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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

Cost in a Theory of Choice

The distinction between the concept of cost in the predictive context, as sketched out above, and the concept of cost in a more general theory of choice, as articulated—though not fully—in Chapter 2, can best be emphasized at this point by elaborating this second concept. The essential element in this concept is the direct relationship between cost and the act of choice, a relationship that does not exist in the neoclassical predictive theory. In the London-Austrian conception, by contrast, cost becomes the negative side of any decision, the obstacle that must be got over before one alternative is selected. Cost is that which the decision-taker sacrifices or gives up when he makes a choice. It consists in his own evaluation of the enjoyment or utility that he anticipates having to forego as a result of selection among alternative courses of action.

The following specific implications emerge from this choice-bound conception of cost:

• 1. Most importantly, cost must be borne exclusively by the decision-maker; it is not possible for cost to be shifted to or imposed on others.
• 2. Cost is subjective; it exists in the mind of the decision-maker and nowhere else.
• 3. Cost is based on anticipations; it is necessarily a forward-looking or ex ante concept.
• 4. Cost can never be realized because of the fact of choice itself: that which is given up cannot be enjoyed.
• 5. Cost cannot be measured by someone other than the decision-maker because there is no way that subjective experience can be directly observed.
• 6. Finally, cost can be dated at the moment of decision or choice.

In a theory of choice, cost must be reckoned in a utility dimension. In the orthodox predictive theory, however, cost is reckoned in a commodity dimension. This distinction can be applied to each of the six attributes listed above. In a theory of choice, cost represents the anticipated utility loss upon sacrifice of a rejected alternative. Because utility functions are necessarily personal, cost is tied directly to the chooser and cannot exist independently of him. In the predictive theory of economic behavior, the cost of producing one “good” is the amount of another that could be produced instead. Cost, as such, exists independently of the choice process, and there is no direct linkage between choosing and bearing cost.

Cost, then, is purely subjective in any theory of choice, whereas cost is objective in any theory that involves genuine prediction. If cost is to influence choice, it must be based on anticipations; it cannot be based on realized experience—at least directly. On the other hand, once cost is divorced from choice, it is a physical concept; it becomes irrelevant whether cost is measured before, at the moment of, or after actual commitment. In the Smithian model, the cost of a beaver is two deer, and this holds so long as the postulated physical relationships hold; there is no point in distinguishing ex ante and ex post measurements. Because of the technological or physical nature of cost, derived from the transformation function in commodity space, the alternatives facing the actor can be “costed” by an external observer. There is no need for the observer to psychoanalyze the hunter in Smith’s model. And the problem of dating does not arise in the objective definition implicit in the predictive theory. On the other hand, cost must be precisely dated in any theory of genuine choice because it is tied to the moment of choice as such. Before choice, cost exists as a subjective experience. After choice, cost vanishes in this sense. What happens to the chooser after he has chosen remains to be considered.