Front Page Titles (by Subject) The Significance of Subjective Costs - Literature of Liberty, Spring 1981, vol. 4, No. 1
The Online Library of Liberty
A project of Liberty Fund, Inc.
Search this Title:
Also in the Library:
The Significance of Subjective Costs - Leonard P. Liggio, Literature of Liberty, Spring 1981, vol. 4, No. 1 
Literature of Liberty: A Review of Contemporary Liberal Thought was published first by the Cato Institute (1978-1979) and later by the Institute for Humane Studies (1980-1982) under the editorial direction of Leonard P. Liggio.
About Liberty Fund:
Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.
This work is copyrighted by the Institute for Humane Studies, George Mason University, Fairfax, Virginia, and is put online with their permission.
Fair use statement:
This material is put online to further the educational goals of Liberty Fund, Inc. Unless otherwise stated in the Copyright Information section above, this material may be used freely for educational and academic purposes. It may not be used in any way for profit.
The Significance of Subjective Costs
“Does It Matter That Costs Are Subjective?” Southern Economic Journal (Summer 1980): 702–715.
Although it has been neglected, the subjectivist interpretation of costs is an indispensable framework. The subjectivist understanding of cost has a history dating back to the origins of neoclassical economics itself, but few economist today are even aware of how the subjectivist tradition differs from orthodox neoclassical cost theory.
The concept of opportunity cost, the subjective value of alternatives foregone, was implicit in the writings of the founder of the Austrian school, Carl Menger (1840–1921); it was made explicit in the work of another Austrian, Friedrich von Wieser (1851–1926); it was further developed by Philip Wicksteed (1844–1927), and was explored in depth by economists at the London School of Economics during the 1930s and 1940s. Although opportunity cost is widely accepted by the economics profession, the subjectivist interpretation of costs is little discussed or appreciated today. To remedy this neglect, James Buchanan's 1969 book Cost and Choice traced the evolution of the subjective cost tradition from von Wieser onwards and demonstrated how “cost is an all-pervasive concept that reaches to the core of economic thinking. Economic decision making is an exercise in choosing among alternatives, and cost can only be understood to be a personal subjective evaluation of the consequences of choice.” Cost for the evaluator is the “rejected opportunity” which the decision maker must overcome before he can choose. As Buchanan puts it, “Cost consists therefore of his own (the individual's) evaluation of the enjoyment or utility that he anticipates having to forego as a result of choice itself.”
The implications of subjective costs for conventional neoclassical cost theory are many but are virtually all at odds with the more standard neoclassical microeconomics. One implication of significance is that cost “cannot be measured by someone other than the chooser since there is no way that subjective mental experience can be directly observed.”
Professor Vaughn argues four points: (1) that the only interpretation one can give to the concept of opportunity cost as the value of the next best alternative is a subjective one; (2) that it is only in full, timeless, certain, general equilibrium that subjective cost can be represented by “objective” money outlays and measurements; (3) that the real world, however, is never in equilibrium; and (4) that the real world's divergence from static equilibrium is most significant when economic theory is used for public policy.
When economic theory is used to formulate policy for real economies, to ignore the fact that the costs we are trying to measure are subjectively calculated by human beings (who make choices in partial ignorance and uncertainty about the future) will be risky. The arguments advanced by those who claim that cost/benefit analyses are objective or “close enough” (on the assumption that costs are identical to measured money outlays) are unconvincing. When costs and benefits are mainly subjective and evaluations are made by third parties who do not directly suffer the consequences of their choices, it is likely that public policy advice will have perverse effects on social welfare.