle. I did live in a community like that for some of the time I was raising my children.

    But raising children is also the most rewarding thing that anyone can do IMO and there is nothing in economics that recognises that fact, nothing that even tries to value the work that goes into raising a child who wants to be part of their society – rather than the dysfunctional alienated children that turn to cults and ISIS – and is able to participate in the economy rather than be reviled as a freeloading dole bludger.

  22. Julie Thomas :
    But it is not only the idea of opportunity cost in economics that fails to have any relevance to the way real human beings, women, children and the men that economists disdain, actually function.

    Quite. I’ve long thought that capitalism naturally tends towards authoritarianism, in part because the economics it espouses is so little related to reality. When your theory is refuted by the world, you can bend either your theory or the world to try and improve the fit (cf Christian “morality”). There’s a whiff of jackboot leather trailing many a self-professed libertarian.

  23. @Megan

    Amnesty Australia are seeking signatories for an online petition asking the Government to help save the thousands of refugees still at sea in our region.

    Thanks for the link Megan.

  24. While considering opportunity cost as a central methodology for economic evaluation might I suggest that is is valuable to consider the limitations of the approach. To that end consider the impact of default opportunity cost parameters such as religion, culture, sexual orientation and societal positioning. Then there are options such as environmental stability.

    I’d be interested to see how opportunity cost handles the multi queue problem. 5 queues, which one to get into, and whether or when to switch queues.

  25. We can exercise our understanding of what an opportunity cost is by answering the following question (answer given in the article I link to below the question—don’t peek!):

    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

    Answer is given in the article Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science, by PAUL J. FERRARO and Laura O. Taylor, Contributions in Economic Analysis & Policy, 2005.

  26. @Donald Oats

    Once $ values are inserted – even for free goods (!, ?) the concept gets mangled.

    I have always considered that the opportunity cost of giving up 1 hr of leisure for 1 hour production is the 1 hr of leisure irrespective of the value of the actual production.

    So I have a bit of difficulty seeing how these authors propose $10.

    If I was willing to pay $1,000 to see Dylan – would this change the opportunity cost?

  27. @Ivor

    If I was willing to pay $1,000 to see Dylan – would this change the opportunity cost?

    Assuming all the other parameters of the problem remained the same, then the opportunity cost of you choosing the free Clapton concert over the $40 Dylan one would go from $10 to $960.

  28. @Donald Oats

    This is the kind of question that’s v difficult if it’s presented orally, but easy (for someone with the right training) if it’s written down. That makes for a neat paper, since the trained reader thinks “how could anyone with an Econ PhD get this wrong”, but it turns out that most Econ PhD’s can’t answer the question when its asked face to face.

  29. @John Quiggin

    I hope nobody thinks the “correct” answer means anything in reality. If they do, they have fallen for a simple but elegant example of the reification fallacy.

  30. My issue with the “problem” is: what is it supposed to demonstrate in practical terms?

    I read the “problem” this way:

    1. The thing I most want to do is free, and it is also the thing I end up doing.
    2. The thing I would next want to do, if I wasn’t doing the first thing – which I am doing, so therefore I’m not going to be doing anything else, anyway – would cost $40, but I’m not doing that thing because I’m doing the first thing.
    3. But, the second thing is something that I would pay $50 to do – if I was able to do it, which I’m not, because I’m busy doing the first thing, and I can’t do both.
    4. In theory, if I don’t do the free thing I really want to do and end up paying $40 for the thing I didn’t want to do….I’m $10 better off because I would have spent $50.

    Therefore…..what?

    What about another option:

    Someone offers to pay ME $50 to go to Dylan instead? If I take the money and miss the free Clapton gig – the one I really would have preferred of the two – what is my opportunity cost of missing Clapton?

    I still don’t get it. It’s like the guy who says: “We could have bacon and eggs if we had some bacon, and if we had some eggs.”

  31. @John Quiggin

    But according to the paper, the question was written down (‘please circle the best answer to the following question’…‘few respondents made their marks quickly and returned the survey’), so that can’t be an explanation for the vast majority of respondents getting it wrong.

    The concept of opportunity cost is simple to understand when given resources can be put towards one of two alternatives, and this is how it is usually presented in economics courses—for example, in the idea of comparative advantage.

    But in the question, differing levels of financial resources are required for the two options, and this confuses people because it’s not the normal framing. It suddenly becomes necessary to consider the benefit from a third category of consumption, whatever the $40 could be spent on instead.

    Anyway, as someone who worries a lot about the atrophying of my economics knowledge, it’s been a nice little ego boost.

  32. Anyway, according to Forbes you could resell your Clapton ticket – for US$750+

    Secondary Market Eric Clapton Tickets at Madison Square Garden Averaging Over $750

    And a Dylan ticket in Germany next month is listed at 75Euros.

  33. I always find this example silly. Trying to monetise entirely subjective things is amusing as a parlour game but no person I’ve ever heard of reasons like this.

    In my case, i’d be tempted to flof off the free tickets o give them away, because even if I couldn’t get a dollar for them, I’d know I couldn’t sttend. The concert would almost certainly be during the day, when I was at work, or hubby was at work, or on a Friday night when we were too exhausted to do anything but recover from the week. And going out on a work night? To the city? I don’t think so.

    Most probably I’d put them on the pile on the kitchen bench of other events in theory I’d like to attend but didn’t want to admit to myself that I’d miss because that would be too depressing, until I remembered the day after I’d missed it that it was yesterday, and then toss it into the recycling with a wistful sigh. I’m not sure what the opportunity cost of that works out to. For the record, Hubby and I miss Vivid every year, even though it’s free. Every year we say, ‘we really must go this year’ and every year we settle for looking at the best pictures and news on Twitter.

    If you have the money and the time to go to concerts, consider yourself privileged. Go to the one you prefer and ignore the relative cost. It’s only money. The things you have done to earn the money are irrecoverable sunk costs, and the things you will do for money are artefacts of the programming of your life — tied by a thousand strings to the many other obligations you have decided are apt. Whether you spend $40 going to Dylan or nothing going to Clapton won’t change that at all.

    If I started working out how much of the ennui associated with marking Geography papers or doing crowd control on assembly was mitigated by a lovely evening at dinner with people I like and how much extra value I’d get if an extra two friends showed up on my dime I really would go nuts … Or more precisely, be nuts.

    Opportunity cost is a useful concept for considering the allocation of scarce resources, but it’s useless for much else.

  34. @Megan

    The example question neatly shows the nonsense results you get if you too literally apply the opportunity cost concept in standard economics. The fallacy is one of reification. (See Note.)

    The problem with the example question resides essentially in the reification of money. Money is an hypothetical construct. It is not a real thing but a mere unit of account used to model values of products and services. Where money mediates a real transaction, two real actions occur. Goods or services are transferred (in a rock concert, sound waves to your ears) and the unit of account IS ACCOUNTED. That is to say, money, the hypothetical construct, is accounted for by real accounting. Numbers (or bits and bytes) change in your account, indicating a quantity going down and numbers change in the rock star’s account indicating a quantity going up. This is a subtle point. The money is abstract or nominal but the accounting is real and happens in a socially constructed accounting system which entails real downstream consequences.

    In the example, a real transfer occurs when you go to the Clapton concert. Sound waves go from Clapton’s speakers to your ears. However, the other part of the “transaction” as it is posed in the question contains both a real and a hypothetical element. By not going to Dylan’s concert it is assumed you pay an opportunity cost and in a sense you do, presuming you like Dylan’s music as well. You do not get to hear Dylan’s music that night. However, it is fallacious to money count that opportunity cost in the way the question suggests it ought to be counted.

    At this very point, the proposed problem makes an error in logic. It presumes money is real outside of the real social accounting of money. It presumes that since you would be prepared to pay $50 to see Dylan’s concert which is $40 a ticket then you (or someone?) have suffered a $10 opportunity cost. It assumes this when NO real social accounting of money has occurred. Where does this $10 appear? It passes through no accounts. It appears in nobody’s accounts. It does not appear in national accounting (e.g. via the trace of the GST). It appears nowhere.

    The posed question contains a logical fallacy! This is the technically correct solution to the question. I wonder if any economists have figured out that the question contains a logical fallacy and that this accounts for their confusion in attempting to answer it? Logicians would spot the fallacy fairly quickly I think. Of all trick questions, trick questions containing a logical fallacy (intended or unintended) are the hardest to figure out at first glance. One gets an uneasy feeling that there is something fundamentally loopy about the question. Then one has to nut it through.

    Note:

    “Reification (also known as concretism, hypostatization, or the fallacy of misplaced concreteness) is a fallacy of ambiguity, when an abstraction (abstract belief or hypothetical construct) is treated as if it were a concrete, real event, or physical entity. In other words, it is the error of treating something which is not concrete, such as an idea, as a concrete thing . A common case of reification is the confusion of a model with reality. Mathematical or simulation models may help understand a system or situation, but they model an abstract and simple mental image, not real life (which will also differ from the model): “the map is not the territory”. – Wikipedia.

  35. @Donald Oats

    Intriguing reading. I should like to suggest a possible alternative interpretation (not because I want to insist that it’s the only correct interpretation, but because it directs the mind along a different track that might be worth exploring).

