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. 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.

  2. @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.

  3. “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.

  4. @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.

  5. @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.

  6. @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.

  7. 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.

  8. @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.

  9. @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.)

  10. @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”.

  11. 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.

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

  13. 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.

  14. 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.

  15. @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.

  16. @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.

  17. @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.

  18. @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.

  19. 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.

  20. @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. 😉

  21. 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.

  22. 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?”

  23. @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.

  24. 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?

  25. @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.

  26. 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)

  27. @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.

  28. @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.

  29. 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.

  30. @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.

  31. 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.

  32. 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.

  33. @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?

  34. “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.) 😉

  35. @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”.

  36. @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?

  37. @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”.

  38. 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.

  39. “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?

  40. @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’.

  41. @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?

  42. @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?

  43. @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)?

  44. 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.

  45. 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.

  46. @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.

  47. @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.

  48. @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.

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