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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

Artificial Choice-Making

The most serious problem in extending the basic allocative meaning of choice-influencing opportunity cost to decisions that must be made outside the market process has been ignored to this point. The preceding discussion was limited to an examination of the meaning of cost in a nonmarket context and to some difficulties in estimation. The problem of choice-making itself was not raised here, although it was treated briefly in Chapter 4.

In the military manpower illustration presented earlier, we presumed, without critical scrutiny, that if costs could somehow be estimated, the choices that were finally to be made would be based upon these. This tends to remove all behavioral content from choosing behavior, however, and it is essential that the distinction between “true costs” and “costs that influence nonmarket choice” be clarified. The basic point to be emphasized is a simple one: costs that are relevant for the making of decisions must be those that relate to the decisions made. The very nature of nonmarket choice ensures that “costs” cannot be those that are confronted in market choice.

The employment of resource services in any manner involves a cost to the resource owners; this cost consists in their own evaluation of foregone alternatives, an evaluation made at the moment of commitment. This is the “true” opportunity cost that comes to be embodied in the market process, and it is this cost, at least at the margins of adjustment, which is brought into line with prices of final products. Allocative efficiency is the result. In this interaction, however, all choices are made by demanders and suppliers, each of whom is responsible for the results of his behavior. The resource owner who decides to commit his services to occupation A rather than to occupation B lives with this decision. To the extent that his own utility influences his behavior, he is under pressure to make “correct” decisions, since his utility will be the magnitude affected by the making of “incorrect” decisions. If a market decision-maker fails to take advantage of prospective opportunities, opportunities which later are revealed as highly desirable, he suffers the sensation of opportunity losses. Those experiences that “might have been” will be recognized as his own losses.

This decision structure cannot be present with nonmarket choice. If the “true costs” of employing resources could be measured (let us say by an omniscient observer who can read all preference functions) along with the “true benefits,” allocative efficiency in nonmarket resource usage could be ensured only if the effective decision-maker acted in accordance with artificial criteria for choice. That is to say, allocative efficiency will emerge only if the effective choice-maker acts, not as a behaving person, but as a rule-following automaton. The distinction here has been widely recognized, and it is as old as the Aristotelian defense of private property. It has not, however, effectively and critically informed the core of economic analysis, largely, I submit, because of the confusion in elementary cost theory. Only recently in the efforts of those scholars (such as Alchian, Coase, Demsetz, McKean, and Tullock) who have begun to develop the rudiments of an economic theory of property do we find explicit examination of the relationship between the predicted outcomes and the decision structure within which the choices are made.