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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

Costs and Decision-Making: Mixed Models

In any real-world political setting, collective decisions are made through institutional processes that usually reflect some mixture of the purely democratic and the purely authoritarian models. Most individuals participate, directly or indirectly, in the formation of group decisions, but some persons participate more fully than others. That is to say, the effectiveness with which particular individuals and groups influence decision-making is widely variable. In such a setting, the costs that influence the choice calculus of an individual participant depend, first, on his own personalized or individualized share in an anticipated payment or outlay and his evaluation of this outlay in terms of his own foregone enjoyments. In addition, he must evaluate the enjoyments that he thinks others must forego as they are subjected to the taxing process. Only if each participant in the group-decision process should evaluate the foregone enjoyments of all others as equally important with his own would the distribution of the anticipated tax payments make no difference in the “costs,” as these influence or modify decisions. If each individual, no matter what his power over collective decisions, should subjectively value the prospective tax dollar paid by each other person equally with his own, then neither the distribution of decision-making power nor the distribution of tax shares would modify the costs which are the obstacles to choice. In such a limiting case, orthodox cost-benefit measurements might be reasonably accurate representations of choice-influencing costs and benefits. Merely the requirements of such a model are sufficient to indicate its manifest absurdity.4

Defenders of cost-benefit estimation may respond here by stating that collective decisions, however and by whomever made, should be guided by the project comparisons that the estimates reveal. The purpose of cost-benefit analysis, this argument suggests, is not that of ascertaining genuine opportunity costs in a choice-influencing context, but rather that of laying down rules for choice. But why should objectively measurable costs be taken to reflect “social cost” under any reasonable meaning of this term? The evaluations of individuals should be relevant in any attempt to derive normative statements, but these evaluations bear little direct relationship to measured outlays for the several reasons noted, the most important of which are, of course, distributional.

At this point, the defender of cost-benefit orthodoxy may reject the implied limitation of his estimation procedure to objectively measurable cost and benefit streams. He may suggest including in predicted costs and benefits some estimates for subjectively valued, but objectively immeasurable, characteristics of alternatives. With this step, however, the whole analysis is subtly converted from one that can claim potential agreement among competent scientists to one that is purely subjective, not to the actual decision-makers, but to the economist who offers his normative advice. The cost-benefit expert cannot have it both ways. He cannot claim “scientific” precision for his estimates unless he restricts himself rigidly to objectively observable magnitudes. But if he does this, he cannot claim that his estimates reflect reasonable norms upon which “social” choices should be based.

[4. ]It is interesting to note that sophisticated cost-benefit analysts recognize the relevance of the distribution of tax shares (or benefit shares), while at the same time they fail to recognize the relevance of the distribution of decision-making power. The oversight of this second distributional effect stems, of course, from the paradigm in which “costs” exist as objectively quantifiable magnitudes, unrelated to the choice process. Among the applied welfare economists who have examined the methodology of cost-benefit analysis, only Roland N. McKean seems to be aware that a problem so much as exists here. See his paper, “The Use of Shadow Prices,” in Samuel B. Chase, Jr. (ed.), Problems in Public Expenditure Analysis (Washington, D.C.: Brookings Institution, 1968), pp. 33-65. For a specific discussion of the importance of the distribution of tax or benefit shares, see the paper by Burton A. Weisbrod, “Income Redistribution Effects and Benefit-Cost Analysis,” pp. 177-208 in the same volume.