    The paper reports that the students carrying out the experiment got 199 respondents to answer their question, and adds in a footnote that four others refused to participate. Is there a sense in which the four who refused to answer were the only ones who were responding correctly and all 199 others were wrong?

  36. So what use is opportunity cost? If it increases, from $10 to $960 merely by my being prepared to pay firstly $50 then $1,000, then this can have no impact on the market.

    Only I know that I am willing to pay $1,000. And in fact I might not even know how much I would be willing to go up to, if there is never the occasion to ‘test the roof’.

    Also assuming I had the physical $1,000 for a Dylan concert but luckily spent $40, I would still be able to purchase other items for $960. I never loose the benefit of $1,000.

    While bourgois economists may cry crocodille tears over the poor:

    a consumer wastes on unnecessary, guilty enjoyment that which could have served to heal the wounds of poverty. —Friedrich von Wieser,

    this is not really a feature associated with opportunity costs.

    The diffference between rich and poor is a structural issue not an issue of some subsequent maldistribution of wealth involving or representing opportunity costs.

    Assuming equilibrium, it only ever costs an equivalent to get something. Any other individual “willingness to pay” is just customers private consumer surplus. This just transfers to other products.

    If things of value are given out for free – all purchases will go there (until satiation) irrespective of opportunity costs.

  37. @Ivor

    Correct. As I demonstrated irrefutably at post 42, the opportunity cost derived in this example is spurious because the proposed problem contains a logical fallacy. It reifies money and treats it as something real with a concrete existence separate from its actual social use as a unit of account. But of course it has no existence other than its accounted use in financial and market transactions. Since no accounted use of money occurs, the posited monetary value of the opportunity cost is of a specious nature rather than a specie nature (pun intended).

    It’s not surprising that bourgeois economists fail to see the logical fallacy; the fallacy of reification in this case. Bourgeois economists are particularly prone to the fallacy of reification. It does duty in the fields of mystification and justification. They mystify and obscure the realities of capitalist economic relations (oppression, exploitation and the theft of produced value) and by such false reasoning they ideologically and morally “justify” the capitalist ownership system.

  38. @Tim Macknay

    I deliberately made that overt and grandiose claim to provoke attempts at refutation. I want to see if anyone can refute my “logic” (to see if it deserves that term).

    I do still contend at this point that my argument is irrefutable. It turns on the peculiar hypothetical nature (indeed non-market nature) of some of the valuations in the problem and the lack of explicit market outcomes in the problem. The problem as stated is abstracted from real market transactions and therein lies its unresolvable dilemma.

    It can be demonstrated that opportunity cost is a real phenomenon in real single case market transactions which can then be re-run over the time dimension to test different outcomes.

    For example, my local food market might have a doughnut seller and a croissant seller. Assume that I allow myself $2.00 for a “treat” purchase when I go shopping. Doughnuts and croissants both cost $2.00 each. I buy a croissant because I prefer a croissant to a doughnut at those prices. However, I would take a free doughnut in preference to a $2.00 croissant. Somewhere between $0.00 and $2.00 is the price that would induce me to buy a doughnut. Let us assume that price is $1.00.

    The doughnut seller has decided I am the representative customer. His goal is to get me to buy the doughnut. This is not actually how he would make his pricing decision but let us forget that. He tests prices and finds one Saturday that I will buy the doughnut at $1.00. Let us assume he can still make a profit at this sale price. Thus it seems my opportunity cost for buying a croissant over a doughnut is $1.00. This is if I have understood the whole concept properly. (A grave admission at this point!)

    What I would argue is that the different market tests, conducted on sequential Saturdays have empirically tested and found a money value for my opportunity cost. There are real accounted transactions of a nominal item (money) in each case. The money accounting can be traced through the transactions and can be seem to affect me the consumer and the two traders. Accounted, preexisting (in the nominal sense) money is neither created nor destroyed but simply ends up in different places in different tests. This is appropriate and consistent with legal-social rules of money as neither I nor the traders are permitted to print or destroy money.

    In the problem example there is no empirical market test of the opportunity cost. I would argue that un-enacted, hypothetical preferences have no assignable value in the market or in economics. Only when preferences are actualised by being enacted do they become concrete, real and assignable as opportunity costs.

    The problem with the proposed opportunity cost of $10 in the problem is both that it is unactualised and has no accounted existence in the financial system. It does not exist nor can the un-actualised preference either “mint” it or transfer it or even quantify it.

    I have other philosophical problems with opportunity cost as an aggregated concept of any use at the macro economic level but that is outside this particular part of the discussion. There I would argue that there are qualitatively different kinds of opportunity costs just as there are qualitatively different kinds of capital. But as I say this goes beyond the particular problem under consideration.

  39. @Ikonoclast

    So, after all those posts, your problem is that a hypothetical question contained hypothetical valuations that weren’t empirically verified. I don’t think I’ve ever wasted so much time trying to understand a point that turned out to be so facile.

    “I would argue that un-enacted, hypothetical preferences have no assignable value in the market or in economics.”

    So the preferences of future generations “have no assignable value…in economics” because we can’t know what un-enacted preferences might be. Maybe they’ll like it hot! So Stern should have just left them out of his benefit-cost analysis of climate change mitigation?

  40. In real life the opportunity cost argument has been used to constrain social welfare.

    Housing activists (and others) are told, that they must pay high rents because of the opportunity costs the funds had if used elsewhere.

    Why would those basing themselves on opportunity costs spend a dollar helping the unemployed if they could make 10% invested elsewhere?

    You have to be particularly cruel to give opportunity costs much credence under modern capitalism.

  41. @Luke Elford

    Is it not acceptable for a person questioned to question the validity of a nonsensical or illogical question? If I asked you;

    “Assume a business owns five automobiles. A fire destroys seven of their automobiles. How many automobiles does the business own now?” And the answer sheet gives the answer as minus two automobiles. Would you not question the validity of the question and the answer?

    The case is the same with the hypothetical problem at issue. It implicitly contains a non sequitur. In plain and simple language it is a stupid and illogical question with no correct answer. If these are the games bourgeois economists play with logic it is little wonder modern economics has (a) failed and (b) lost the public’s confidence.

    Your blithe assumption that the preferences of future generations have an assignable, computable monetary value in current economic terms when, among other things, many future conditions and variables are unknown and the outcomes of current economic adjustments are equally unknown and the assumption that these calculations will in reality drive the necessary changes is exactly that… a swathe of blithe and unwarranted assumptions. It is consistent with the bourgeois economic position that everything can and should be assigned a money value and that all social and environmental decisions should be made based solely on money calculations. This is typical if I may say of the FACILE thinking of bourgeois economics.

    The above is not an argument for inaction on climate change. I would argue for direct, state-dirigist regulatory action based on democratic demand and thence enforced compliance based on the science not on economics. This type of thinking assumes the future value of a livable environment to humans to be in a sense infinite and certainly inestimable by economic means. Only the morally corrupt thinking of bourgeois economic doctrine posits that a money value can be put on everything and that this is the way to make all decisions.

  42. As JQ probably knows already, the idea that prices change according to the distribution of wealth between labour and capital is a staple of Sraffian economics, as is the corollary that for any distribution of wealth between classes there exists a (different) set of commodity prices which will clear the market.
    This paper (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=725912) outlines how von Wieser’s intuitive ideas about the distribution of wealth and prices can be formalised in an input/output matrix model.

  43. @Ikonoclast

    ‘For example, my local food market might have a doughnut seller and a croissant seller. Assume that I allow myself $2.00 for a “treat” purchase when I go shopping. Doughnuts and croissants both cost $2.00 each. I buy a croissant because I prefer a croissant to a doughnut at those prices. However, I would take a free doughnut in preference to a $2.00 croissant. Somewhere between $0.00 and $2.00 is the price that would induce me to buy a doughnut. Let us assume that price is $1.00.

    ‘The doughnut seller has decided I am the representative customer. His goal is to get me to buy the doughnut. This is not actually how he would make his pricing decision but let us forget that. He tests prices and finds one Saturday that I will buy the doughnut at $1.00. Let us assume he can still make a profit at this sale price. Thus it seems my opportunity cost for buying a croissant over a doughnut is $1.00. This is if I have understood the whole concept properly.’

    No, you haven’t understood the whole concept properly.

  44. “Only the morally corrupt thinking of bourgeois economic doctrine posits that a money value can be put on everything”

    Quite. There should be real-world tests applied to any economic theory. Here are a couple off the top of my head:

    1: If an economic theory contradicts the (by now fairly well understood) inclinations of the human species, there is something wrong with it.

    2: If an economic theory contradicts the (by now fairly well understood) laws of physics, there is something wrong with it.

    Please don’t smile. My rule 1 says that greed trumps economic rationalism. My rule 2 says that the planet is fucked if economics disregards my rule 2.

  45. @Donald Oats
    The problem that people don’t seem to be seeing (including the authors) is in the language of the question which says that the Dylan concert is the “next best” activity. No one except Megan seems to have remarked on this, but the clear implication is that you want to go to the Clapton concert and Dylan would be second best.

    It may make sense to an economist to say that there is an opportunity cost to not doing the the thing you didn’t want to do anyway, but to many that would simply confirm the theory that there’s something wrong with economics!

