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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

The Choice Among Projects

To this point, attention has been limited to the cost side of a possible decision to impose a tax for the purpose of financing a specific government project. This particular choice involves a cost, but one that is quite different from that which arises when different choices are considered. One of these is the selection of one from among many public projects. Here the choice-influencing cost will be quite different from that involved in the decision to impose the tax. To each particular decision there is attached a unique opportunity cost and this depends on the particular characteristics of the decision.

Economists have often noted that the genuine opportunity costs of projects undertaken during periods of massive unemployment are nonexistent. Care must be taken, however, to specify the precise meaning of this conclusion and to examine the particulars of the decision in question. First, consider the decision as to whether or not to issue new currency to finance any new spending, public or private, during a period of deep depression. The alternatives are, first, those of doing nothing about the deficiency in aggregate demand and, second, financing new spending from taxation or public loans. Since, by assumption, unemployed resources are available, the issue of currency promises to generate no inflationary pressures. To the decision-maker who is properly informed, there are no “real costs,” in the sense of enjoyments to be foregone either by himself or others. Since either of the alternative courses of action, even if the identical benefits stream is promised, will impose such real costs, he will tend to choose currency issue. For this choice, it is correct to say that there is, or should be, no cost obstacle. If, however, despite the presence of unemployed resources, taxation is selected as the financing device, the choice here necessarily involves a cost. The alternative uses to which money paid out in taxes might be put are foregone by the decision-maker and others once taxation is decided upon; and these foregone alternatives must be evaluated at the time of choice. The existence of unemployment may cause even these choice-influencing costs to be low relative to the choice-influencing benefits of the new spending, but there is no denying that “real costs” exist.

The financing choice, that which is involved in a potential decision to issue currency or to finance new spending through other means, must be sharply distinguished from the spending choice, which arises when a selection among projects must be made. There is, first, the choice between using the funds to expand private-sector or public-sector spending. The choice of a public-sector project involves an opportunity cost that is represented in the anticipated foregone enjoyments from the possible expansions in private-sector spending that might be generated by the same funds. Once the option has been made for a public-sector project, still another choice must be confronted, and this also involves a choice-influencing cost, an obstacle to decision. Once currency has been issued, and the decision has been made to expand public-sector spending, the choice among separate public employments of the funds must be faced. The choice-influencing cost of the new post office building is the subjective value that the decision-maker places on the new school building that might be constructed instead. The familiar statement, “The post offices built during the 1930’s cost very little in terms of sacrificed alternatives” tends to be misleading. These projects did involve genuine opportunity costs to the decision-makers, and these were represented as the prospective values of other public and private projects that were never undertaken. The issue of currency, to the extent that this was carried out in the conditions of the 1930’s, was the choice that should have cost very little in terms of sacrificed alternatives.