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• Subjective Vs. Objective Costs
• The Significance of Subjective Costs
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Subjective vs. Objective Costs

Jack Wiseman

• Director, Institute of Social and Economic Research, University of York.

“Costs and Decisions.” University of York. Reprint Series: Economics, Numer 289. Reprinted for private circulation from Contemporary Economic Analysis (Vol. 2, Ed. by David A. Currie and Will Peters). Croom Helm, 1980, pp. 473–490.

Professor Wiseman is one of the surviving members of the London School of Economics “subjective costs” school, which, in turn, was influenced by the Austrian school). He comments on the implications of uncertainty and learning for the nature of economic decisions (the concept of “opportunity costs”). On this foundation, he then discusses “orthodox” economics and ways in which it can develop.

To obtain a satisfactory solution to the economic problem of the nature of costs, Professor Wiseman urges a “return to consistent development of the subjective cost tradition.” By contrast, the dominant “orthodoxy” treats opportunity costs as essentially “objective.” This belief in objective costs leads to a misunderstanding about the nature of the resource-allocation process and to inflated claims by economists as to their competence as “social engineers.” A better approach is to see opportunity-cost decisions as the subjective valuations of individuals. Methodological individualism is needed as the logic of individuals as they make subjective decisions in a world of change and uncertainty. Opportunity cost cannot have an “objective” existence; it is the rejected subjective plan of an individual—one that is never implemented at all. There is no reason why two individuals deciding on the same (“best”) course of actions should have the same opportunity costs.

The dominant or orthodox Anglo-American paradigm of “objective” opportunity costs ignores the fact that the relevant foregone alternatives (“costs”) are those perceived by the individual decision-taker and have no “objective” manifestation. This “objective” interpretation likewise sees resource allocation as some objectives and known-in-advance process, a rather simple process of maximizing measurable quantities. The crucial deficiency in the “objective” model is the absence of uncertainty. Everyone is assumed to have objective knowledge of future opportunity costs and future prices. But this, then is not a “decision” model. If all future prices (and so all future resource-allocations) are known with certainty, then there is no way in which present decisions can alter future prices or resource-use.

In short, the orthodox, objective model of costs does not explain the process by which resources are allocated between competing uses through time. It describes “equilibrium states,” not adjustment processes. The orthodox approaches cannot adequately deal with uncertainty since they assume a world in which decision makers (“clockwork Bayesians”) cannot experience surprise.

In the light of a more adequate interpretation of the decision process in terms of subjective opportunity costs, we see the need for a theory of learning in its entrepreneurial sense of identifying and acting upon new opportunities. Equilibrium or objective models are of little help in the real economic world of change, individual choice, and learning.

Prof. Wiseman believes that the Austrian school of economics (as in Israel Kirzner's Competition and Entrepreneurship and E.G. Dolan's The Foundations of Modern Austrian Economies) offers a more adequate theory of the market process. This school reveals the futility of policy prescriptions that pretend to predict and measure “objective” social welfare functions. Since evaluations are individuals' private or subjective evaluations, policy makers cannot perform cost-benefit analyses in any objective, measurable fashion.