Does It Matter That Costs Are Subjective?

Abstract

The subjectivist interpretation of cost has a history at least as long as that of neo-classical economics itself. The concept of opportunity cost, the subjective value of alternatives foregone, was implicit in the writings of Carl Menger, made explicit in the work of Freidrich von Weiser, developed by Phillip Wicksteed and explored in depth by economists at the London School of Economics during the 1930's and 40's. Although the concept of opportunity cost is widely accepted in the profession as a whole (and is, in fact, often regarded as the benchmark of thinking), the peculiarly subjectivist interpretation has not found many adherents, and is actively discussed by only a small subset of the economics profession today. The general fate of the subjectivist interpretation of cost has been neglect rather than confrontation, and indeed, it is likely that most economists practising today are not even aware of any subjectivist tradition which differs from accepted neoclassical cost theory found in most textbooks on economic theory. Cost, it is presumed, is something that economists understand very well, even if accountants do not. That most economists fully understand the meaning and implications of cost was a proposition directly challenged by James Buchanan in his 1969 book, Cost and Choice [4]. Here (and in later writings), Buchanan traced the evolution of the subjectivist interpretation of cost from von Weiser to the present, and argued forcefully for the essential correctness of this tradition. To Buchanan cost, properly defined, is not limited to that which can be revealed in traditional cost curves in micro-economic theory. Rather, cost is an all pervasive concept that reaches to the core of economic thinking. Economic decision making is an exercise in choosing among alternatives, and cost can only be understood to be a personal subjective evaluation of the consequences of choice. Specifically, Buchanan summarizes his view of cost as follows: