Tag Archives: braun

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).



Filed under economics

Hülsmann and Braun on time preference

I couldn’t get through the first bits of Eduard Braun’s Finance Behind the Veil of Money without first re-reading Mises’ chapter in Human Action, “Action in the Passing of Time”, and Prof. Hülsmann’s 2002 QJAE article, “A Theory of Interest”. Braun refers to both liberally in his reformulation of interest theory. Time preference, à la Mises, is cast aside as the source of value spreads over time and new explanations are offered.

Hülsmann tries to pinpoint the value spread as existing between means and ends. The thinking goes like this: means are employed to satisfy ends. Means are always employed prior to the satisfaction and are “given up” in exchange for the end. Therefore, means are valued less than the ends they attain. I will only give up present means for a future satisfaction if I value the means less than the ends.

The problem with this is that means aren’t directly valued on their own. They receive only derivative value based on the ends they can achieve for the actor. Means are never placed in a preference ranking except as a convenient way to describe the end they satisfy. When “$100 in the present” occupies a place in my preference ranking, it actually stands for “the ends I would/could satisfy with $100 in my pocket right now”. So Hülsmann’s language,

Originary interest is the fundamental spread between the value of an end and the value of the means that serve to attain this end.

is confusing and nonsensical. One cannot separate the value of an end and the value of the corresponding means. It’s more than an equality between the two (which Hülsmann criticizes along familiar lines as the criticisms against the concept of indifference), it’s that they are the same thing. The value of any means is the value of the end it can satisfy–in a literal, substantial sort of way, not a mathematical, quantitative sort of way.

Braun strikes Hülsmann with the flat of the blade, saying that the value spread comes from the categories of cost and revenue, not means and ends, and then goes on to his own reformulation of the fundamentals of action in time. The differences may just be semantics, but that remains to be seen. My current research interest is in the subsistence fund/wages fund theories (featured in Braun’s book), and Hülsmann’s and Braun’s departure from Misesian/Rothbardian time preference theory of interest may just be tangential rabbit-chasing, but maybe it deserves more dedicated and serious inquiry.

Leave a comment

Filed under economics