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adrock3215
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I am unclear about how an Objectivist would approach the subject of economics and would like some discussion of the topic. I have not found any particulary pertinent Objectivist literature on the subject. If there is something discussing this in particular please let me know.

I suppose the matter at hand is: What is economics? It quite obviously differs from a natural science. Experimentation is much more difficult. Some economic thought and knowledge seems to be acquired without the scientific method. On the other hand, some economic knowledge seems to be acquired by grossly overassuming a world different from the one in which we live. A typical economics professor will begin with something like: "Assume that there are only two people in the economy..." or "Assume that there are 4 products outputted in the economy..." It seems as if Mises' pure rationalism is a bit wacky, but on the other hand Friedman's use of positivism seems to embrace a fact-value distinction. Friedman implicitly argued that positive economics is concerned with the study of what is, and normative economics is concerned with the study of what ought to be. I'm obviously not comfortable leaving it at that.

So, how do we know that, for example, Say's Law is correct? Quite evidently, there is a difference in approaches between its formulation and the formulation of a Hubble's Law or Boyle's Law.

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A typical economics professor will begin with something like: "Assume that there are only two people in the economy..." or "Assume that there are 4 products outputted in the economy..."

A physics professor will also begin by asking you to think about an object that is subject to no external force, or only to the gravitational force of the Earth, and so on. These are ways of focusing your attention on a specific entity in order to make observations about its nature, without being distracted by an innumerable host of other entities.

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A physics professor will also begin by asking you to think about an object that is subject to no external force, or only to the gravitational force of the Earth, and so on. These are ways of focusing your attention on a specific entity in order to make observations about its nature, without being distracted by an innumerable host of other entities.

I've heard this sort of necessary essentialization gently mocked with the phrase "imagine a perfectly spherical chicken of uniform density..."

By far the most comprehensive text on economics by an Objectivist is George Reisman's Capitalism: A Treatise on Economics. Reisman's definition of economics as "the science that studies the production of wealth under the division of labor" is a bit unusual but he defends it pretty well. Methodologically Dr. Reisman is sadly closer to von Mises than to Ayn Rand, however. I don't know of any systematic work on the methodological foundations of economics from what I think would be a proper inductive basis.

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"imagine a perfectly spherical chicken of uniform density..."

LOL, now that is an excellent example of the kind of hypothetical that has no place in either physics or economics: the impossible, contradictory hypothetical. It is important to emphasize that something like a two-person economy is not impossible or contradictory--as anyone who has read Anthem will know. (And if the world continues to surrender to environmentalism at its current pace, the world of Anthem will become a reality within decades.)

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I don't know of any systematic work on the methodological foundations of economics from what I think would be a proper inductive basis.

While the other posts were helpful in their own way, this is what I was trying to get at. Works explaining the methodological foundations of economics.

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I suppose the broader question is about the methodical approach of the other "humanities", like Philosophy, the Arts, or Psychology. None of these use experiment, but must still formulate principles.

A brief search through the "Objectivism CD" brought up nothing direct, but I figured I'd post the tangentially relevant snippets that I found, anyhow.

The great mistake here is in assuming that economics is a science which can be isolated from moral, philosophical and political principles, and considered as a subject in itself, without relation to them. It can't be done.

The best example of that is Von Mises' Omnipotent Government. That is precisely what he attempted to do, in a very objective, conscientious, scholarly way. And he failed dismally, even though his economic facts and conclusions were for the most part unimpeachable. He failed to present a convincing case because at the crucial points, where his economics came to touch upon moral issues (as all economics must), he went into thin air, into contradictions, into nonsense. He did prove, all right, that collectivist economics don't work. And he failed to convert a single collectivist.

The materialist equation of physics with science is equally groundless. Science is systematic knowledge gained by the use of reason based on observation. In using reason, however, one must study each specific subject matter by the methods and techniques suited to its nature. One cannot study history by the methods of chemistry, biology by the methods of economics, or psychology by the methods of physics.
The purpose of the science of economics is to identify how the principles of a proper politics actually work out in regard to men's productive life (and what happens to production under an improper system). Politics tells us that man has the right to property.
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I have my own thoughts on what the proper definition of economics is, and IMHO I have proved both my point and why focus upon the division of labour as an element of the definition itself is an error (albeit a minor one). At present it's in the next chapter of my personal book on economics, after the Concept of Value. However, not long ago I smacked my forehead and realised that it and another related issue together would perhaps be excellent material for an article to be published in The Objective Standard. At present it needs to be cleaned up, rearranged, made more tight, and a bit more research done to make sure I am not plagiarising what others have already pointed out (as I said, the book is chiefly for personal use). I don't know when it would be ready, nor even if TOS would accept it, but it's a few months at the earliest. No help for you right this instant, Adrock, but at least now you know it's possibly coming, I guess.