    Ikon

    I’ve looked at some of the earlier stuff JQ wrote about Hazlitt and opportunity costs, and I agree with the ideas Julie was floating above. This is about privilege. There is a clear difference between things you have to do – care for small children, for example – and things you choose to do – attend this university rather than that, for example. Only people who are freed from taking care of the necessities of everyday life (middle class white men like Hazlitt, for example) have choice in the sense that opportunity costs assumes.

    Unfortunately as I understand it JQ does not intend to critique the idea, though perhaps he can clarify that.

  46. @J-D

    You have failed to explain how I have misunderstood the concept of opportunity cost. You have merely asserted that I have misunderstood. Without a clear demonstration of my misunderstanding and an explanation of the correct understanding your claim is mere hand-waving.

    It seems to me I have calculated opportunity cost for the individual being scrutinised in the same way that the problem example applied opportunity cost or rather the calculation thereof.

    “In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would be had by taking the second best choice available.[1] The New Oxford American Dictionary defines it as “the loss of potential gain from other alternatives when one alternative is chosen.” – Wikipedia.

    But I am open to explanation and demonstration of any error I made.

  47. @Val

    I have been tackling the notion of opportunity cost from two angles. One angle was the very limited angle where I deduce that the specific question cited by Donald Oates actually contains a false assumption which makes the question nonsensical. I won’t repeat these arguments in this post.

    More broadly (in some other posts), I attacked the idea that “opportunity cost” as applied in standard economics (or as I pejoratively call it “bourgeois economics”) is an objective concept. I argued and argue that it is an ideological concept or at least a concept with many ideological trappings as it is applied in standard (classical and neoclassical) economics.

    Julie’s idea(s) clearly also fall into this arena; namely that the “opportunity cost” concept as applied in standard (classical and neoclassical) economics has clear ideological dimensions (whether or not it also has clear objective or empirical dimensions). So Julie and I are in in-principle agreement on this matter. We might express it differently and be focusing on different aspects but in essence we are in agreement.

    The problem with classical and neoclassical economics is that it pretends, in the main, to be objective and non-ideological.

    It is pretty clear to me that my objections about reification (both in the question cited by Donald Oates and in more my high level criticisms of how “opportunity cost” gets treated as a whole in standard economics) are on firm ground.

    Consider the following quote (and the whole paper is worth reading).

    “Objections to “Misplaced Concreteness” (the problem of excessive abstraction).

    This critique challenges the simplifications made (often for the purpose of mathematical tractability) in neoclassical texts. As all theories must simplify, the problem is not that details are missing, but that necessary information, material whose inclusion would often alter the conceptual framework organizing the discussion, is absent. Concern about excessive abstraction brings us back to “subtext” issues, as what a paradigm deems “important to explain” influences what is a permissible abstraction.

    Marxist objections to the treatment of labor as just another input, feminist objections to reducing all relationships to exchange relationships, institutionalist objections to neglect of institutional contexts, environmentalist objections to treating nature as a commodity, all illustrate this kind of critique of principles texts. Neoclassical authors often write about Giffen goods (but not positional goods), insatiable and transitive utility functions, (but not inter-personal utility comparisons), how tastes and preferences may change with income, but not in response to advertising, etc. From a heterodox perspective, they abstract from the wrong material, or as Yogi Berra would say, they make the “wrong mistakes”.

    The problem of “excessive generality” is closely related to that of “misplaced concreteness”.
    For some subjects neoclassical theory’s use of a highly abstract, static, and MI-oriented approach is reasonable. The problem with the paradigm is its aggressive extension into areas for which it is inappropriate, especially vis a vis its simplistic policy implications. “If you have a hammer the whole world is a nail”, and the neoclassicals would bludgeon all into an abstract commodity space.” – Telling Other Stories: Heterodox Critiques of Neoclassical Micro Principles Texts – Steve Cohn, August 2000.

  48. I agree with everyone 🙂

    As I understand it, there is a set A of two possible states: A := {(free, Clapton), ($40, Dylan)}, consisting of S[1] := (free, Clapton), and S[2] := ($40, Dylan), where State S[k] := (TicketPrice[k], Performer[k]); and k = 1 or 2.

    So, I have a notion of state of my microcosm, i.e. S[1] is the act of seeing Clapton for free, and S[2] is paying $40 and seeing Dylan. The question restricts the universe of possible states to just these two, as represented by the set A.

    If I choose S[1], the best alternative forgone is S[2] (which in this case is by default, there being only two possibilities); the dollar value to me of S[2] is $50, but I would spend $40 to gain that $50 of value if I chose S[2]. The nett value of S[2] = $50 – $40 = $10. The opportunity cost of S[1] is the value of the best alternative forgone, i.e. $10.

    If I actually went and saw Dylan, stumping up $40 for a ticket, I give a nett value to that experience as $50 (of intrinsic value, i.e. I’m willing to pay) – $40 (ticket price on the night) = $10 nett, but that doesn’t mean I get paid $10 for turning up (to address Ikonoclast’s point). The $50 value to me is my intrinsic judgement (utility??) as to what I would be willing to pay to get the opportunity to see Dylan; this isn’t the same thing as what I actually have to pay on the night (which is $40, if I choose to go see Dylan).

    If I valued seeing Clapton at $13 that I’d be willing to pay, and I could see him for free, then the value gap between seeing him and the best alternative is $13 – $10 = $3. If I was only willing to pay $3 to see Clapton, and I saw him for free, then the value gap would be $3 – $10 = -7$ < 0; i.e. What the hell am I thinking by seeing Clapton, when I would value seeing Dylan a good $7 more?

    The point is that the opportunity cost is the value of the best alternative: that doesn't imply that our chosen option is the best option.

    Another way of looking at it is I have a (jumbled) set A of all the possible options in my microcosm, my universe. Select one of the elements of A, say S[1], and exclude it from the set, giving me a new set B1 := A / {S[1]}, the set of options other than S[1]. The opportunity cost of S[1] is the highest value element in B1. If A := {S[1], S[2], S[3],…,S[n]}, i.e. consists of n mutually exclusive options, then B1 := {S[2], S[3],…,S[n]} contains n-1 options. If we find the option with the highest value in B1, that option gives the opportunity cost of S[1], i.e. the value of best alternative forgone.

    The opportunity cost of S[2] is the best alternative in the set B2 := A / {S[2]}, i.e. B2 = {S[1], S[3],…,S[n]}. And so on, for each element S[k] in set A.

    Hmmm. I think that's right. Correct me if I'm wrong, but in my synthetic example of being willing to pay $13 to see Clapton is actually using dollar amounts to score my preferences, utility being the concept lurking there, disguised as a dollar value. The empirical way of eliciting a dollar value is to find a random sample of participants and get them to make the choices, based on different ticket prices for a given performer, and see the frequency which participants chose performer P at a each different ticket price offered. Something like that.

    In any case, I’d have seen Dylan, no contest.

  49. @Donald Oats
    Oops. Second last para, the empirical way elicits each participants’ personal judgement (ranking): I don’t mean that we somehow merge/sum/average out, etc, each participant’s rankings with other participants rankings. Poorly worded/thought bubbled. My bad.

  50. @Donald Oats

    Now, suppose you do the whole analysis only in terms of subjective valuations (so as to not mix up currency values and utilities, which I agree is messy and restrictive to specific micro-economic examples). Call the subjective valuations a ‘preference ordering’ (ranking of subjective valuations). From an outsiders point of view (eg a theoretician), the ‘microcosm’ as you called it (set of possible choices) is not known (eg the dimensions) and the subjective valuations are also not known. So, what can be done? See Pareto efficiency. (The set of all possible options is characterised for each individual in the economy. Hence not only a micro problem can be conceptualised, but an economy as a whole. Feasibility constraints – real resources – can be imposed on the economy as a whole. Under some conditions the second fundamental welfare theorem can be derived. This is the interesting one because it involves possible wealth redistribution.)

    I am sure JQ also knows the exact description of what I’ve tried to describe roughly in words, using as much as possible your own words. So I look forward to see how JQ is establishing the equivalent for a whole economy using the notion of ‘opportunity costs’.

    Pareto teaching conceptualisation. He used words to the effect: ‘When we conceptualise the world we think of a sphere’. (A choice of a mathematical object is involved. Obviously, if a person tries to find out where the closest creek is to their current point in space, looking at a globe is of no use. But if a person wishes to teach a child something about the spacial relationship of various countries, then a globe is quite helpful. Similarly but not quite equivalently, the abstractions in economic theoretical models cannot deal with all relevant questions people have over time and space. These models merely provide a mental map, so to speak. Additional information is required, that is empirical data and interpretations. I said ‘not quite equivalently, because if we acknowledge the notion of idiosyncratic likes and dislikes of people, then there is subjectivity involved which isn’t involved in natural sciences.)

  51. @Donald Oats

    That’s a way of seeing it.

    What is at issue here (in some senses) is the matching of mathematics to reality. This is a somewhat fraught area of philosophy if you follow Popper’s comments on it.The issue seems relatively easy when there is a simple analogical correspondence between maths and reality as occurs between say positive integers (natural numbers) and discrete, whole objects like apples.

