Helping Liberals Understand the Opportunity Cost Concept

The other day I was shocked to discover that a liberal blog I follow actually dedicated an entire post to the opportunity cost concept...Forced to Choose: Capitalism as Existentialism. What isn't so shocking is that...it's 80 comments later and still nobody has actually used the term "opportunity cost".

The opportunity cost concept is one of my favorite concepts...and I certainly would have submitted a comment sharing why I love the concept so much. The "minor" detail was that I had been banned from the blog a while back...

Crooked Timber comments threads are an opportunity to engage in conversation, not the granting of a soapbox for you to promote your private obsessions. Please go away. - Chris Bertram​

Yes, I'll admit it. Trying to help people understand basic economics is my private obsession. Well...I guess it can't be too private or else I wouldn't be here right now trying to help liberals understand the value of the opportunity cost concept.

It's pretty straightforward. Basically...whether you choose X or Y reveals your priorities. If you have $10 to spend...whether you spend it on a sandwich or a book reveals which one is a bigger priority for you. At that moment...which was a more pressing concern...being physically hungry or being mentally hungry? Was your stomach growling louder than your mind was? It wouldn't be logical to spend that $10 on your second most pressing concern...which is why nobody does it. Spending $10 on your second most pressing concern wouldn't be a waste...but it certainly wouldn't be optimal. So what if you spent your $10 on your third, fourth, fifth or 1,000,000th most pressing concern? At which point do you perceive your $10 to be wasted?

When we say that a mind is a terrible thing to waste...we don't mean that a person's mind is not being used. We just mean that it is not being used to help solve problems that are a priority for other people. But how do we know whether a problem is truly a priority for another person? Their opportunity cost decisions...how they spend their money. Their spending decisions speak louder than their words. This is why when we suspect that there is a disparity between words and beliefs...we challenge the person to put their money where their mouth is. If they truly believe that something is a priority then they should have no problem spending their OWN time/money accordingly.

Giving people the freedom to put their own money/time where their mouth is what prevents scarce resources from being wasted. It's a fail-safe system. If we take people's spending decisions away from them then we remove the only thing that prevents the misallocation of limited resources. On the individual level, if I take your spending decision away from you...then whether you end up with a book, or a sandwich, or a box of tampons or a Tillandsia depends on how well I know you. On the group level, if a small handful of people take the spending decisions away from millions of people then we end up with wars when everything else was a bigger priority. Understanding the opportunity cost concept is understanding the economic value of tolerance. This is why the opportunity cost concept is the key to unlocking world peace and maximizing abundance.

As a huge fan of this concept...I've collected a few relevant passages.

Here's a good definition...

The concept of opportunity cost (or alternative cost) expresses the basic relationship between scarcity and choice. If no object or activity that is valued by anyone is scarce, all demands for all persons and in all periods can be satisfied. There is no need to choose among separately valued options; there is no need for social coordination processes that will effectively determine which demands have priority. In this fantasized setting without scarcity, there are no opportunities or alternatives that are missed, forgone, or sacrificed. - James M. Buchanan​

A simple example...

By contrast, if a consumer wants a new TV set and a new washing machine and he can afford only one of these without drawing on his savings (which he dislikes), he is in a cross-road situation. He must deliberate until he arrives at a decision as to which course of action he prefers. Thus, while we have reason to assume that preference functions for alternative uses of private funds (including the savings alternative) have some firmness and consistency, our findings raise doubt whether the corresponding concept of a preference function for alternative fiscal policies is fruitful. - Eva Mueller​

My favorite...

By preferring my work, simply by giving it my time, my attention, by preferring my activity as a citizen or as a professional philosopher, writing and speaking here in a public language, French in my case, I am perhaps fulfilling my duty. But I am sacrificing and betraying at every moment all my other obligations: my obligation to the other others whom I know or don’t know, the billions of my fellows (without mentioning the animals that are even more other others than my fellows), my fellows who are dying of starvation or sickness. I betray my fidelity or my obligations to other citizens, to those who don't speak my language and to whom I neither speak or respond, to each of those who listen or read, and to whom I neither respond nor address myself in the proper manner, that is, in a singular manner (this is for the so-called public space to which I sacrifice my so-called private space), thus also to those I love in private, my own, my family, my son, each of whom is the only son I sacrifice to the other, every one being sacrificed to every one else in this land of Moriah that is our habitat every second of every day. - Jacques Derrida​

How many of you caught the reference to Moriah? That's an example of partial knowledge. Moriah is where Abraham was about to sacrifice his only son Issac.

