Shorten gets opportunity cost right

The concept of opportunity cost “The opportunity cost of anything of value is what you must give up so that you can have it.” is the central theme of my book Economics in Two Lessons, due out in the US on 19 April and hopefully in Australia soon after that. My central claim is that two lessons based on opportunity cost and their relationship to market prices provide a framework within which almost any problem in economic policy can usefully be considered.

That’s not the way economics is usually taught (opportunity cost gets a brief nod before the focus moves on to supply and demand). So, I was impressed to see Bill Shorten use the term in relation to climate change inaction. Not only that but he used it correctly! Here’s Bill, quoted in the SMH

Opposition Leader Bill Shorten defended the new policy by urging voters to consider the cost of inaction on climate change, saying “There is a huge opportunity cost when we don’t take action,”

Perhaps I shouldn’t be surprised. Labor’s Shadow Assistant Treasurer is Andrew Leigh, a fine economist who has had nice things to say about my book. And Labor has been listening to Richard Holden, who is, I think, the brightest young economist we have right now.

Surprising or not, it’s great to see a return of economic literacy to public debate, after years dominated by vapid slogans.

32 thoughts on “Shorten gets opportunity cost right

  1. I also noticed Bill Shorten having used the term ‘opportunity cost’ and, given the indicators in his speech as to policy direction on climate change, he used the term roughly correct in relation to scientific knowledge.

    The difficulty with the notion of opportunity cost is that unless markets are complete, there does not exist a measure of costs for the alternative, which accountants would recognise now (there is no invoice). That is, with incomplete markets it is expectations and therefore appropriately defined preferences which determine the opportunity costs. Except for the uninteresting case of a society consisting of 1 person, there is no unique opportunity cost and therefore no agreement can be assured. This is the reason why I have no use for the notion of opportunity cost. I prefer to approach environmental issues from the perspective of a Lindahl equilibrium framework. However, the term opportunity cost may well be an effective communication tool in a policy context.

  2. As expected in his budget reply speech Shorten failed to expose the LNP’s biggest budget stretch, biggest arithmetic sleight of hand, their biggest lie – ponzi migration; which also puts the lie to most anything Shorten proposed. Such reliability, never an opportunity wasted to duck or conceal the cost of the reigning oligarchy.

    – If you repeat a lie often enough, people will believe it, and you will even come to believe it yourself.
    -The best propaganda is that which, as it were, works invisibly, penetrates the whole of life without the public having any knowledge of the propagandistic initiative.
    -Peoples do never govern themselves. That lunacy was concocted by liberalism. Behind its “people’s sovereignty” the slyest cheaters are hiding, who don’t want to be recognized.
    – Joseph Goebbels

  3. Ernestine Gross,

    Can I suggest you read this very interesting short paper?

    “The Aggregation Problem : Implications for Ecological Economics” – Blair Fix

    As further grounding, if you have the time, read this book:

    “Capital as Power. A Study of Order and Creorder” – Shimshon Bichler and Jonathan Nitzan.

    The authors suggest the book should be read in full and the reader should not skip ahead to the second section on their actual theory. However, if you already have a knowledge of classical economics and even a smattering of knowledge about Marxism, I think the first section can be skipped.

    The theory does require one to look at modern capitalist economics from another angle, not a classical angle and not a Marxist angle.

  4. Beyond snarky Hugo and zero on “siscussion”.
    JQ apologies yet In the sprit of “isegoria[5] (equal right to address the political assemblies), ” Hugo’s comment passes but not here yet “isokratia[7] (equality of power) I have to stand up. “or on other commenters (flames) will be deleted, or edited to remove such points. Commenters with a repeated history of provocation (trolls) will be banned.” johnquiggin com/ discussion-policy/

    I am AleD – no quotes – I think that politicians already use/misuse economic terms/concepts sufficiently. There are so many things these models/quantities don’t take into account (not even mentioning that they are just ‘models’ that often have theoretical value only, are not deterministic, easy to misuse/use to one’s own advantage, etc). And so many valuable things to which they assign the constant value of zero. For example taking care of the environment. In part thanks to these we cannot talk directly about taking care of the environment, but must justify ieverythinh in terms of profit. It seems to me that the economists are partly to blame, for not producing better models, among other things (I am not an expert and this is only an impression. I am not comparing economics with other fields either).

    Hugo, I am standing up and calling you out as 1.5 – below “Paul Graham’s Hierarchy of Disagreement lists ad hominem as the second lowest type of argument in a disagreement.”

  5. ‘Discussion’!

    Ikon at APRIL 4, 2019 AT 7:19 AM – excellent comment. 6.5 on the 7 point “Paul Graham’s Hierarchy of Disagreement”.

    Thanks to totaram for getting me to reread your comment Ikon.

    “The uncertainty of money under this weight of problems renders the logic of opportunity cost calculations, in money, null and void.” My model though Ikon – as null point errors are a deal breaker – must include opportunity cost always imo.

  6. Ikon @ 6 April 2019, 9:04 AM,

    The paper by Blair Fix is very readable. I have only one comment to make. IMO, Fix isn’t quite clear in relation to mathematics in economics. The issue of ‘unit of analysis’ and how it affects measurement is certainly not new nor is the issue of aggregation. Regarding the former, the issues regarding GDP, real or nominal are familiar to fully trained economists; I have given an example regarding opportunity costs. Regarding the latter, aggregation was the topic of a seminar I had the opportunity to attend at the University of Bonn in 1990. The presenters of papers as well as the discussants were all mathematical economists (Gerard Debreu, Beth Allen, Werner Hildenbrand were among them). While the word epistemology is not typically used in the work by these people, it is of course the usage of the language of (pure) mathematics, which enables theoreticians to deal with epistemological questions. Incidentally, Blair Fix also used mathematical reasoning to make his point clear and succinct..

    JQ’s critical post of an article on the average income is an example of the misuse of statistical measurements.

    I imagine Blair Fix’s paper would be most useful for teaching purposes, particularly in macro-economics.

    (As an aside, I did find your link to a relevant paper on the global financial system. Yes it supported what I was talking about.)

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