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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

G. F. Thirlby and “The Ruler”

Academically, both Vienna and Capetown were close neighbors to London in the 1930’s, and, as a consequence of the influence of transplanted LSE economists, the next major contribution to the theory of cost emerged in Capetown. Primarily under the influence of Arnold Plant and W. H. Hutt, an oral tradition developed at Capetown which expanded the London approach. The published results appeared in 1946 in two papers by G. F. Thirlby. In these papers, Thirlby, who had been trained at LSE and who returned to London a few years later, carried forward the process of clarification. He continued until 1960 his attempts to convert other economists to what he considered to be a more acceptable and consistent view of opportunity cost, but his argument seems to have been largely neglected.

In his first 1946 paper, Thirlby, like Coase, related the economist’s notions on cost to those of the accountant.24 Thirlby had fully incorporated the subjectivist economics of Wicksteed and the latter-day Austrians in his analysis, and his emphasis was on the subjectivity of costs. Citation at some length from this early paper seems warranted here:

Thirlby’s emphasis on the ephemeral nature of cost distinguishes his paper from earlier contributions in the LSE tradition. And in this early paper, Thirlby himself wavers in his adherence to this conception which his later writings were to stress. Note that he says “prospective or realized” at one point: he fails to see that the very notion of realized cost produces a contradiction, as he was later to demonstrate. Similarly, his reference to cost being “vaguely apprehended” implies that something different from that which is apprehended emerges at a later point in the decision-action sequence that might be called cost.

The extension of Thirlby’s rigorous opportunity-cost reasoning to the question of the relevance and practicability of the so-called “rules” for pricing was straightforward, and this was the content of his second paper, “The Ruler.”26 Thirlby made it clear that he was relatively uninterested in the much debated “which rule” question, one that obscures the analysis of the “any rule” problem. As in his other paper, stress was placed on the fact that cost was not “an objective something in the sense that it can be scrutinized.” The standard definitions and measurements were held to omit valuations of the “lost opportunities,” and Thirlby argued that unless these were taken into account, no rule could ever be applied to ensure the satisfactory meeting of people’s preferences.

He rejected the orthodox distinction between “long run” and “short run,” and he was explicit in saying that “cost occurs only when decisions are made, that is, in planning stages” (p. 259). He clarified the distinction between what we might call the decision, budget, and accounting levels of calculation. Cost is relevant to decision, and it must reflect the value of foregone alternatives. A budget, however, reflects the prospective or anticipated revenue and outlay sides of a decision that has been made. It is erroneous to consider such prospective outlays as appear in a budget as costs. The budget must, however, also be distinguished from the account, which measures realized revenues and outlays that result from a particular course of action. This clarification is a simple one in itself, but it is highly useful for our purposes. It shows that the forward-looking or ex ante framework is not, in itself, sufficient to ensure the adoption of the appropriate cost concept. The budget is, by definition, a planning document, an ex ante projection of events; it does not, however, balance anticipated revenues against anticipated cost in the relevant opportunity-cost sense. The “cost” side of a budget measures anticipated outlays which are to be made as a result of a particular course of action’s having already been chosen. It cannot reflect the value of alternative courses of action which might have been selected save in the exceptional case where no alternative revenues in excess of anticipated outlay could be secured.

There is, or should be, no difficulty in convincing critics that cost must be subjective at the moment of choice. But one can fully accept the subjectivist point of view in this respect and still think that, after decision, cost becomes objective and, hence, measurable. In his earlier paper, Thirlby might not have fully sensed the instantaneous vanishing of cost upon decision. In “The Ruler,” however, this point is emphasized. “[T]he cost figure will never become objective; i.e., it will never be possible to check whether the forecast of the alternative revenue was correct, because the alternative undertaking will never come into existence to produce the actual alternative revenue” (p. 264).

Following these two 1946 papers, Thirlby continued to present his ideas on cost, for the most part in the context of a theory for business organization and decision. Although most of the central ideas were developed in the two early papers, some shifts of emphasis are worth noting. In a 1952 paper, Thirlby argued plausibly for a more widespread recognition of a time dimension in economic analysis, particularly with respect to the decision process. “[A] period of time elapses between the making of the decision and the achievement of the results.... A mental deliberation or planning operation, followed by a decision, precedes the business operations which are so planned.” Recognition of this would “keep in front of our minds the high degree of subjectivity in the maximization process.... It would prevent our attributing a false objectivity to the cost and revenue figures.”27

In his latest paper, published in 1960, Thirlby suggests that subtle shifts in the definition of cost lead to confusion about social cost. “The subtle change in the meaning of cost, from the valuation of his own [the entrepreneur’s] displaced end-product to the money input required for the selected course of action, is a change leading to still another conception, which carries with it the suspicion that it is to be regarded as a social cost. It resembles the first meaning of cost, in that it is supposed to be an alternative value displaced, but differs from it in that it is not the entrepreneur’s own valuation of his own displaced end-product, but other people’s (consumers’) valuations of products which might have been produced by other entrepreneurs had they not been displaced.”28 This statement accurately summarizes the distinction between the London conception of opportunity cost and the orthodox conception that is currently held by most economists.

[24. ]G. F. Thirlby, “The Subjective Theory of Value and Accounting Cost,” Economica, XIII (February 1946), 32-49.

[25. ]Ibid., 33-34.

[26. ]G. F. Thirlby, “The Ruler,” South African Journal of Economics, XIV (December 1946), 253-76.

[27. ]G. F. Thirlby, “The Economist’s Description of Business Behavior,” Economica, XIX (May 1952), 150.

[28. ]G. F. Thirlby, “Economists’ Cost Rules and Equilibrium Theory,” Economica, XXVII (May 1960), 150.