In the mean-time, for the methodology I would recommend in particular "Economic Man: an obituary", "Economics and Rational Self-Interest", and "The philosophic state of economics" by Salsman. They're not directly on the subject, but they're close to it enough that you can figure out a fair bit for yourself from there (as I have done for my own needs). I'd also recommend works by Dr Buechner, but they're still not listed at the Ayn Rand Bookstore (does anyone know why?). I have not heard Salsman's "Philosophy of the Austrian School" so I can't comment on it.

JJM

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In the mean-time, for the methodology I would recommend in particular "Economic Man: an obituary", "Economics and Rational Self-Interest", and "The philosophic state of economics" by Salsman. They're not directly on the subject, but they're close to it enough that you can figure out a fair bit for yourself from there (as I have done for my own needs). I'd also recommend works by Dr Buechner, but they're still not listed at the Ayn Rand Bookstore (does anyone know why?). I have not heard Salsman's "Philosophy of the Austrian School" so I can't comment on it.

I just remembered that Harry Binswanger is offering a course on "Philosophical Issues in Economics" at the upcoming 2008 OCON. The course description is:

Over the last thirty years, economists have improved their views significantly in regard to content—but not in regard to method or to economics' basic concepts. Economics as a science desperately needs the application of a proper epistemology. This course explores the application of Objectivist principles of methodology to economics, refuting prominent anti-concepts and proposing the proper conceptualization. Dr. Binswanger covers such topics as: the proper definition of "economics"; is economics "value free"?; what "reduction to the perceptual level" means in economics; "scarcity" and "the Garden of Eden premise"; capitalism and "socially objective value"; the "natural selection" of productive ability; "consumer sovereignty" as altruism; the epistemological meaning of money; the proper definition of "inflation"; "externalities"; "market failure"; the proper concept of "monopoly"; the answer to the "free rider" argument; the "Laffer Curve" as appeasement; the rampant "reification of the zero" in economics.

Sounds like this will at least touch on some of the issues of interest. Typically the OCON courses get released on CD over the following year.

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I just remembered that Harry Binswanger is offering a course on "Philosophical Issues in Economics" at the upcoming 2008 OCON.

Yup, I've already signed up for it in week 1! It will indeed be interesting to see what the good doctor has to say is the meaning of economics. So, thanks for reminding me of Dr Binswanger's course, because now I wont submit anything I write until after I have attended. Sorry Adrock :(

Other topics of interest to me are his take on the epistemological meaning of money, his definition of inflation (I still stand by mine), and what he identifies as an application of the reification fallacy (I know what the fallacy itself is). I'm scratching my head about that last one, but my guess is that it's chiefly in reference to the fallacy of treating opportunity cost as an actual cost and all the myriad ways in which this fallacy is in use.

JJM

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I think I would be most in line with what Rand said in the Letters of Ayn Rand (sNerd posted it above). I think the subject of economics cannot be divorced from a proper moral and political philosophy. Perhaps this is why the study of economics is in the state it is in today. Most professors do not hold explicity defined philosophical principles. When one takes economics classes in the universities, one is given many theories, seemingly disconnected. A professor will go into Keynesian economics, but the class is left to figure out for himself whether he agrees with Keynesian economics. But there is never a question as to why some particular widely accepted economic conclusion is true.

For example, most economic professors will tell you that the minimum wage causes unemployment. Of course, I totally agree with this conclusion. I regard it as true. I can say, well, of course, if a businessman must pay an employee who is worth $5 an hour $7 an hour, then the employer will choose to not hire him, and wait for the next $7 an hour candidate to come along. It sounds like common sense, right? I suppose Rand would say there is no need to prove that this is true. She would probably say, "Yes, minimum wage causes unemployment. But that is not of any particular importance. The primary reason the minimum wage laws are incorrect are because they violate the rights of individuals to freely contract their own labor."

Perhaps you are right John McVey, some more text needs to shed light on this topic. I hope to be reading your books within a few years.

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I think the subject of economics cannot be divorced from a proper moral and political philosophy. Perhaps this is why the study of economics is in the state it is in today. Most professors do not hold explicity defined philosophical principles.

That's exactly what Dr Buechner said in "Objective value and modern economics", and I agree completely. If you see an offer to sell a second-hand copy, GRAB IT. Most of it is about the nature of value, and other classes of schools' false notions of value. That's great in its own right, but for your purposes near the end he points out that it is a fundamental of economic thinking and as such it determines what is acceptable as economic knowledge and what the subject-matter of economics properly consists of. Again, it's not the whole topic you want, but enough to help you get close to the right track.

I can say, well, of course, if a businessman must pay an employee who is worth $5 an hour $7 an hour, then the employer will choose to not hire him, and wait for the next $7 an hour candidate to come along. It sounds like common sense, right?