Here's a Christian's perspective on Derrida's perspective...

It is through the gaze of my extinguished self that I realize the limitations that make scarcity necessary. Through this gaze into my own limitedness - a limit always established by the impending cessation of space and time for me - through this gift of death, I discover in nature the best way to be efficient. Thanks to death I must choose x rather than y. This has become a feature of 'nature' - a demystified 'nature' that bears no possibility of participation in the eternal. This is consistent with capitalism. - D. Stephen Long​

From the bible...

For what shall it profit a man, if he shall gain the whole world, and lose his own soul? - Mark 8:36​

Again from the bible...

For God so loved the world, that he gave his only begotten Son, that whosoever believeth in him should not perish, but have everlasting life. - John 3:16​

From Greek mythology...

‘Hercules, (says she,) I offer myself to you, because I know you are descended from the gods, and give proofs of that descent by your love to virtue, and application to the studies proper for your age. This makes me hope you will gain, both for yourself and me, an immortal reputation. But before I invite you into my society and friendship, I will be open and sincere with you, and must lay down this as an established truth, that there is nothing truly valuable which can be purchased without pains and labour. The gods have set a price upon every real and noble pleasure. If you would gain the favour of the deity, you must be at the pains of worshipping him; if the friendship of good men, you must study to oblige them; if you would be honoured by your country, you must take care to serve it. In short, if you would be eminent in war or peace, you must become master of all the qualifications that can make you so. These are the only terms and conditions upon which I can propose happiness.’ - Joseph Addison​

The opportunity costs of war...

Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone. It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children. The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities. It is two electric power plants, each serving a town of 60,000 population. It is two fine, fully equipped hospitals. It is some fifty miles of concrete pavement. We pay for a single fighter plane with a half million bushels of wheat. We pay for a single destroyer with new homes that could have housed more than 8,000 people. This is, I repeat, the best way of life to be found on the road the world has been taking. This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron...Is there no other way the world may live? - Dwight D. Eisenhower​

The moral of the story is...I don't decide what my actions are worth to you...you do. Ignoring this simple truth is the cause of every war and every other man made catastrophe. How long will liberals choose to ban those who try and help them understand this simple truth? Any amount of time is too long. Don't let your sacrifices be in vain. For goodness sake go out there and try and help a liberal understand the value of the opportunity cost concept. Hopefully you will succeed where I have failed.

 

You've offered a confused (and invalid) understanding. In terms of the consumer, opportunity costs would be described by the nature of the budget constraint (and therefore relative prices). Its incorrect to confuse it with revealing preferences (where you'd instead refer to aspects such as the marginal rate of substitution). In terms of the firm we'd refer to 'next best opportunity', but that merely describes the difference between economic costs and accountancy costs (providing an understanding of profit related to the entry and exit decision)

 

Can you offer an example?

 

Your question doesn't make sense. I've already given two examples, using consumer theory and theory of the firm to demonstrate the invalidity of your claims. You've confused economic costs and preferences.

 

Beautiful sentiments well explained........ but ........ it misses the basic point of humanity!

together there creates a synergy. apart we're used and abused picked off and marginalised with the forces of money, a cost benefit analysis totally unacceptable and alien to democracy.

http://www.youtube.com/watch?v=fJ224ygAqdY&feature=related

http://www.youtube.com/watch?v=xQbXO828Vio&feature=related

http://www.youtube.com/watch?v=n38ftBTDhY0


This international brigade fought fascism,something now held up as AIPAC Capitalism and the benefit there of...... something your and my forefathers fought against in WW1 and WW2.
Supported by the Church of all nations ...... and where is there god? Its owned and on display if one only looks!!!!

$

£

Regards
Highlander

 

http://www.youtube.com/watch?v=9oD0Kz9L9RE&feature=related

http://councillorterrykelly.blogspot.co.uk/2011/07/scotlands-heroes-of-international.html

Aye thats religion for you!