    The issue becomes more difficult when it comes to cases where there is not a clear analogical correspondence between maths and reality. Imaginary numbers (for example) might be considered as a part of maths where there is no clear analogical match to reality (or a mathematician might dispute me on this). Yet imaginary numbers have their uses in shortcut calculations which can replace matrix calculations for multiple dimension problems. The entire calculation provides an analogical match to reality in a sense but does an imaginary number on its own analogically match anything in reality? Just asking! 😉

    In the words of Einstein: “As far as the laws of mathematics refer to reality, they are not certain, as far as they are certain, they do not refer to reality”.

  52. Ikon I think the piece you quoted above does go to the heart of the problem – in my terms it’s the assumptions that are the problem. However it goes beyond that questions of ontology and epistemology – how we see the world, how we understand the world. The way that western thought (to use a short hand term) has seen the world in the modern era is in terms of sovereign individuals (in terms of assumptions, the normative form of the individual was implicitly male, white, able bodied and adult, but all human beings were to some extent conceptualised as sovereign, even though as lesser subordinate forms if they weren’t the normative form). And in many ways this is reasonable, especially to middle class adults in urban areas – we do experience ourselves as separate (even though for women this separation may be interrupted by periods of pregnancy, birth and breastfeeding) and for most of the time we have meaningful choice to some degree – we have some degree of control over our environment.

    But this has made us forget that in another way we are not separate – we are just one part of a bigger and much more complex ecology – and that we don’t actually control it. That’s why it is so frustrating trying to argue with mainstream economists – because orthodox economics is still a dominant discourse, and because it is still located in the epistemological domain of the sovereign individual who has choices and utility, it seems almost impossible to get them to see that there are other ways of thinking, and that we urgently need to start thinking in those ways.

    Basically that’s why I’m apprehensive about JQ’s project of using opportunity costs to explain economics. I don’t see how it is going to be helpful in addressing the problems of growing inequality and economic degradation we face, because to address them we need to think, and build systems of knowledge, not only as ‘part of’ a society or community as well as being individuals, but as ‘part of’ an ecology, and that’s really hard.

    Some of the Eco-farmers I’ve talked to seem to do this to some extent – they talk about the ‘community’ of plants and animals in a way that I think really useful. But as I say, I don’t see how ‘opportunity cost’ can help in this project.

    Sorry for a long comment. I’m trying to work out ideas for my thesis, which will also have to grapple with mainstream economic theory, but hopefully even though long, this is relevant to the discussion.

  53. Sorry in the second sentence it should read “goes beyond that [ie implicit assumptions] TO questions of ontology and epistemology…”

  54. OK, maybe this is it??

    1. I prefer to see Clapton.
    2. By seeing Dylan instead I’m $10 better off according to standard economic theory (even though factually I’m $40 worse off, and missed the show I preferred to see).

    What does the economist tell me I should do?

    The economist apparently tells me I should miss the free show, see the crap show, lose my $40 and thank them for sorting it all out for me!

    Stuff that! I’m going to need something better than a smarty-pants trick-question to explain to me why I should see Dylan rather than Clapton when doing the former costs me money to do something I don’t want to do and doing the latter is free and is exactly what I want to do.

  55. PS: If, on the other hand, the economist says “No, you go ahead and see Clapton. I was just theorizing about how to put a price on an impossibility in an alternative parallel reality and how to insert that price into real reality for no practical purpose other than to theorise.”

    Then I’d be OK with that. Fly a kite, do what you like. Just don’t try to tell me that I’ve somehow “lost” $10 by seeing Clapton for free.

  56. @Ernestine Gross

    In a way I take your statement in parenthesis, “(so as to not mix up currency values and utilities, which I agree is messy and restrictive to specific micro-economic examples)” as a vindication of my objection that the question Donald Oates linked to is not a valid question as it contains a logical inconsistency or inconsistencies. I essentially demanded that it be looked at and tested in micro, in detail, via all the possible empirical transactions including the money accounting and then found a logical problem with it at that level. The logical problem was and remains the assumption of a $10 opportunity cost where there is no empirical transaction path to support that $10 quantifaction. However, it is very likely you have not read my maunderings on this topic (having learned in the past to avoid my maunderings in general) so you probably won’t be able to comment.

    I also apprehend from your comment that there may be a way out of the dilemma of scaling up the opportunity cost concept to the macro level by preference ordering or ranking. I had made various comments which were very dismissive of the possibility that opportunity cost as a concept had any legs at the macro level. These comments were predicated on the assumption that currency value accounting was the method advocated and indeed was the only way to do it. “A little knowledge is a dangerous thing.” – Alexander Pope.

    Now I begin to perceive (very dimly) why J.Q. would write a book called “Generalized Expected Utility Theory : The Rank-Dependent Model” which I have not read by the way.

  57. @Ikonoclast

    The question does not contain a non sequitur. It assumes that preferences are known and satisfy various conditions. If you knew the first thing about the ‘bourgeois economics’ towards which you feel such superiority, you would know that in such a case, and with assumed prices and an assumed income, preferences can be expressed in monetary values. It is not necessary for market transactions to actually occur for willingness to pay to be established and opportunity cost calculated.

    Uncertainty about preferences or anything else does not paralyse economic analysis and is not an excuse for public policy not to be based on serious attempts to understand how it affects people’s welfare.

    Moreover, J-D is right. If doughnuts and croissants cost $2 each, the opportunity cost of buying the croissant is whatever the value of the doughnut is to you. But you haven’t established a willingness to pay (WTP) for a doughnut, only the difference between your WTP for the two products.

  58. @Val

    Absolutely Val, I agree with everything you say there. One thing I have become aware of though is that I have to become far more careful to NOT make the broad-brush assumption that Ernestine’s and John Quiggin’s conceptions of economics are un-nuanced like the tenets of crude neoliberalism. The trap for me is that I hear the same terms, like “opportunity cost” or “market”, that neoliberals use and it’s like a red rag to a bull. I immediately charge, assuming that E. or J.Q. are using the term in the same way, with the same simplistic meaning, as the rankest neoliberal ideologues. Of course, I am completely in the wrong when I do that.

  59. @Luke Elford

    Okay, fair enough. If you and J-D are right then I don’t understand the concept of “opportunity cost” in economics. I do understand opportunity cost in terms of my original jerrycan of water example where I can have one use of a resource or another but not both. I can’t both wash with the water and keep it stored as potable water for my next 3 day’s hydration needs.

    I thought I had empirically established my WTP in my example where I indicated I would buy a doughnut priced at $1.00 and implied I did in fact do so when the price dropped to $1.00. You say “you haven’t established a willingness to pay (WTP) for a doughnut, only the difference between your WTP for the two products.” This is a distinction that is too fine for me. I don’t understand your point there.

  60. Opportunity cost is a very simple concept, although simple does not mean easy.

    When you choose one alternative, by definition you do not choose another alternative (if there is only one alternative, it is not a choice). The value of the highest-value alternative you do not choose is the opportunity cost of your choice. For example, if I am picking between chocolate and vanilla ice cream, and I pick chocolate, then the opportunity cost of that choice is the value I would have gotten from choosing the vanilla ice cream. If I am picking between chocolate, vanilla, and strawberry ice cream, and I choose chocolate, and the value I would have gotten from choosing vanilla is higher than what I would have gotten from choosing strawberry, then the opportunity cost of that choice is the value I would have gotten from choosing the vanilla ice cream.

    The answer to the music ticket question is $10. Here’s why: first of all, the fact you have a free ticket to an Eric Clapton concert is irrelevant. All that matters for the purpose of this question is your next-best alternative to seeing Eric Clapton, which in this case is seeing Bob Dylan perform. You value seeing Bob Dylan at $50, and you must give up $40 to see him, for a net benefit of $10. So the value you give up by seeing Eric Clapton is $10.

  61. @Tom Dilliperd

    I still can’t understand that application of opportunity cost as being valid. It seems to me that the basic principle of the opportunity cost is this. You can have one use of a resource but not more than one use of that resource when it is exhausted upon one specific use. My jerrycan of water example describes this type of opportunity cost. I can wash with the water or use it as potable drinking water. I can’t do both. I also understand the concept of next best use. Washing with the water would have been my next best use.

    There is perhaps a variant of opportunity cost where you fail to make the best use of something. If I keep my money under the mattress then I fail to keep it safe and fail to earn earn interest on it. The opportunity cost I pay is the interest I fail to earn or even the entire capital if it is stolen. Money we can also treat as being exhausted upon one specific use (for the individual concerned) when it is spent .

    I begin to experience difficulty when the concept is applied to the value of second best use in consumer choice. Assume there are only two flavours to keep the example simple. A chocolate ice-cream is $3.00 and a vanilla ice-cream is $2.00. I don’t see how the opportunity cost of choosing the chocolate ice-cream is $2.00. I can arithmetically derive this value if a pedagogue tells me what is regarded as the right method. “The value of the highest-value alternative you do not choose is the opportunity cost of your choice.”

    So, I could get “right” answers on a question paper with very simple opportunity cost questions by applying the pedagogue-taught method of deriving it. Though I am sure I would not be able to get the concert ticket question right just by blindly applying the method.

