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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 Cost of Military Manpower: An Example

An example may illustrate some of the points put forth in this chapter. Let us suppose that the government calls upon an economist for expert advice. It asks him to estimate the “cost” of securing military manpower of specified quality and in specified quantity. The comparison of benefit estimates with this “cost” presumably will form the basis for making allocative decisions concerning the amount of military manpower to be employed. To simplify the problem, assume that a fixed number of common soldiers is needed. These are units that are homogeneous for the military purposes for which they are required.

In Figure 2, let us depict the actual supply curve for common soldiers as S, and let us say that X is the quantity needed. The supply curve, which we shall assume is accurately known to the consultant, represents a schedule of minimum prices (wages) that would be required to bring forth the several quantities indicated. Initially, let us also presume that all prospective soldiers are motivated solely by the prospect of pecuniary rewards. In this case, the curve S also represents the returns that these prospective military men forego in alternative lines of employment. The fact that the supply curve slopes upward indicates differential productivity in alternative employments despite the homogeneity of units in producing military services.

If the government is presumed to act as if it were a fully competitive industry in purchasing military manpower, its prospective outlay is measured by the rectangle 0XPY. This outlay overstates the “costs” that are involved in the prospective occupational choices, however, because of the inframarginal quasi-rents. The shaded area, RPY, is not a part of total costs in any choice-influencing sense. If the amount represented by this area is included in the cost side of a cost-benefit comparison, the result will be biased against resource commitment in this usage. Providing only that the government relies on contractual purchase agreements, this conclusion holds regardless of the means through which the government purchases its military force. If, for equity reasons, the government pays a uniform wage to all soldiers, despite the emergence of inframarginal quasi-rents, outlay will be greater than “costs,” but a part of outlay will now represent a by-product of the resource commitment. Unless this is recognized in the cost-benefit computation, too few resources will be allocated to all increasing supply-price public facilities or projects. The use of predicted outlay to measure “costs” in this situation would reflect the Pigovian error that Young effectively exposed.

If nonpecuniary elements are present in the occupational choices of resource suppliers, the supply curve no longer measures the earnings of prospective soldiers in other employments. Some such curve may be derived, say A in Figure 2, which does reflect alternative pecuniary earnings. As drawn, the curve of alternative returns in relation to the “true” supply curve suggests that nonpecuniary differentials shift from positive to negative over increasing quantity. This presents a more serious difficulty to the economist who must estimate costs than that which the presence of inframarginal quasi-rents presents. When nonpecuniary aspects of choice can be assumed away, the area under the actual supply curve does reflect “costs,” and this area can be roughly approximated from observed data on earnings in alternative employments. With nonpecuniary elements in the picture, however, no such indirect means of approximating choice-influencing costs exists. Whether or not some estimate of alternative earnings will over- or understate costs will depend on the quantity that is specified. As drawn in Figure 2, an overestimate would result for quantities toward the left of the quantity range, and an underestimate for quantities toward the right.

All of the measures of costs so far discussed, direct or indirect, assume meaning only if the government purchases the resource units in a series of contractual market-like arrangements with the individuals who are to supply the services. The soldiers must voluntarily sell their services. If the actual recruitment of soldiers takes place in any other manner, the cost considerations discussed here must be re-examined. In the absence of nonpecuniary elements in choice for every one of the men conscripted, the opportunity costs of a conscripted military force would be measured by the earnings that members of this force could secure in nonmilitary employments.1 This would imply that each member of the force would be indifferent between military and nonmilitary employment if earnings in military employment were equivalent to those in nonmilitary pursuits. As noted earlier, this is a much more restrictive requirement than that which is needed to eliminate the significance of nonpecuniary elements for allocative decisions within a market-like process. In the latter, nonpecuniary elements need not modify the allocative results so long as a sufficient number of marginal adjusters remain indifferent to the nonpecuniary differences among the separate employments. If foregone earnings are to measure choice-influencing costs, however, this indifference must be manifested for every resource supplier, not just for those who are the marginal adjusters. The disappearance of nonpecuniary elements in choice at the freely adjusted margins of behavior, like the disappearance of quasi-rents at the margins, restores the allocative relevance of resource-service prices as proximate measures for marginal opportunity costs. But this is helpful only if resource services are purchased through ordinary contractual arrangements.

[1. ]This definition of the opportunity costs of conscription is advanced by George Stigler in his highly respected textbook in microeconomic theory. Stigler says, “The cost of a soldier for an economy, however, is his foregone product as a civilian, and this is not directly affected by his rate of pay.” See George Stigler, The Theory of Price (3rd ed.; New York: Macmillan, 1966), p. 106.