The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Preface
• Acknowlegments
• Cost and Choice
• 1.: Cost In Economic Theory
• Classical Economics
• Marginal-utility Economics
• The Marshallian Synthesis
• Frank Knight and American Neoclassical Paradigms
• 2.: The Origins and Development of a London Tradition
• Wicksteed and the Calculus of Choice
• H. J. Davenport
• Knight On Cost As Valuation
• Robbins, 1934
• Mises, Robbins, and Hayek On Calculation In a Socialist Economy
• Hayek, Mises, and Subjectivist Economics
• The Practical Relevance of Opportunity Cost: Coase, 1938
• G. F. Thirlby and “the Ruler”
• Mises’ Human Action
• The Death of a Tradition?
• Appendix to Chapter 2: Shackle On Decision
• 3.: Cost and Choice
• The Predictive Science of Economics
• Cost In the Predictive Theory
• Cost In a Theory of Choice
• Choice-influencing and Choice-influenced Cost
• Opportunity Cost and Real Cost
• The Subjectivity of Sunk Costs
• Cost and Equilibrium
• 4.: The Cost of Public Goods
• The Theory of Tax Incidence
• Costs and Fiscal Decision-making: the Democratic Model
• Costs and Decision-making: the Authoritarian Model
• Costs and Decision-making: Mixed Models
• The Choice Among Projects
• The Costs of Debt-financed Public Goods
• Ricardo’s Equivalence Theorem
• Tax Capitalization
• 5.: Private and Social Cost
• Summary Analysis
• A Closer Look
• Internal Costs, Equilibrium, and Quasi-rents
• An Illustrative Example
• Pigovian Economics and Christian Ethics
• Narrow Self-interest and Alternative-opportunity Quasi-rents
• Conclusion
• 6.: Cost Without Markets
• Prices, Costs, and Market Equilibrium
• Resource-service Prices As Final-product Costs
• Market Equilibrium, Costs, and Quasi-rents
• The Cost of Military Manpower: an Example
• The Cost of Crime: Another Example
• Artificial Choice-making
• Socialist Calculation and Socialist Choice
• Costs In Bureaucratic Choice

Wicksteed and the Calculus of Choice

Wicksteed deserves recognition for having shifted cost theory away from its classical, objective foundations. Although Jevons can with justice be labeled as precursory, the major advance beyond Marshallian conceptions was made by Wicksteed, who tied opportunity cost quite directly to choice. He stated that cost-of-production, “in the sense of the historical and irrevocable fact that resources have been devoted to this or that special purpose, has no influence on the value of the thing produced.”1 In this respect, cost-of-production does not affect supply. What does affect supply is anticipated cost “in the sense of alternatives still open which must now be relinquished in order to produce this specific article”;2 this cost “influences the craftsman in determining whether he will produce it or not.”3 Here, the critical relationship between any measurement of cost and the act of choice is established. At any moment in time, one can look either forward or backward. One looks backward in time in a perspective of foreclosed alternatives. One looks forward in time in a perspective of alternatives that still remain open; choices can be and must be made. With this elementary clarification, cost tends to be a part of choice among alternatives, a choice that must be subjective to the chooser. Cost does not hold the direct relationship to commodity or resource units that it does in both the classical and neoclassical discussion.

Wicksteed fully recognized the many ambiguities that surrounded the usage of the term “cost,” and he provided excellent examples.4 But when all is said, Wicksteed, too, remained less than wholly clear. When put to it, he chose to define cost-of-production or cost-price as “the estimated value, measured in gold, of all the alternatives that have been sacrificed in order to place a unit of the commodity in question upon the market”5 (italics supplied).

There is no doubt that Wicksteed was a major formative influence on the cost theory that emerged in the late 1920’s and early 1930’s at the London School of Economics. And, as I hope to show, traces of the “correct” theory of cost are found in the acute observations of Wicksteed. This may not emerge full-blown in Wicksteed for the simple reason that he need elaborate no further in answering his own questions. One feels that Wicksteed’s cost theory, as that of Marshall, could have been made fully equal to the challenge presented by the new range of issues of the 1930’s.

[1. ]Philip H. Wicksteed, The Common Sense of Political Economy (London: Macmillan, 1910), p. 380.

[2. ]Ibid.

[3. ]Ibid.

[4. ]“These reflections will explain the great ambiguity of the term ’cost price.’ ... [M]embers of the same trade ... will use the word in different senses. One will declare that he is ’making no profits at all,’ but is ’selling at a loss,’ and another will say that ’things are bad enough with him, but not quite so bad as that,’ when they both mean to indicate exactly the same state of affairs. Men will declare in good faith that they are ’selling below cost price,’ and yet will never think of suspending operations.” Ibid., pp. 380-81.

[5. ]Ibid., p. 385.