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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

Socialist Calculation and Socialist Choice

The Austrians and pseudo-Austrians—Mises, Hayek, and Robbins—who were involved in disputing the possibility of socialist calculation in the great interwar debate were all contributors to the evolution of opportunity-cost theory and implicitly acknowledged the basic distinction emphasized here. This particular aspect of their argument tended to be obscured, however, by their relative overemphasis on the difficulties in calculation that prospective socialist decision-makers would face. These difficulties are, of course, extremely important, and the information problems that centralized economic planning confronts are indeed enormous, as experience has surely proved. Relatively speaking, however, the more significant criticism of socialist economic organization lies in the difficulties of choice-making. Even if the socialist state should somehow discover an oracle that would allow all calculations to be made perfectly, even if all preference functions are revealed, and even if all production functions are known with certainty, efficiency in allocation will emerge only if the effective decision-makers are converted into economic eunuchs. Only if such men can be motivated to behave, to make decisions in accordance with cost criteria that are different from their own, can this decision-structure become workable. This amounts to saying that even if the problems of calculation are totally disregarded, the socialist system will generate efficiency in results only if men can be trained to make choices that do not embody the opportunity costs that they, individually and personally, confront.

The contrast between the implicit behavioral assumptions made by those who have proposed the Pigovian corrective taxes and subsidies in the face of external diseconomies and economies and the implicit behavioral assumptions made by those who argued that socialist organization can produce efficient results is striking. As noted in Chapter 5, for the Pigovian policy proposals to accomplish their own stated purposes, individuals who generate externalities must behave so as to maximize their own narrowly conceived economic interests. The effects of their own behavior on the predicted utility levels of others than themselves cannot be assumed to influence their behavior. By comparison, the idealized manager of the socialist enterprise must be assumed to act solely on the basis of nonindividualistic criteria. His own utility cannot be allowed to influence the decisions that he makes; he must choose in accordance with the costs and benefits predicted for the whole community; and his own position in the community must be treated as if it were the same as that of any other member. Whereas the Pigovian man must be strictly Homo economicus in the narrowest sense, the socialist bureaucrat must be non-Homo economicus in the purest sense. Both men can be only caricatures of actual persons, but both have been present in much serious discussion of real-world policy.

The contrast in the behavioral assumptions implicit in these two related bodies of literature is striking in itself, but even more interesting for our purposes is the common source of the confusion. In their contrasting ways, both the Pigovian policy correctives and the idealized socialist economy are intellectual products of cost-theory confusion. Both find their roots in classical economics, with its objectification of costs. Only if costs can be objectified can they be divorced from choice, and only if they are divorced from choice can the institutional-organizational setting that the chooser inhabits have no influence on costs. In the socialist scheme of things, costs are derived from physical relations among inputs and outputs. These may be externally measured, and these measurements can provide the basis for the rules that are laid down for managers of enterprises. Valuation enters the calculus only as the consuming public, through their behavior, establish demand prices, which become objective realities once established. The subjective valuation that must inform every choice is neglected.