Cost and Choice: An Inquiry in Economic Theory (Collected Works of James M Buchanan, Vol 6 (Paper))

Rating:
Summary: Austrian economics by a non-Austrian
Review: 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, since 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.


Rating:
Summary: Clarity and Brevity
Review: This book is outstanding. It explains sophisticated concepts in economics in a fashion that is relatively easy to understand. The Chapter on "Cost in Economic Theory" clearly illustrates the superiority of marginal value theory and the importance of the concept of opportunity cost. The chapter on "the London Tradition" and the title chapter demonstrate the importance of subjectivity in economic costs. The chapters on public goods and social costs touch on a series of important issues in political economy. Also, Buchanan's discussion of the Socialist Calculation Debate is illuminating. Best of all, it is succinct and lucid. Cost and Choice is a must read for everyone who wants to understand economic theory.

Rating:
Summary: Clarity and Brevity
Review: This book is outstanding. It explains sophisticated concepts in economics in a fashion that is relatively easy to understand. The Chapter on "Cost in Economic Theory" clearly illustrates the superiority of marginal value theory and the importance of the concept of opportunity cost. The chapter on "the London Tradition" and the title chapter demonstrate the importance of subjectivity in economic costs. The chapters on public goods and social costs touch on a series of important issues in political economy. Also, Buchanan's discussion of the Socialist Calculation Debate is illuminating. Best of all, it is succinct and lucid. Cost and Choice is a must read for everyone who wants to understand economic theory.