Subjective and Objective Opportunity Cost
Opportunity Cost
It is easy to argue that the idea of opportunity cost is fundamental to any understanding of economic thinking. It can easily stated as "the cost incurred by not enjoying the benefits associated with another alternative". It is what we gave up to enjoy the decision we do make. The traditional model makes opportunity cost an objective concept meaning that an outside observer can measure and identify it separate from the decision maker. This is known as the objective opportunity cost theory.
James Buchanan and Subjective Opportunity Cost
James Buchanan wrote a thin volume about opportunity cost in economics in 1969 called "Cost and Choice". In the book, Buchanan makes the case that cost is a concept that is in the mind of the decision maker only and cannot be truly understood by an outside observer. Cost cannot be measured or grasped by an outside observer. He also makes the case that the concept of choice and cost is forward looking and disappears as soon as the choice is made. Another point he makes is that cost can only be borne by the decision maker and cannot be shifted to someone else. This is the basis for the subjective theory of opportunity cost which is critical to Buchanan's overall economic project.
With these arguments, Buchanan can expand on those concepts to argue why socialism is impossible because an outside planner cannot observe or understand cost and against welfare economics because an outside analyst trying to do cost benefit analysis or resolve a market failure cannot observe a parameter of objective value known as cost. Buchanan is thus a proponent of the subjective theory of opportunity cost and uses it throughout his career.
Samuels/Schimd, Opportunity Cost and Power
Warren J. Samuels and A. Allan Schmid (SS) wrote books and article about opportunity cost as well but most importantly was an article in 1997 called “Cost and Power” in the book "Borderlands of Economics". In this article, they make the case also that cost is subjective and cannot be objectivity identified as a parameter. Are they making the same argument as Buchanan? The answer is mostly no, but lets explore this point on a deeper level and see if and why it matters.
SS thought that cost was defined by both natural features and the distribution of rights and duties in an economy. They clearly believe in the partial truth of the neoclassical definition of opportunity cost, as they write, "the neoclassical theory of costs is incomplete". The other part they believe is missing is based on the distribution of rights and duties. They write that, "opportunity cost is always opportunity specific" or that again rights and duties matter. This distribution mattered because it defined who had their ability to impose a cost on another person. The neoclassical world view takes the stars quo of rights and duties as a given, like technology, and builds that automatically and unthinkingly into the model.
How did this view relate to Buchanan? In the SS view of the world, costs were partially determined by technology and natural features of the world and partially determined by the legal and cultural rules of that society or community. Thus, we see that at least partially viewed costs from a neoclassical viewpoint that costs were a parameter of the world out there to be discovered. However, I would say that they also viewed this portion of cost as far less important. Their subjective idea of cost was not the one of Buchanan and the isolated decision maker who was assessing their options and viewing costs from that singular viewpoint. What they meant by subjective was that cost was a mostly human determined variable that could shift and move between economic parties. SS did believe that some costs were objective and could be identified by an outside observer. Thus, we observe that the Buchanan view of subjective cost is different from the subjective cost view of SS.
Where do we go from Here?
The end result of our brief analysis is that opportunity cost is an idea that a student of economics and a participant in the world learns quickly. From a young age, we learn there is a price or cost of doing something. We may also quickly learn that that the cost may vary from person to person. This variation is not simply due to different perceptions and subjective mind sets but also due to different realities of legal and cultural rules in place in a community. Equally importantly, these legal and cultural rules can change both through deliberate and non deliberate action over time. Regardless of which view you take on this question (SS or Buchanan or neoclassical), it is a critical issue that defines how one would look upon doing economics and the type of policy recommendations that one would be willing to examine and put forward.
It is easy to argue that the idea of opportunity cost is fundamental to any understanding of economic thinking. It can easily stated as "the cost incurred by not enjoying the benefits associated with another alternative". It is what we gave up to enjoy the decision we do make. The traditional model makes opportunity cost an objective concept meaning that an outside observer can measure and identify it separate from the decision maker. This is known as the objective opportunity cost theory.
James Buchanan and Subjective Opportunity Cost
James Buchanan wrote a thin volume about opportunity cost in economics in 1969 called "Cost and Choice". In the book, Buchanan makes the case that cost is a concept that is in the mind of the decision maker only and cannot be truly understood by an outside observer. Cost cannot be measured or grasped by an outside observer. He also makes the case that the concept of choice and cost is forward looking and disappears as soon as the choice is made. Another point he makes is that cost can only be borne by the decision maker and cannot be shifted to someone else. This is the basis for the subjective theory of opportunity cost which is critical to Buchanan's overall economic project.
With these arguments, Buchanan can expand on those concepts to argue why socialism is impossible because an outside planner cannot observe or understand cost and against welfare economics because an outside analyst trying to do cost benefit analysis or resolve a market failure cannot observe a parameter of objective value known as cost. Buchanan is thus a proponent of the subjective theory of opportunity cost and uses it throughout his career.
Samuels/Schimd, Opportunity Cost and Power
Warren J. Samuels and A. Allan Schmid (SS) wrote books and article about opportunity cost as well but most importantly was an article in 1997 called “Cost and Power” in the book "Borderlands of Economics". In this article, they make the case also that cost is subjective and cannot be objectivity identified as a parameter. Are they making the same argument as Buchanan? The answer is mostly no, but lets explore this point on a deeper level and see if and why it matters.
SS thought that cost was defined by both natural features and the distribution of rights and duties in an economy. They clearly believe in the partial truth of the neoclassical definition of opportunity cost, as they write, "the neoclassical theory of costs is incomplete". The other part they believe is missing is based on the distribution of rights and duties. They write that, "opportunity cost is always opportunity specific" or that again rights and duties matter. This distribution mattered because it defined who had their ability to impose a cost on another person. The neoclassical world view takes the stars quo of rights and duties as a given, like technology, and builds that automatically and unthinkingly into the model.
How did this view relate to Buchanan? In the SS view of the world, costs were partially determined by technology and natural features of the world and partially determined by the legal and cultural rules of that society or community. Thus, we see that at least partially viewed costs from a neoclassical viewpoint that costs were a parameter of the world out there to be discovered. However, I would say that they also viewed this portion of cost as far less important. Their subjective idea of cost was not the one of Buchanan and the isolated decision maker who was assessing their options and viewing costs from that singular viewpoint. What they meant by subjective was that cost was a mostly human determined variable that could shift and move between economic parties. SS did believe that some costs were objective and could be identified by an outside observer. Thus, we observe that the Buchanan view of subjective cost is different from the subjective cost view of SS.
Where do we go from Here?
The end result of our brief analysis is that opportunity cost is an idea that a student of economics and a participant in the world learns quickly. From a young age, we learn there is a price or cost of doing something. We may also quickly learn that that the cost may vary from person to person. This variation is not simply due to different perceptions and subjective mind sets but also due to different realities of legal and cultural rules in place in a community. Equally importantly, these legal and cultural rules can change both through deliberate and non deliberate action over time. Regardless of which view you take on this question (SS or Buchanan or neoclassical), it is a critical issue that defines how one would look upon doing economics and the type of policy recommendations that one would be willing to examine and put forward.
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