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• 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

Robbins, 1934

In a basic paper published in 1934,10 Lionel Robbins reacted against the emphasis by Knight and others on an alternate-product conception of opportunity cost, much as Knight himself was led to do in his 1934 and 1935 papers. In so doing, Robbins provided the basis for an opportunity-cost conception that later came to be identified with the London School of Economics. Neither Knight in his 1924 paper nor Robbins realized the importance of the distinction they were making, and Robbins considered himself to be merely clarifying certain ambiguities that had arisen in connection with the emerging Austrian orthodoxy, the source of which he attributed to Wieser. Specifically, Robbins argued that cost must be defined in terms of displaced value and not in terms of displaced real product. He demonstrated that once beyond the Smithian deer-beaver model, displaced real product has little meaning. His illustrative examples were those of final goods produced with wholly different inputs or with the same inputs but in differing and fixed coefficients. Shifts in demand generate shifts in cost under such conditions, and these cannot be interpreted in terms of displaced real-product alternatives. Costs are changed because the relative values of the inputs change, values derived from the demand for final products.

Although these clarifications were useful and represented the main thrust of Robbins’ argument, they are not the subject of interest here. More or less as asides, Robbins introduced several statements that involve a different basic notion of cost. He apparently did not think of these statements in this light, perhaps because they were especially obvious to one who had fully learned his Wicksteed and perhaps because, in another sense, they were immaterial to his central theme. I refer to his explicit linking of cost to the act of choice itself. “The process of valuation is essentially a process of choice, and costs are the negative aspects of this process” (p. 2, italics supplied). “[I]t is the central requirement of any theory of cost that it should explain the actual resistances which production in any line of industry encounters” (p. 5, italics in original). “The isolated producer thinks of the sacrifice that he is making by not producing something else” (p. 5, italics supplied).

Unfortunately, after having interspersed these highly provocative remarks in his discussion, Robbins proceeded, almost simultaneously, to obscure their potential impact. In this, Robbins seems to have proceeded much as Knight had a decade before. On the page immediately following the last two statements cited above Robbins said: “The condition that prices shall be equal to cost of production in the value sense is as essential a condition of equilibrium in the Walrasian system as the condition that marginal products shall be proportionate to factor prices” (p. 6). The subtle but essential distinction between cost in the act of choice and cost in the predictive theory of economic behavior has disappeared in this apparently orthodox neoclassical statement.

[10. ]L. Robbins, “Certain Aspects of the Theory of Cost,” Economic Journal, XLIV (March 1934), 1-18. Robbins’ interest in the issues here was indicated in his earlier paper, “On a Certain Ambiguity in the Conception of Stationary Equilibrium,” Economic Journal, XL (June 1930), esp. 209-11.