The Opportunity Costs of Neoclassical Economics

Abstract

The notion of "opportunity cost" has been neglected in economics. The reason is that any such measure of cost is invisible, unobservable, and untestable. Yet the so-called 'competitive ideal' in neoclassical theory is based on claims of decreasing returns and substitutional tradeoffs in production, consumption and social relations, and therewith an exclusive focus on scarcity in economics. Within this view, collusion is suspect: it raises prices, reduces sales, and so harms social welfare. This is the baseline emphasis of neoclassical microeconomic theory. The opportunity costs of this framework involve a significant loss of perspective on actual economic phenomena, the potential value of which may far exceed that of orthodoxy. Here are several reasons why. First, the real world is interdependent and not decomposable into parts: all we do initiates effects spreading outward forever on everything. Second, our interconnected environment calls for a network or systems conception of economics in which substitution and complementarities coexist in nondecomposable tangles, obviating any institutional claim for the efficiency of competition over cooperation. Third, if all long-term production occurs with increasing returns, then the nature of economic relations solely reflects substitution for physical goods in short-term contexts; all long-term material outputsas well as all intangible tradesexhibit a complementary connection to make cooperation efficient. Fourth, the unbounded character of economic effects suggests an analytical bound derived from our rational limits, since we cannot see the full range of outcomes stemming from our decisions: planning horizons so enter this scene. Such 'horizon effects' suggest another important distinction in economics of 'atoms, bits and wits,' where atoms (the realm of physical things) are only subject to substitution assumptions in the short run, but shift to complementary interaction for all longer horizons. For bits (the realm of transactions involving information and all intangible outputs) and wits (that of horizon effects), both are realms characterized by complementary relations, so also yielding an economics in which cooperative systems are efficient and where competition cannot but fail by restricting output, knowledge and truth, while promoting a myopic culture in a dangerous self-destruct mode. This is the 'opportunity cost' of neoclassical economics: a world hurtling into a self-destructive failure due to its myopic culture spawned by rivalry, blind to its own pathologies and encouraged by an economics dogmatically closed to realistic conceptions due to competitive frames wrongly imposed in complementary realms, such as in academics, ecology, ethics and organizational learning. These costs far exceed the value realized by this approach. The paper explores these failures in more detail and describes the horizonal theory that would have emerged from the 1930s debates on cost had Hicks not walked away from increasing returns and had Hirshleifer not promoted a false 'rescue' endorsed by Alchian in 1968, when he declared decreasing returns "a general and universally valid law." Because of 'The Hicksian Getaway' in 1939-and 'The Hirshleifer Rescue' in 1962a rigid orthodoxy in economics emerged that was resistant to any alternative views, seeing them as a threat to its unearned dominance instead of as an opportunity to engage in new learning. A (supposedly) 'scientific' community was thus transformed to a closed domain of adherents strongly opposed to open debate and discussion. The curious character of this unheralded situation deserves closer attention than it has gotten thus far. That is the primary aim of this paper.