Eduard Braun on Opportunity Cost

From Finance Behind the Veil of Money, page 32:

The opportunity-cost concept does not allow for the inclusion of time. Opportunity costs, in other words, are not a matter of action but of choice. James Buchanan is not the only one who stresses the close relationship between choice and opportunity cost. G. F. Thirlby, who published a lot on the cost problem, also writes: “By deciding to take the preferred course, he [any person] incurs the cost—he displaces the alternative opportunity.” According to this opinion, costs appear at the point of time when the decision is made and then lose all of their “significance . . . because the decision displaces the alternative course of action.” However, it seems to be problematical to link cost to choice. Decisions are not bound up with costs. To illustrate this hazardous statement, let’s have a look at an example.

Let us suppose friends X and Y are on a trip in the mountains. X has two apples in his bag. Y loves apples, but has forgotten to pack one. During the first break, X permits Y to take one of the apples. Well, one could say this is a great deal for Y! However, things look differently if one takes into account opportunity cost. As soon as Y takes one of the two apples, he abstains from taking the other one. If we assume, for simplicity, that the two apples are alike, then the disadvantage in this decision is just as great as the advantage. According to opportunity-cost theory, Y is not better off at all although he has received an apple for free. His preference for one of them cost him the other one.

It is interesting to see that the story would run totally differently if X had not offered that Y take one of the apples, but if X had given one to Y. In this case, Y does not have any opportunity costs. Those only appear when he has to choose like he had to in the first example. From this point of view, as George Reisman also notes, the possibility of choosing between several alternatives—a possibility that one would think to be beneficial from the point of view of the person choosing—appears to be something bad, even destructive. The best that could happen to anyone would be to have no freedom of choice. No opportunity cost means—from the point of view of most economists—no cost at all.

My response to this is that if X says Y can have one apple, the other apple is not the opportunity cost. The forgone alternative is not having an apple. This solution is the same as Rothbard’s solution to the Buridan’s Ass problem–the ass does not just face the choice between two equal bales of hay, but the choice to eat or not to eat.* Therefore indifference is never, ever a problem in economics, because there is always a third “option” of not having the satisfaction at all.

Just because X was not specific about which apple was the gift doesn’t mean that the choice is between one apple or the other. It means that the choice is between taking an apple or not taking one, just like the donkey facing the choice between eating from one of the bales of hay and going hungry.

This may actually help explain time preference (which is what Braun was on his way to redefining). If action is undertaken to remove some “uneasiness” (Mises, Human Action), then there is an universal reason for preferring the satisfaction of an end sooner rather than later: the longer it takes to have the satisfaction, the more time is spent feeling the “uneasiness”. Indeed, with each passing moment in which the choice in question is not made, the actor incurs the opportunity cost of not having the end satisfied.


*Rothbard on Buridan’s Ass:

Buridan postulated a perfectly rational ass who found himself equidistant between two equally attractive bundles of hay. Indifferent between the two choices and therefore unable to choose, the perfectly rational ass could choose neither and thereby starved to death. What this example overlooked is that there is a third choice, which presumably the ass liked the least: starving to death. So that it was therefore “perfectly rational” not to starve to death but rather to choose one of the two bundles even at random (and then to proceed to the second bundle).

Advertisements

4 Comments

Filed under economics

4 responses to “Eduard Braun on Opportunity Cost

  1. Ede Wolf

    You write: “The forgone alternative is not having an apple.”

    Isn’t that exactly what he says? The opportunity Y gives up is staying the way he is. -> no opportunity costs for Y.

    Like

    • In the first scenario, where X allows Y to choose which apple he takes, Braun says that the opportunity cost is basically the same as the benefit because he identifies the opportunity cost as the benefit he would have from other identical apple.

      Like

  2. Ede Wolf

    Thank you! I got it wrong before and mixed up the two cases.
    So you say that the true foregone alternative in scenario 1 is not the other apple, but simply Y doing nothing and having no apple. (Inaction, of course, is an option in almost any choice-situation.)

    Let me get this right: If the two apples slightly differed, say one was red and one was green, then the foregone alternative would be the apple which was not chosen (the second best alternative). But if both apples are identical from the viewpoint of Y, then the foregone alternative is having no apple at all?

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s