    However, while I could derive the approved answers for very simple opportunity cost questions, I would still not agree that the answers meant anything in reality. My honest (and perhaps ignorant) response would be “This is bulldust. It means nothing in reality.” I honestly cannot see how the opportunity cost of buying the chocolate ice-cream is $2.00 and how such an opportunity cost means anything.

    From the consumer end, the application of opportunity cost would logically have to do with the exhaustion of the consumer’s money (one would think). If the consumer is a kid and has only $3.00 and buys the chocolate ice-cream then his money is exhausted. How is the opportunity cost of doing this $2.00? Rather, I would see the opportunity cost of buying the chocolate ice-cream in preference to the vanilla ice-cream as $1.00. The kid has lost the opportunity to spend the dollar saved on a $1.00 sweet or anything else being sold for $1.00.

    It is clear from my example that if the conventional wisdom is right then I have got the concept back-to-front and inside-out somehow. Can anyone explain to me logically rather than arithmetically why the correct answer is $2.00 (presuming it is)?

    Who pays this opportunity cost of $2.00 or who alternatively is derived of $2.00? Sorry folks, I just don’t get it yet. I can understand my son’s explanation of why electrical and electronics engineers use imaginary numbers in certain calculations yet I can’t understand economic opportunity costs. Heh. Maybe it’s because the former process is logical and the latter process is illogical. 😉

  62. I think that I actually understand the concept of opportunity cost, i just don’t
    A)see what use it is in addressing important contemporary problems
    B) know whether those who are explaining or defending the concept actually understand my epistemological objections

    Maybe I’m being arrogant, but I suspect they don’t. I hope ikon that I am not barging in as you described, but my experience so far that is that people like JQ and Ernestine don’t seem to fully get these ideas. I would be happy to be proved wrong, but so far they seem to ignore my ideas or brush them aside with an ‘we know that and it’s not important’ sort of attitude – which I think arises from not fully understanding the ideas.

  63. Correction: First sentence of my last paragraph above should read.

    “Who pays this opportunity cost of $2.00 or alternatively who is deprived of $2.00?”

  64. @Val

    This is a really interesting arena but if I start becoming too much of a bush philosopher (cousin of the bush lawyer) about this I will get us both sent to the sandpit. I am in a zone of uncertainty on this issue. Sometimes I think JQ and Ernestine, as representative broadly orthodox academic economists though certainly not neoclassicals (though either or both might dispute this categorisation and/or dispute my categories) don’t “get these ideas”. I mean ideas that question the entire framing of conventional economics.

    Other times I think they do get it and get it in a way that I don’t get. In other words, their understandings, both ideological and technical, may be so nuanced that it is me who just does not get it. I use a broad ideological brush and when I get angry in debate I just sweep whole disciplines away and declare them to be “bulldust”. It’s certainly the case that when one gets angry one stops thinking clearly.

    The problems I have with economics still baffle me. I sort of see my problem this way now.

    I can get science because science deals with real stuff. I can get philosophy because philosophy deals with supposed stuff. I don’t get economics because economics deal with real stuff and supposed stuff… at the same time.

  65. All the explanations given so far involve individuals making choices about consumer products (not Ikons, who is actually talking about ecologically relevant questions of resource use). I guess the more relevant, ecological or ‘thinking like a planet’ questions are: how much resources does this concert use? Is it worth it? (Note: not ‘could these resources be put to better use in a way that I as a human being could benefit from?)

    That is, the questions are explicitly about value and impact on the ecology rather than utility and value to human individuals.

    Of course, we can’t – and shouldn’t – take human beings out of it entirely, especially future generations. But we need to think about value and worth in terms that don’t depend on utility and that think about whole communities or ecologists of living and non-living things.

    Naomi Klein towards the end of ‘This Changes Everything’ touches on some of these issues. She suggests there are some things we can’t measure because their value is inherent. She still tends to justify this in human terms (rights) but I think her way of thinking is very useful.

    She says “we will not win the battle for a stable climate by trying to beat the bean counters at their own game” (p 567) and asserts that while movements for abolition of slavery, universal suffrage and universal health care ” contained economic arguments” but did not win “by putting a monetary value on rights and freedoms”.

    So I guess in a way the question is are some of us here wasting time by trying to beat the bean counters at their own game? Are JQ and Ernestine, et al, bean counters? I understand from what Ernestine said that they/JQ would not be trying to put simple (or simplistic) monetary values on things, but aren’t they still using utility (ie utility to individual human beings?) as a basic concept? And isn’t that the basic problem?

  66. @Luke Elford

    Not meaning to create more irritability – I lack social skills ok – but what is your problem with Ikon’s reference to “‘bourgeois economics’”.

    I didn’t notice the superiority that you saw in his words, but I wouldn’t would I, because being idiosyncratic and not being bourgeois, I feel the same lack of respect as many people do for this class of people and their choice to be insular and ignorant of the effects of their choices on the rest of us.

    Is there a reference that explains the real bourgeois economics?

    As you say “with assumed prices and an assumed income, preferences can be expressed in monetary values.” I’d add you need to assume that all people are or should be like the person doing the calculation. But so what?

    Surely the assumptions about the world and its people made by the bourgeois men are not going to be relevant for women children and the non-bourgeois man?

    This is just one of the incredibly stupid and cruel assumptions that von Wieser and subsequent bourgeois economists make:

    “Inequality is undoubtedly more readily borne, and affects the dignity of the person much less, if it is determined by impersonal forces, than when it is due to deSign. In a competitive society it is no slight to a person, no offence to his dignity, to be told by any particular firm that it has no need for his services, or that it cannot offer him a better job.”

    Tom Dilliperd

    Opportunity cost may be a very simple concept but some of us are not simple.

    The concept of opportunity cost itself is easy to understand, as JQ says when you set it out as a clearly defined problem, people get it right, but understanding the stuff that can’t be reduced to “mathiness” is the difficult thing we need to do.

  67. Sorry about typos in the above – I’m doing this on my phone. Hope it makes sense but it should be ecologies not ecologists of course (there’s probably more)

  68. @Val

    I agree.

    The problem is valuing things and that is what von Wieser’s book is mainly about and reading it makes clear how lacking in the necessary knowledge about other human beings he is. It is also possible to see the influence of all the dysfunctional ideas about evolution and IQ and eugenics are backgrounding his thinking.

  69. @Ikonoclast

    I think Tom Dilliperd is right. But this shows how bourgeois theory is deliberately constructed.

    If opportunity cost is “net benefit” then the fact that you may $40 to get it one way and zero dollars to get it another way, is excluded.

    Either way the net benefit is $10. It is the slope of demand curve – irrespective of the height of the curve above the origin.

    Why would you spend $40 to get a net benefit of $10 when you can get a net benefit of $10 for free?

    The above stream of 70 posts just indicates how weak economic theory really is and just how imune it is to the real interests of humanity.

  70. Replying to both Julie and Val, there is certainly a problem with everything being reduced to the money nexus or even to the utility nexus as defined by man or rather by some men (and a few women – e.g Maggie Thatcher or Gina Rinehart).

    John Ralston Saul is the modern writer and philosopher to whom I normally refer in this context. J.R.S. basically says the fundamental fault lies in thinking that economics can guide our important socioeconomic decisions. He refers to obsessions like economic “efficiency” as at best second order or third order concerns. One can see what he means.

    At a certain time in history (circa 1990) it become scientifically and ecologically very clear that we should stop burning coal and oil and do so promptly, indeed almost immediately. Yet it remained economically efficient to keep burning coal and oil in vast quantities for another 25 years and counting. The merely economic and economic policy response has been to investigate the causes of market failure, especially in relation to negative externalities and to begin toying (I use the word intentionally) with various approaches and schemes to re-jig economics so it hopefully one day might address serious negative externalities.

    There are alternatives to letting economics guide and determine all our decision making but the discussion would get too long for this blog. I’ll try to wind up with an analogy to a well known saying: “Economics is a good servant but a bad master.” We have made economics (economic reasoning) the master and director of our entire society and therein lies the problem.

  71. @Julie Thomas

    Is there a reference that explains the real bourgeois economics?

    Paul Samuelson introduced this concept in one of the more stupid of his tracts.

    You can test an economist by asking how many multiples of the average wage do they get – and what productivity do they have to show for it.

  72. When you do one thing, you do not do another thing.

    Yes?

    That other thing you could have done would have provided you with some value.

    Yes?

    So when you do the thing you did, you forwent some value, the value of that other thing you could have done but didn’t.

    Yes?

    That forgone value is the opportunity cost of your choice.

    One hardly needs to buy into every dogma of modern economics to understand and accept the idea of opportunity cost. You can see opportunity cost in action here and here. I will probably blog more about the problems opportunity cost poses for the neoclassical analysis of externalities later today.

  73. I agree with you to a degree ikon but I think it’s more that we have let a certain kind of economics become our master, rather than economic thinking per se. I think feminist economic thinkers like Marilyn Waring can be useful, though again as Naomi Klein suggests, they should be part of what we we do rather than the main focus.

    But yes in general I agree that mainstream or orthodox economics has become the dominant discourse of our polity since about the late 1980s and that’s a huge problem.