The same raising its ugly head in these times of wanton destruction ........ look for your self and decide for yourself.

Regards
Highlander

 

Aye ... opportunity costs ....... aye!

Would that be like in this instance, the fed is forced to give Germany 50 tonnes of Gold back every year for the next three years?

And the costs? Well would that be finding that 50 tonnes of gold on the open market when Germany has said " it's going to physically test all German gold Bullion"

Aye the opportunity costs might even break the bank of China, America hasn't any money now, where the hell is going to get 150 tonnes of Gold? Well gold that hasn't tungsten in the middle!

Aye someones going to have there arses kicked, and someones nation is going into steep poverty!

http://www.silverdoctors.com/germany-announces-intentions-to-repatriate-its-gold-from-ny-fed/

Hey presto all the reasons for FEMA, secret prisons and torture chambers, only, now, its going to be your turn, when the came for ........... reap what your sow!

Regards
Highlander

 

Aye ... the plot thickens ...... not happy with the banks stealing from its European citizens .... the banks are now protecting the FED!

The Bundesbank is refusing access to the German nations gold bullion!

http://www.zerohedge.com/news/2012-...ands-bundesbank-audit-sovereign-gold-holdings

Have a nice day .... not many more to come! All thanks to corrupt AIPAC and corrupt AIPAC senators.


Regards
Highlander

 

Aye and as for opportunity costs ...... you AIPAC America succeeds where even the American nation cannot hide from is owned status!

http://www.youtube.com/watch?v=JrtuBas3Ipw&feature=player_embedded

Special relationship .... yer owned!

Oooh ....... NOT MANY MORE TO COME!

Regards
Highlander

 

Aye and as for opportunity costs ...... you AIPAC America succeeds where even the American nation cannot hide from is owned status!

http://www.youtube.com/watch?v=JrtuBas3Ipw&feature=player_embedded

Special relationship .... yer owned!

Oooh ....... NOT MANY MORE TO COME!

Regards
Highlander

 

What a totally b.ulls.h.i.t post.

45,000 Americans died every year from lack of health prior to health care reform. Each death represents millions in lost productivity to society. Multiply that over a 20 or 30 span or longer and this means society loses multiple billions (if not trillions) in productivity and taxes. Yet, the drugged up and delusional right wingers who call themselves pro life say their deaths are a good thing and even went so far as to yell "let him die" during a Republican debate. Health care reform is an opportunity cost that saves society trillions in productivity and in added tax revenues. This is why it succeeds everywhere it is practiced, including Israel where Romney himself was forced to conceded that it is a good thing.

 

If taxpayers were given the freedom to directly allocate their taxes...would public healthcare receive more revenue than it currently does?

 

We'd expect public good underprovision. Your whole approach is based on misunderstanding of basic economic concepts, as shown by the ridiculous reference to opportunity costs

 

How could you only expect public good underprovision? If you'd expect public good underprovision then you'd have to also expect public good overprovision. This is simply because the total tax revenue would be exactly the same. The only thing that would change would be the distribution of public funds.

Except...why would taxpayers continue to give their own hard-earned money to a government organization that was over producing a public good? If you wake up on Mars one day would you still continue to give your taxes to NASA? If we've protected every endangered animal would you still continue to give your taxes to the EPA? If everybody and their mama has their doctorate would you still continue to give your taxes to public education? If we've cured every known disease would you still continue to give your taxes to public healthcare?

If taxpayers, who spend hours of their lives earning their money, fail to notice the diminishing returns of their tax expenditures, then how can we expect congress to notice the diminishing returns of money that they did not earn?

Naw, any government organization that was "underfunded" would simply learn how to do more with less. Because nobody should have to pay an organization to do less with more.

 

"Underprovision". More pseudo-scientific claptrap.

 

In the opening post you got the concept of opportunity costs ridiculously wrong. Here, it looks like you don't understand public goods. Let's stop you here and ask you to define public goods? Hint: its not goods just produced by the public sector

 

In a pragmatarian system...voters would decide whether a good should be public, taxpayers would choose which public goods they funded and congress would determine the tax rate. Well...directly allocating taxes would be optional...so congress would have all the same responsibilities...with perhaps a bit less money to spend.

