Cost and Choice: An Inquiry in Economic Theory

by James M. Buchanan

Book Overview

While relatively short, Cost and Choice, according to Hartmut Kliemt in the foreword, "holds quite a central place in Buchanan's work. For the fundamental economic notion of 'cost', or 'opportunity cost', is intimately related to the individualist and subjectivist perspective that is so essential to the Buchanan enterprise."

To be sure, the Austrian School of economists enunciated similar views of cost decades before Buchanan,...

• Format: Paperback
• Language: English
• ISBN: 0865972249
• ISBN13: 9780865972247
• Release Date: December 1999
• Publisher: Liberty Fund
• Length: 113 Pages
• Weight: 0.65 lbs.
• Dimensions: 0.5" x 6.0" x 8.9"
• Age Range: 18 to 10 years
• Grade Range: Postsecondary to Grade 5

Customer Reviews

Disentangling the Idea of Opportunity Cost

I am not an economist, but do have a masters degree in political science. As such, I am relatively familiar with cost theory in economics and reasonably familiar with the "Austrian school" of economics's subjective theory of value/cost. Even though I am not an economist, I found this book (except for the final two chapters) quite clearly written and explained. Buchanan certainly isn't writing for a popular audience (and it is not a popular subject), but his writing was easy enough for me to understand without a full-on econ background. As others mention, this book explains and expands on the subjective theory of costs. Simply stated, economists of the classical sort liked to think of 'cost' and 'value' in objective terms - 'cost' referring to the measurable expenditure. Thus, the opportunity cost for buying a candy bar is simply all of the other financial options the buyer forgoes in spending that money here, rather than another place. Buchanan's book first recaps the history of thinking about cost and the gradual emergence of a subjective theory of cost. Under the subjective theory that Buchanan endorses, cost means basically any opportunity that buyer anticipates giving up for sake of the choice being made. In other words, instead of the cost of a candy bar being limited to anything else the buyer could have bought for the price, it can also include such things as the anticipated disappointment when one weighs oneself the following morning or the dissatisfaction that comes with knowing that one broke their diet. So as not to sound frivolous, the reason these are actual costs is because, in a very real way, they are things the chooser considers when making their choice. As the very word 'choice' implies that there is a weighing of pros and cons, any 'cons' that the chooser anticipates are opportunity costs. As other reviewers mention, I am not sure how necessary the last two chapters were. They are quite hard to follow and seemed more suited to a separate essay where themes from this book are put into practical contexts. All in all, Cost and Choice gave me a lot to think about. Buchanan is a good explainer and arguer and provides a very rich history of the evolution of "opportunity cost" as a concept. Good book for those interested in the subjective theory of cost and the microeconomic idea of opportunity cost in general.

Subjectivist Economics at its best

The notion of opportunity cost has now been tacitly accepted among mainstream economists and even included in conventional textbooks. I stress the word "tacit" because mainstream economists are quick to contrast this conception of cost with the more familiar one of direct outlay cost --- that is, the actual resources expended in production. I myself grappled with this dilemma for quite some time, and could see little way around it before encountering this book. Buchanan accomplishes a lot in this book. Not only does he give a clear presentation of subjectivist cost theory, but he also explores the historical development of this intellectual tradition. The Austrian school is correctly credited for both coining and developing this concept. The tradition then settled and thrived under the aegis of Lionel Robbins and the London School of Economics (LSE). It is best to grapple with the notion of cost as a consequence of planning. To try to tackle the problem of cost at the resource expenditure stage is to miss the point. A decision must be made for purposes of production (or human action generally). One is confronted with a variety of choices in this respect. The appraisal of these many alternatives is a subjective phenomenon. The weight one attaches to opportunities forgone cannot be measured, examined or compared. It would be difficult even to know what alternatives the planner was aware of. Cost then must be understood as an act of choosing. The cost in the act of decision making represents the plan one wishes to pursue at the expense of other alternatives. In short, if one wishes to understand what led to "direct outlay cost", one must understand the plan which gave rise to this expenditure and the setting in which that decision was made. Let me also recommend another book (much better in my opinion, but entirely neglected) is L.S.E. Essays on Cost, edited by James M. Buchanan and G. F. Thirlby. There are some extraordinary essays contained in this volume, especially those of Thirlby and Wiseman.

Austrian-based cost theory

The word "cost" means something different in a context of making a choice than it does in a context of budgeting or in a context of accounting. Buchanan argues that within the context of making a choice, orthodox economics employs an inaccurate meaning of the word cost. This book is an attempt to develop the correct meaning of the concept of cost within a context of choice. Buchanan defines cost as "that which the decision-taker sacrifices or gives up when he makes a choice. It consists in his own evaluation of the enjoyment or utility that he anticipates having to forego as a result of selection among alternative courses of action" (p. 41). Buchanan's notion of cost within a setting of choice is one of opportunity cost. His argument builds on the concept of cost developed in Austrian economics (Carl Menger, E. Böhm-Bawerk, F. von Wieser), and even more so by scholars at the London School of Economics (Lionel Robbins, Friedrich A. von Hayek, Ronald Coase during the 1930s, G.F. Thirlby and Jack Wiseman during the 1950s). It differs from the notion of cost of classical economists (Adam Smith, David Ricardo, Thomas Malthus) in two main ways. * In classical and neoclassical economics, cost is based on units of resource input during the production process (ch. 1). The value of goods in exchange is then determined by the relative costs of their production (Adam Smith' famous example that a beaver should fetch twice as much in the market as a deer, because it costs twice as much labor to kill a beaver as it costs to kill a deer). Buchanan, on the other hand, defines cost as that given up when making a choice. He prefers marginal-utility economics (cf. William Stanley Jevons, Carl Menger, Leon Walras), according to which exchange value is determined by marginal utility, or demand. * In classical economics, cost can be objectively measured. Under the Austrian-London-Buchanan concept of cost, on the other hand, cost is subjective, in that it is different for each decision maker (p. 23). "In an unchanging economic environment populated by purely economic men, the two approaches become identical in a superficial sense. In a universe where all behavior is not purely economic, where genuine choice takes place, the important differences emerge with clarity." (p. 25) Thus, "[i]n a theory of choice, cost must be reckoned in a utility dimension. In the orthodox predictive theory, however, cost is reckoned in a commodity dimension." (p. 41) Short as the book is, it could have been even shorter. Lots of the second half is barely interesting (ch. 4-6, which are applications of Buchanan's cost theory to, respectively, public finance, Pigovian welfare norms, and nonmarket decision-making; sounds promising but it simply gets too tedious). This would have worked better in a shorter, long paper-length version.

Clarity and Brevity

Cost and Choice is a short, easy, and informative read on opportunity cost. Some of the classical economists hinted at the idea of opportunity cost. Opportunity cost thinking can be seen in the work of Ricardo and Bastiat. Yet the labor cost doctrine held its sway over economic thinking until Carl Menger demolished it. Menger's student Weiser developed the idea of alternative costs, but how did this idea get to England? Buchanan describes the development of the `London tradition' at the LSE. Thirlby, Coase, Hayek, and Robbins were all involved in developing the modern opportunity cost doctrine. Buchanan also inquires into the idea of social costs and public choice. The idea of opportunity cost is, of course, at the center of the socialist calculation debate. The opportunity cost concept raises a number of issues as far as the Coase theorem and public goods theory are concerned. Who chooses over what alternatives in the public sector? Cost and Choice is a great book to use in undergraduate microeconomics. Some grad students should read it too: especially those who majored in engineering or one of the physical sciences as undergrads. It is also a worthwhile read for the educated public.