    Julie – so did you read the whole of that von Wieser ‘Natural Value’ book you linked to? Well done you if so?! I just read a few sections, but yes, one does see this middle class adult man (who has apparently sprung fully formed into the world), looking around him and seeing the world entirely in terms of use, value, individual wants and goods (even poor old services don’t really get a mention). Relationships, care, love, laughter, conversation, companionship etc don’t get a mention. Sex is perhaps hinted at, as among the “coarser wants”?

    It is funny from today’s perspective to see him writing about water as something that there is so much of that no-one values it, or suggesting that people naturally stop eating when they’ve had enough. But it ought really to be an object lesson to economists, one would think.

  74. @Julie Thomas

    You can question the relevance of the approach and results to the real world, if you like, given that it assumes a level of rationality that people don’t display in real life. I still think the analysis is useful, especially for thinking about government policy, which we should try to be rational about even if we often fail as consumers. But that wasn’t Ikonoclast’s criticism. His argument was that the approach was internally inconsistent, but it is not. You can criticise the assumptions (some of which, admittedly, are not made explicit in the question, but should be known to the economists being asked), but you cannot claim that the conclusions do not follow from them.

    “Surely the assumptions about the world and its people made by the bourgeois men are not going to be relevant for women children and the non-bourgeois man?”

    Firstly, that’s quite an ad hominem. Secondly, I would argue that the concept of opportunity cost is of greatest relevance to the poor. It is for the poor that trade-offs and hence opportunity cost loom largest. Opportunity cost is a much more serious issue when the competing alternatives are food and shelter rather than rock concerts. The poor are under much greater pressure to be good at making trade-offs.

    Re the quote: As Ikonoclast defines the term, ‘bourgeois economics’ is a pejorative name for mainstream economics. Thus, it does not refer to an Austrian like von Wieser. Do you have any evidence that a belief that people feel no lack of dignity if they face rejection in seeking a job is common among mainstream economists? Can you think of a commenter on the blog who identifies with mainstream economics who would agree with the comment? Do you think Professor Quiggin would agree?

  75. “Do you know how the Economists first came into being? They were humans once, taken by the dark powers, tortured and mutilated. A ruined and terrible form of life. Now… perfected. My fighting Neoclassicals. Whom do you serve?”

    (Apologies to LOTR.) 😉

  76. @Luke Elford

    No, “Bourgeois economics” is a technical term for the economics wherein wealth is structurally transferred from producers to others, to create a chasm between rich and poor.

    Slavery, fuedalism, colonialism and capitalism are all forms of “bourgeois economics”.

  77. @Ivor

    “Why would you spend $40 to get a net benefit of $10 when you can get a net benefit of $10 for free?”

    If you go to the Dylan concert, you pay $40 to get a benefit of $50, yielding the net benefit of $10. What benefit you get from seeing the Clapton concert is not stated, and hence which alternative would be best for you to choose, given your preferences, cannot be determined from the information in the question, which is not about that anyway.

    “The above stream of 70 posts just indicates how weak economic theory really is and just how imune it is to the real interests of humanity.”

    How can you know how weak the theory is when your preceding sentences make clear that you do not understand it?

  78. @Luke Elford

    There is a difference between obtaining a net benefit with no sunk cost, and obtaining the same benefit with a sunk cost.

    you will find this covered in a footnote in Ferraro’s paper.

    you are the one who “does not understand”.

  79. More seriously, I do get the opportunity costs concept in production as in (from Wikipedia);

    “1. Explicit costs

    Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends $100 on electrical power consumed, its explicit opportunity cost is $100.[5] This cash expenditure represents a lost opportunity to purchase something else with the $100.

    2. Implicit costs

    Implicit costs (also called implied, imputed or notional costs) are the opportunity costs not reflected in cash outflow but implied by the failure of the firm to allocate its existing (owned) resources, or factors of production to the best alternative use. For example: a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using them for production.” – Wikipedia

    I also get a sort of concept of consumer opportunity costs as in “I spend $3.00 on a chocolate ice-cream so that means I can’t have (next best) a $2.00 vanilla ice-cream PLUS another $1.00 sweet. Thus to me the opportunity cost of the chocolate ice-cream would be that I couldn’t have the sweet, value $1.00. Though there remains the niggling utility opportunity cost that the vanilla ice-cream doesn’t taste as good as the chocolate one. This might indicate where my fallacy lies in this calculation

    I think, but I am not sure, that I am missing the point of the “consumer opportunity cost” concept precisely because I am focusing on the monetary costs of the transactions and not on the utility benefits to the consumer. The utility benefit may or may not be valued in monetary units of course.

    Whilst I can sort of half-see where I might be going wrong, I still can’t really get it. The consumer in taking opportunity A loses the opportunity to take opportunity B (when these are mutually exclusive opportunities). If opportunity B happens to be worth to the consumer in utility precisely its market cost then this market cost is the lost utility opportunity cost in money terms.

    I can twist and torture my logic this far. I still can’t see how this concept is really real or has any real application. Heaven knows why I can’t see it. Maybe it’s just a notional or formal concept like an imaginary number and it works in certain operations and calculations but has no essential empirical reality or meaning other than its (claimed) usefulness in those operations and calculations. The claimed usefulness of imaginary numbers I can actually see demonstrated. The claimed usefulness of this formal utility-value concept of opportunity cost I cannot see for myself and have not seen demonstrated.

    I remain yours truly etc. etc.,
    Rather Sceptical.

  80. “I still think the analysis is useful, especially for thinking about government policy, which we should try to be rational about even if we often fail as consumers.”

    And how would this idea relate to democracy?

  81. @Ernestine Gross
    Capitalism’s strategy is to remould human nature to fit the discipline of the rational market through means such as corporate propaganda and tightly lobbyist-constrained lawmaking. Democratic decision-making will by such means converge on ‘rationality’.

  82. @Ernestine Gross

    Do you not see any role, within a democracy, for, say, policy analysis exploring the opportunity cost of using water for irrigation rather than environmental flows (and vice versa) in the Murray-Darling Basin? No role in informing voters or politicians?

  83. @Ivor

    The footnote is about some respondents possibly mistakenly thinking that the Dylan ticket had already been bought, and nominating an opportunity cost of $50 as a result. What does this have to do with what you wrote?

  84. @Luke Elford

    I’m still trying to work out how it works in reality.

    Let’s stick with example but we’ll call the environment ‘Clapton’ and irrigation ‘Dylan’.

    In the example we were told that we chose Clapton and asked what the opportunity cost of that was. Does the analysis occur before the decision is made in the real world, and therefore affect the decision by effectively telling us the “right” answer?

    e.g. In the example, I’m guessing that if we haven’t yet decided whether to go to Clapton or Dylan and we do the exercise, then the “right” thing to do is choose Dylan (because we’re $10 better off that way)?

  85. Crispin Bennett :
    @Ernestine Gross
    Capitalism’s strategy is to remould human nature to fit the discipline of the rational market through means such as corporate propaganda and tightly lobbyist-constrained lawmaking. Democratic decision-making will by such means converge on ‘rationality’.

    I am sure what you wrote makes sense to you. It doesn’t make sense to me. “Capitalism’ is a word. It can’t form a “strategy” . There is no such thing as “the rational market”. The word “market” can mean a place where people meet to exchange things or just chat. It can mean a set of prices for which ‘things’ are offered and bought at specified times and locations, denominated in currency units or in exchange rates (quantities). “Democratic decision-making” – how does it work in your household? Was the outcome of the FIFA president election democratic? Was it rational? And so forth.

  86. Given the logical difficulties I have with opportunity cost as forgone utility value to the consumer coupled with its measurement in money units separate from real or possible money transactions, it seems to me that;

    The title of one of J.Q.’s books, along with some pithy observations made by Ernestine Gross give me a big hint as to what direction I should now bend my thoughts. The J.Q. book in question, which I have not read yet, is “Generalized Expected Utility Theory:The Rank-Dependent Expected Utility model.”

    The title very elegantly conveys a complete concept IMO. I know from the title it will be talking about “Expected Utility”. This makes sense to me. When we consider different, mutually exclusive options, we gauge them on “Expected Utility”. There is really no way we can do more than that. We cannot gauge on “real utility” (whatever that is) nor on the actual utility that eventuates when the good or service is tested empirically at the hour of reckoning when we use it. We can also be in a different psychological and even physical state at time of use compared to the time of purchase.

    The mention of the “Rank-dependent” model also tells me something. We are not making standard money quantifications to compare different products which will have different qualitative effects. On the other hand, we might well do this, indeed should do this, when buying a product in bulk to get a better unit price. We are in general making ranked choices. A is better than B is better than C but we don’t quantify it generally. Rather we work on somewhat subjective heuristics. Of course, I might get a shock when I try to read the book, either finding it out to be about something else entirely or too esoteric and mathematical for me.

    Along similar lines Ernestine replied to Donald Oats (forgive the re-quote);

    “Now, suppose you do the whole analysis only in terms of subjective valuations (so as to not mix up currency values and utilities, which I agree is messy and restrictive to specific micro-economic examples). Call the subjective valuations a ‘preference ordering’ (ranking of subjective valuations). From an outsiders point of view (eg a theoretician), the ‘microcosm’ as you called it (set of possible choices) is not known (eg the dimensions) and the subjective valuations are also not known. So, what can be done? See Pareto efficiency. (The set of all possible options is characterised for each individual in the economy. Hence not only a micro problem can be conceptualised, but an economy as a whole. Feasibility constraints – real resources – can be imposed on the economy as a whole. Under some conditions the second fundamental welfare theorem can be derived. This is the interesting one because it involves possible wealth redistribution.)”

