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?
John Quiggin 
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
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.
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.
“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].
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. “
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.
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. ???).
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.
I located the original book by von Wieser.
http://www.worldcat.org/title/theorie-der-gesellschaftlichen-wirtschaft/oclc/8056197
I haven’t read it. One would have to order it via a library.
Wiesner has been translated into English and at least one book seems accessible in Australia – but not in Queensland.
von Wiesner
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.”
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.
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.
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?
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?
I dunno what do you reckon it is Ivor? Same as for a woman?
@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.
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?
@Julie Thomas
In either case the opportunity costs are all but equal to the gain.
@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.
I meant “If anyone says otherwise”. The “you” in that statement was definitely not directed at Julie Thomas.
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.
Apologies for OT but there isn’t a recent “message board”.
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.
http://www.amnesty.org.au/action/action/37269/
@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.
I did not mean to write “general general” just “general”.
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 !
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.
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.
@Megan
Thanks for the link Megan.
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.
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!):
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.
@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?
@Ivor
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.
@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.
@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.
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.”
@Tim Macknay
Ok, so by going to Clapton I loose a possible benefit of paying $40 for something I valued at $1,000?
Yes?
@Ivor
As I understand it, yes.
@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.
Anyway, according to Forbes you could resell your Clapton ticket – for US$750+
And a Dylan ticket in Germany next month is listed at 75Euros.
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.
@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.
@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?
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:
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.
@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.
@Ikonoclast
Let’s not get carried away. 😉
You made an argument, that is all.
@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.
@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?
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.
@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.