The concept of opportunity cost “The opportunity cost of anything of value is what you must give up so that you can have it.” is the central theme of my book Economics in Two Lessons,due out in the US on 19 April and hopefully in Australia soon after that. My central claim is that two lessons based on opportunity cost and their relationship to market prices provide a framework within which almost any problem in economic policy can usefully be considered.…What the cost of not doing something is, must be considered along with the cost of not doing it. This is the implicit justification for military spending for "national security" and advancing "national interest." That is to say, existential threats have priority over resources. The question is whether climate change is an existential threat. Is so, then all resources must be mobilized, which will involve sacrificing lower priorities.
So, I was impressed to see Bill Shorten use the term in relation to climate change inaction. Not only that but he used it correctly! Here’s Bill, quoted in the SMHOpposition Leader Bill Shorten defended the new policy by urging voters to consider the cost of inaction on climate change, saying “There is a huge opportunity cost when we don’t take action,”
A lot of left-ish proposals these days, including high marginal tax rates at high incomes and bans on share buybacks, are about increasing the cost to firms of making payouts to rich shareholders, thereby reducing the opportunity cost of other uses of the money. Some of these proposals I think are solid. Some I think half-baked. [1] But the basic logic behind the proposals is missed I think by a lot of smart commentators.Interfluidity
Indeed, even opportunity cost can be rarely computed without working out the full equilibrium of a path not taken. This is why, if I were to re-write Economics in One Lesson, it is Nash equilibrium that would be the lesson and not opportunity cost.John Quiggin, are you listening?
After a couple of preliminary posts, here goes with my first draft excerpt from my planned book on Economics in Two Lessons. They won’t be in any particular order, just tossed up for comment when I think I have something that might interest readers here. To remind you, the core idea of the book is that of discussing all of economic policy in terms of “opportunity cost”.John Quiggin
I’ve been promising for a long time to write a new book, framed as a reply to a free-market tract Economics in One Lesson by Henry Hazlitt, published in 1946, but still in print and popular among free market advocates. Its popularity reflects the fact that it’s a reworking of Bastiat’s “What is Seen and What is Not Seen”, still one of the best statements of the case for free markets....
But as a general statement, Hazlitt’s One Lesson is false, which is why my working title is Economics in Two Lessons”.I've been wondering when someone was going to write this.
Lesson Two is “Market prices do not reflect all the opportunity costs we face as a society”
To someone trained in mainstream economics, as I have been, the immediate examples of this Lesson are “market failures”, such as externality, monopoly and information asymmetries. I originally planned my book to focus on these market failures, making it a somewhat idiosyncratic take on what is usually called public economics. But I kept feeling that I was missing out too much that was important: unemployment, income distribution and many other issues.John Quiggin
The avalanche of commentary since the Ukrainian crisis erupted a year ago has overshadowed any reflections on the immense forgone benefits (technically speaking, the “opportunity cost”) of what might have been if Washington had been working for peace and stability instead of war and chaos..The irony is that after WWII, the US decided that it was in its longterm interest to rebuild and befriend its former enemies, the Axis of Germany, Italy and Japan. After the end of the Cold War, the US decided instead to hobble Russia and focus on maintaining global hegemony permanently.
Vlad Sobell teaches political economy in Prague and Berlin