    I do not understand all the technical points E.G. makes here but I do believe I get the general concept(s). I at least feel that I can see how using subjective evaluations (via “preference ordering” in a ranked system) and eschewing the “mix up (of) currency values and utilities” offers a way out of the sense of illogical that I get from the concert ticket example of opportunity cost.

    I don’t know if anyone else will get what I mean here or even give a fig for my “dilemma”. Sometimes our logical difficulties are very idiosyncratic and others just can’t see why we struggle with a particular concept which seems easy to them.

  87. @Megan

    It’s more a concept than a tool for a particular purpose, but, yes, in making decisions we should take the opportunity costs of our actions into account—to use Ivor’s example of government spending, we need to remember that money spent on the military could be spent on health services instead, and we need to compare the benefits of the two options before making a decision.

    The question doesn’t ask about what the best option to choose would be, and it doesn’t give enough information about your hypothetical preferences to draw a conclusion. You benefit $10 from seeing the Dylan concert, but you might benefit more from seeing the Clapton concert—if you value seeing Clapton at anything over $10 it would be better to see the Clapton concert, since it’s free.

  88. @Luke Elford

    It is obvious.

    There is a difference between outlaying a million dollars for a net benefit of $10 compared to getting a net benefit of $10 by outlaying $40.

    A capitalist will pick one in preference to another.

  89. @Luke Elford

    I would ask this question. If a concept has no purpose why create it? What use is it? What reason does the concept have to exist? I cannot fathom the raison d’etre of a dangling concept. It’s worse than a dangling participle!

    A subsequent internet search shows I have not invented the term of the concept or the terms of the “dangling concept”.

    From “Interaction theory in forest ecology and management” – By Rolfe A. Leary.

    “A concept which hangs by itself I call a dangling concept. Just as proper grammar has no place for dangling participles, advanced science has no place for dangling concepts.”

    He then goes on to elucidate his theory of dangling concepts. Suffice it to say that he, in my interpretation, suggests that concepts must form concept systems. Without having read further, my educated guess is that the justification for this lies in systems science. In dealing with complex interacting systems only conceptual models with interacting/interconnected concepts make any sense (as the only ones that can show analogous congruence).

    So whilst some aspects of basic opportunity cost theory make sense (implicit and explicit production costs) being connecting to money accounting, the example in the concert problem makes no empirical sense at all. It is entirely formal and unconnected. It’s just my opinion of course.

    OTOH, I think I can see why a Rank-Dependent Expected Utility model would make sense.

  90. I have just re-found a quote of JQ’s that I remembered from earlier – a note to a previous post on why he used orthodox economic concepts

    “I guess the big exception to this [ie appropriateness or functionality of using orthodox concepts but in a critical way] is if you want to discard methodological individualism altogether, but the theoretical enterprises that took this route (such as structuralism) don’t seem to me to be prospering.”

    I found it on the CT site http://crookedtimber.org/2007/06/01/heterodoxy-is-not-my-doxy/ I guess it was probably on this one too?

    I think what I am talking about is discarding methodological individualism, though that’s probably not the way I’d express it – so I guess I may just be disappointed trying to have a discussion about it here, since JQ has apparently decided that critiques of methodological individualism are a side trail he doesn’t want to go down.

    However I’d say that in social theory there are a number of answers already being offered to the debate about structure and agency, including social practice theory and cultural theory drawing on Bourdieu et al. The issue to me is how do we incorporate ecological perspectives in this. However it looks like I’m in the wrong place to be having this discussion, which is a real shame.

  91. @Ikonoclast

    I said it was more a concept than a tool for a particular purpose. If I said that sustainability was more a concept than a tool for a particular purpose, would you respond ‘If a concept has no purpose why create it?’

    If you want to learn more, I suggest you start with something more elementary than the rank-dependent expected utility model. You’ll need to understand the modelling of preferences under certainty before grappling with uncertainty, and even then it’s best to start with basic expected utility theory because the rank-dependent model is a response to its shortcomings.

    @Ivor

    Not if they are acting in accordance with their preferences as described by you.

  92. @Luke Elford

    Fair point, an umbrella concept may well be very different from a dangling concept. I’d have to think it through and anyway reasoning by analogies has limits so I might get precisely nowhere.

  93. @Val

    I admit I find J.Q. too economically orthodox for my ideological biases. But his blog is the most owner-tolerant one I know. He tolerates more dissent, more heterodoxy, more disagreement and even more combativeness against his own views than I have seen elsewhere. He also allows user-generated comment threads (sandpits etc.) to go on their own merry way. He comments quite a bit and has interchanges with a diversity of bloggers. This makes it more interesting than many blogs. I like the blog-owner to be an active conductor but not a dictator.

    I don’t actually visit many blogs and I write almost exclusively on this blog so take the next comments as coming from a very small sample size. Only Gail the Actuary interacts more with her guest bloggers than J.Q. does. However, I am now critical of Gail’s entire approach to her subject matter and I don’t bother to write there anymore.

    Bill Mitchell’s MMT blog is very interesting. He provides enormous detail in the areas of macroeconomic hard data and policy around the world (well mainly Aus, USA, EU and Japan). His ideological bias also matches mine (very left wing) but he separates his ideological comments well from his MMT posts which definitely predominate. I have little trouble accepting his MMT perspective. I accept most of it apart from a few rather rhetorical (IMO) exaggerations. I fail to see how a Keynesian could have much trouble accepting MMT or significant swathes of it.

    OTOH, Bill’s blog is mostly an intense monologue pushing the same essential MMT principles over and over but always with new hard data. The focus goes deep into macroeconomics, national accounts and national macroeconomic policy (for a blog) but not wide into other parts of macroeconomics or other social issues (usually). Bill rarely interacts with guest bloggers though I did provoke him to write an essay-sized blog once refuting my claims that MMT was too much founded on ” growthism” which is in contradiction to limits to growth.

    His ripostes on that topic (LTG) are good and well nuanced as are J.Q.’s. One comes away feeling both that they are the most enlightened economists one has come across re LTG issues and yet somehow they still seem too “economy-ish” on the issue and not quite ecology-ish or physics-ish enough. It’s hard to put one’s finger on it but there seems somehow to be at base an enormous faith in economics (if faith is the right word). I am quite a bit more sceptical about economics and belong to the school of thought that the natural laws (of physics, chemistry, ecology etc) finally do hold all the trump cards.

    Voluntarism is the doctrine that the will is a fundamental or dominant factor in the individual and his/her life course. It is probably related to methodological individualism. Going up a step, we could say that a doctrine or spirit of societal or civilisational progress-voluntarism is the animating belief of much economics. Economists really believe for the most part (it seems) that humanity can plan for progress in everything or most things and not suffer too many unintended consequences. If economists do not exactly hold the view that man can “dictate” to nature and physical forces then at least they seem to presume man can negotiate on an equal footing.

    It’s as if economists don’t have a full acceptance that the economy as a system is a fully embedded sub-system in and dependent on the biosphere system (the system of natural systems). It’s more as if they see the economy as being on equal footing with nature and “yeah sure we can horse-trade successfully with nature anytime, anywhere, any century.” It’s this kind of intellectually insular hubris that troubles me. It’s like they don’t have the final level of respect for the ultimate level of wicked problems. Somehow their faith in their own systems is rather too great. It could do with being tinged with a little more humility and caution. It’s classical hubris. And we know or ought to know what regard the “gods” (really the natural forces) have for human self-importance. Of course this is just my idiosyncratic view and a very subjective one at that.

  94. Ikonoclast, I think an issue is with the use of “next best alternative”, instead of “best alternative forgone”, as they are not interchangeable: the former implies that my current choice is optimal, and therefore all other alternatives are of less value to me, but there is (at least one) alternative which is the “next best alternative”; the latter says that for my current choice (which could any of the options, even be the lowest value choice in my judgement), which mightn’t be optimal, I look for the highest value alternative among the options excluding the selected one, and it is quite possible that the “best alternative foregone” is of higher value to me than the option I did select.

    By the way, when I say “select”, I don’t mean I actually prefer that option selected: it is only selected in the hypothetical, meaning that to determine the opportunity cost if I select a particular option, I consider the best alternative forgone in the set of all options excluding the selected one.

    Again, I’m not an economist so you get wot you pay for in reading this 🙂

  95. Lets see whether a thorough treatment by JQ of the alledgedly fundamental concept of ‘opportunity cost’ can show results such as those by Varian (1974), “Equity, Envy, and Efficiency”, JET, 9, pp 63-91, to be special cases. Would it lead to fewer implementation problems than state contingent valuation models in the area of environmental economics? I look forward to the book.

  96. Johnston’s The Austrian Mind, a favorite book of my youth, has some sections on von Wieser, his teachers and students, and the overall intellectual and cultural background.