For example...if voters decided that bicycles, because of the positive externalities of preventative medicine and environmental protection, should be a public good...then a government organization would be created that would be responsible for supplying bicycles to inner city youth. The more effective this program was...the more money taxpayers would choose to give to it. The more money that taxpayers chose to give to this program...the more bicycles this program would be able to supply.

It would be the same exact thing with healthcare. The more money that taxpayers chose to give to public healthcare...the more people that would qualify for coverage.

So why do you want to quibble over the exact definition of a public good? If enough voters agree that something should be a public good...then so be it. If you disagreed then you'd have the freedom to withhold your taxes from that public good.

 

As I thought, as with opportunity costs, you don't understand the definition of public goods.

 

A definition of a public good can either be inclusive or exclusive. On one extreme we have socialists who say that everything is a public good and on the other extreme we have anarcho-capitalists who say that nothing is a public good.

So what's wrong with allowing voters to decide whether something is a public good and allowing taxpayers to decide which public goods they spend their taxes on? How would that not be a perfect balance between the community and the individual? The community would decide that healthcare was a public good and individuals would decide how much of their own taxes they would spend on public healthcare. Where's the difficulty?

 

Rubbish! Public goods have an economic definition; a definition which you've ignored to peddle your one dimensional guff.

Why don't you understand opportunity costs? Why have you confused economic costs with preferences? Is it part of this 'pragmatarian system' where you are forced to ignore sound economic comment?

 

Of course public goods have an economic definition...but how does that change a pacifist's perception of the value of war? National defense is a public good...therefore pacifists should be forced to pay for it? Naw, I don't care about the economic definition of a public good...and neither do most people. That's why taxpayers should have the freedom to shop for themselves in the public sector. Let the public goods market supply what people demand.

 

A poor example. National defence and pacifism are not mutually exclusive. You should be attempting to refer to non-perfection in public goods (e.g. Troops can be used to strike break, ensuring that 'national defence' can break the non-excludability trait). Of course your bumph will do nothing about that, given its a regulatory matter and not a funding one.

Now answer my questions!

 

So what would pacifist taxpayers do in a pragmatarian system? Would they give some of their taxes to the DoD? Would they only want to give their taxes to the peace-keeping efforts of the DoD?

So it costs nothing to enforce regulations? So regulators are happy to do their jobs for free? There is such a thing as a free lunch?

If voters want drugs to be illegal...then so be it...this is a democracy. But just because this is a democracy does not mean that we should ignore economics. Therefore, it should be up to taxpayers to decide exactly how much of their taxes they are willing to give to the DEA. The DEA should spend no more...and no less money than taxpayers are willing to give to it.

Errr..what was the question again? You wanted me to quote you the technical definition of a public good? Why? What good will that do? Will the technical definition of a public good change somebody's mind about whether drugs should be legal or not? Will the technical definition of a public good change somebody's mind about the value of space exploration? Will the technical definition of a public good change somebody's mind about the value of protecting the environment?

Changing people's minds about their values isn't my priority. My priority is to help them understand that their values...as represented by their spending decisions...are absolutely necessary to ensure that resources in the public sector are put to their most beneficial uses.

 

I don't play pretend. You just gave an inept example.

Funding and regulation are quite distinct. Teach yourself some basic liberal political economy.

Given you've got opportunity costs completely wrong and you're deliberately abusing the concept 'public good', is your stance completely reliant on an invalid use of economics?

 

My argument was not that you play pretend. My argument was that people shouldn't have to pay for things that they do not value. Therefore, you didn't counter my argument.

My argument was not that funding and regulations are the same exact thing. My argument was that enforcing regulations cost money. Therefore, you didn't counter my argument.

I made my stance quite clear. There's absolutely no benefit to quibbling over the technical definition of a public good. Yet, as usual, you did not counter my argument.

All the examples I gave in the OP are examples of the opportunity cost concept. Yet, your argument is that I've got opportunity costs completely wrong. I've already asked you to provide an example of the opportunity cost concept...and you've completely failed to provide even a single example.

Your "use" of economics has absolutely no bearing on reality. Give me some real life examples of the opportunity cost concept in order to prove me wrong.