  97. @Donald Oats

    I’ve already written far too much on this thread and this had better be my last post on it. I’ve stated what I get about opportunity cost and what I don’t get about it. As much as I twist my logic (or lack of it), the concert ticket question seems illogical to me as does the answer to it. My mind rebels against it.

    I read the paper about applying the test to various economics graduates. The number of correct answers was no better than one would expect by chance on a multiple choice test. To me this is diagnostic of something but my diagnosis is different from that of the authors of the paper.

    If so many graduates performed so poorly (a statistically valid sample I assume?) then this could indicate one or more of the following as some possibilities are not mutually exclusive;

    (a) they had not been taught a key concept properly;
    (b) they had forgotten a key concept or how to apply it;
    (c) opportunity cost is not a key concept at all;
    (d) opportunity cost is a formal concept with little real application except perhaps in the case of opportunity costs in production (explicit and implicit costs) and thus rarely exercised;
    (e) the problem question poses such an unrealistic or hypothetical twist on the formal concept that it makes little practical logical sense and thus confuses people;
    (f) the problem question has a fundamental flaw in logic.

    The authors of the paper seemed to assume (with no real discussion that I can see) that the issue existed about in the area of (a) and (b).

    I tend to the view that the issue resides in the area of of (d), (e) and (f). Most of my previous posts are the best evidence I can muster for this view so I won’t repeat myself.

  98. It would be interesting to see a parallel experiment attempted in one of the physical or biological sciences: I mean, researchers could select a suitable problem dealing with a basic concept from an introductory textbook and then pose it as an impromptu test to attendees at a conference in the relevant field in order to see how they perform. Would they do better or worse than economists, or about the same?

  99. @Ernestine Gross

    Such a distribution described by Varian could only exist under communism or possibly in some form of stationary society such as:

    R A Radford’s economic organisation in POW camp
    Kibbutz/Armish settlement
    community on large passenger cruise ship
    military force

    It cannot exist under capitalism – because of the restricted nature of wage-labour.

  100. @Ivor

    I believe you misunderstand the reseach methodology of mainstream economics, as it developed during the second half of the 20th century. You are not the only one. The purpose of Varian’s article, as I understand it, is not to say “this is what we (or you should) want” (or “you can’t have unless you become a communist”, as you assert). In the first instance, this paper provides some conceptual definitions of words. For example, in the more recent past, the period during which wealth inequality has grown in many local economies, the word ‘envy’ has been introduced and used by those who gained a lot of wealth, relative to others, to justify their position on the grounds that complaints are merely an expression of ‘envy’. Varian provides a concept of envy which potentially is applicable to everybody in a society, including the currently ‘rich’. (‘You are only envious’ is not longer an argument’.) Then he relates this new concept (in economic theory) to Rawl’s theory of justice (philosophy) and then to well established notion of efficiency in economics. Finally, he analyses the model by checking under which conditions on the elements of the theoretical economy, stated conclusions make sense. The reader can then reflect on what insights are being gained, given empirical information on the state of contemporary society. (Too much is already known as to why the idealised form of communism – preferences are being communicated to a central planning agent together with complete information on resources far into the future – doesn’t work).

    May I suggest you read

    John Quiggin, “Heterodoxy is not my doxy”, referenced by Val @2, p2.

  101. @Ernestine Gross

    I don’t think that Varian was explicitly stating what we should want. he was setting up a model of distribution and definitions.

    However surely these only have interest and relevance if and only if they can lead to real social effects?

    You do not need a central planning agent to communicate preferences. This is a false cartoon.

    I read Quiggin’s piece but it was extremely naive and written in 2007 before the GFC. Contrary to Quiggin and the CT crowd – orthodox Marxism, when faced with the challenge of depression and fascism, did not produce nothing but the counsel to wait for the revolution.

    It produced an international war against fascism in Spain, many domestic struggles against Nazis in occupied zones, self management in Yugoslavia, Eurocommunism after the Second World War and immense social and worker movements across the Western world. Rosa Luxemburg did not counsel anyone to wait.

    you will find the “wait for the revolution” canard better associated with the ALP left and fence-sitters such as John Langmore etc.

    It produced the exact opposite to Quiggin and the CT lot who appear to all swoon after digesting rank fiction as in “Red Plenty” which they propagate.

    My comments were the result of (as you suggest)

    The reader can then reflect on what insights are being gained, given empirical information on the state of contemporary society.

    presumably that is what Varian wanted?

  102. @Ivor

    So. you pick on a date when you believe it serves your argument but you ignore the dates relevant to the article by Varian and my comment. Won’t wash, Ivor.

  103. @Ikonoclast
    A couple of other possibilities: the survey was poorly executed (but I doubt that’s the case); opportunity cost is easier to appreciate when applied in strict finance, i.e. value is easily understood in dollar terms, as opposed to the survey question (where value is a subjective conversion from enjoyment to dollar value for acquiring that enjoyment). No doubt there are more possibilities.

    One thing that’s curious is that the mid-range answers were chosen a bit more frequently than the two extreme answers. I don’t know if it is statistically significant, but it suggests the subjects fell foul of framing, i.e. they tended to select answers between the two extremes.

    As a pedagogical tool, it wouldn’t be a bad idea to test student knowledge in this manner at different points throughout the undergraduate degree, not to fail them or grade them, but to measure how well the fundamental concepts are being absorbed. The secondary benefit of a short survey is that the questions just might prompt a few students to re-read their notes on the fundamental definitions, concepts, and how they work. Then again, surf’s up.

  104. @Ivor

    Varian was published, as stated, in 1974 and I talk about research methodology in the second half of the 20th century and contemporary society. You bring empirical examples which date from the first half of the 20th century or earlier. As for motivation of authors, there is also curiosity.

  105. @Ernestine Gross

    The scenario suggested by Varian could not exist in both the first half or the second half of the 20th Century nor even in the first half or second half of the 21st century because wage labour, by definition, creates an unfair distribution and therefore continuously generates “legitimate” envy.

  106. @Ivor

    I acknowledge your opinion on whatever.

    I look forward to see what JQ comes up with using ‘opportunity costs’. I have never considered the notion of ‘opportunity costs’ as fundamental but I am curious. Who knows, something interesting and useful may evolve.

  107. Confusion arises because discussions of opportunity cost often define it carelessly as ‘the value’ of the forgone alternative.

    What they mean is, ‘the NET value TO YOU’ of the forgone alternative. This is the ‘consumer surplus’ – the difference between the amount you would be willing to pay for the forgone alternative and its actual price.

    If you would be willing to pay $50 to see Dylan, and Dylan costs $40, seeing Dylan gives you a consumer surplus worth $10. [note 1] If you miss Dylan, for whatever reason, you have forgone that $10 worth of consumer surplus.

    How much you value seeing Clapton will of course influence your choice whether to see Clapton or Dylan, but it’s irrelevant to answering the question ‘What is the opportunity cost of seeing Clapton?’

    We’re talking here about the conventional definition of ‘opportunity cost.’ *By that definition*, it’s quite clear that the answer is $10. Whether you think that’s interesting or psychologically realistic or relevant to real world problems is a different matter.

    I have no trouble accepting that the concept of opportunity cost is relevant to real world problems. If I drop into a church fete with $20 in my pocket, and see two things that I covet, priced such that I can only take one of them, I will definitely be thinking about opportunity cost.

    #70 Ikonoclast: if you define the forgone alternative as ‘a different icecream’, the opportunity cost of choosing icecream A is whatever your consumer surplus would be if you chose icecream B. If you define the forgone alternative as ‘a different icecream plus a lolly’ the opportunity cost of choosing icecream A is whatever your consumer surplus would be if you chose (icecream B+lolly).

    Note 1: if we accept the conventional practice of using money as the common unit for comparing the value of things of different types. In this case the things being compared are the pleasure of seeing Dylan versus the utility of having $40 still available to be spent on other things.

  108. Joseph Stiglitz’s latest talk on “Inequality” is on the ABC Big Ideas website.

    http://www.abc.net.au/tv/bigideas/stories/2014/07/30/4057169.htm

    I have gagged myself from talking more on opportunity cost on this thread. (Everyone can breath a sigh of relief). However, a number of posts above began to branch into other interesting arenas. Maybe when we get a new Monday comments and new Sandpit we can discuss some of these issues.

    Certainly growing inequality is becoming a big issue. The right way(s) to tackle this problem need to be debated in our community. Another issue is the prediction by some economists that Australia is heading towards a recession. Connected to this is the issue that current macroeconomic settings do not seem stimulatory enough, or at all, to some economic observers, to do anything to prevent this slide into recession. Finally, there is a question, in my mind, about working within the orthodoxy or questioning the orthodoxy fundamentally. In everyday speak do we need to reform the existing system in some direction or do we need to completely transform the system into something new? But as I said, these are topics for the sandpit.

  109. @John

    If the definition of opportunity costs is net value then the answer is $10.

    However I have seen opportunity costs derived as the slope of the production possibilities frontier (which, it appears, is not “net”).

    There are also concepts such as “social opportunity costs” – which are not net.

    A definition of opportunity costs as “net” is not useful if you get the same net benefit from transacting a million dollars as a hundred dollars.

    Investors would look to net – percentage benefits.

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