You're right, but it's incomplete. Added to that is that at some point the businessman will say "nobody can do work that is worth the minimum $7 per hour I am legally obliged to pay" and so will withdraw the offer of employment altogether. Thus unemployment persists even though there is work that could possibly done, because that work is not as valuable as what else the $7 could be spent on.

I suppose Rand would say there is no need to prove that this is true. She would probably say, "Yes, minimum wage causes unemployment. But that is not of any particular importance. The primary reason the minimum wage laws are incorrect are because they violate the rights of individuals to freely contract their own labor."

You're entirely correct about priorities, but I don't think she'd say a practical issue like that is unimportant. Philosophy can show what is moral, eg that minimum wage laws are wrong, but more is needed to bring the matter home. Dr Peikoff summed up the value of economics to philosophy by pointing out that it completes the case for man's rights. Economics helps tie political theory directly to people's daily values. Showing a concrete example that is close to the hearts of many demonstrates in a vivid way that the moral is the practical and that the immoral is the impractical.

I hope to be reading your books within a few years.

It will be more than a few years, I expect. I'm writing it primarily for my own use, and it's going to take a LOT of work to get it anywhere near a publishable standard. I'll publish bits and pieces of content when and where I can.

JJM

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Economics helps tie political theory directly to people's daily values.

I agree, but to this statement I say: How? What is the methodology an economist should use to achieve this? That was the reason I started this thread, and I still feel mostly unclear about an answer. The answer must be epistemological in nature. How is a certain economic claim verified?

Showing a concrete example that is close to the hearts of many demonstrates in a vivid way that the moral is the practical and that the immoral is the impractical.

It isn't really concrete if people don't agree on the methodology. Tell someone the minimum wage thing and they will say: Well, how do you know it causes unemployment? Have you done a test and verified it or something? If not, how do you guarantee that every businessman will act in the same manner and increase his hiring standards? If all people accepted that minimum wage caused higher unemployment, say, with the same consensus with which they accept that gravity will cause you to fall when you step off a building, then we would for sure not have the minimum wage laws. If it is important to demonstrate the truth of this concrete, then how does one assert its' validity?

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I agree, but to this statement I say: How? What is the methodology an economist should use to achieve this? That was the reason I started this thread, and I still feel mostly unclear about an answer. The answer must be epistemological in nature. How is a certain economic claim verified?

Here’s how I approach the issue. To begin economics, one has to know a considerable amount about core philosophy. In economics some of that can be taken for granted, particularly that existents have a certain nature and there are causal laws explaining events, that through the use of reason man is competent to learn of the nature and causes of existents and events surrounding them, that individuals should be act rationally to pursue their own self-interests, and that the right economic system is laissez-faire capitalism. The preliminary step in economic methodology is figuring out how and why they are necessary in general for economics, giving particular attention at this stage to the nature of reason and how induction is the means to knowledge.

The first step in economics itself is to go over the nature of value and man again, all the while grounding it in various relevant concrete observations. In value, you have to demonstrate that the bulk of values to men are objective, and explain the nature of those few that aren't (see my value article). In man, you have to show that man is capable of reason, and then show what the nature of rationality is in relation to action to gain and/or keep values in general (we haven't gotten to economics yet). Part of that includes discussion of what if a particular man does not act rationally, which is a parallel to the question of what about non-objective values.

Now we begin economics itself – using the nature of man and what is rational action, plus drawing in some crucial observations (which I'm not going to show here), one then simultaneously answers two questions: Who is Economic Man and what is Economic Action? (That pair of questions, btw, is the working title I have in mind for the piece I'll do up and submit to TOS.) Once you've got that you are then in the position to demonstrate that economics consists of an integrated set of laws that delimit and describe a host of actions and consequences within a certain context.

You are now formally able – and required – to identify the full methodology by which you obtain and verify the laws of economics, and in doing so validate economics as a science. The basis is the method of induction, as applied within the context you have delimited. What you draw observations from is the entirety of what actually is done and their consequences in the real world. In particular, since the bulk of economics is about production, take a look at the various subfields within production: market analysis, agriculture, manufacturing, supply-chain management, finance, law, and so on. This also includes doing your own observations as and when you can. I twigged on something vital first-hand just from a single event in a shop. For that matter, I twigged on something vital about the nature of value just watching my father play with one of my parents' dogs. Do not discount the value of homely occurrences. You have to work to glean important details from them, but they are still valid and can even be the clincher for a train of thought.

Some economists will tell you that one cannot use the scientific method of experiment within economics – this is complete and utter nonsense. Dr Peikoff showed that history is itself a controlled experiment – for instance, compare East and West Germany - but even he did not even begin to state the case. Each of those fields is a proper science in its own right, they've spent trillions conducting formal and impromptu experiments for real during the course of over a hundred years, and the economist must pay attention to what they have to say. In addition to general observations and thought, it is the economist's job to look at the results of the work done in these fields and abstract from it all whatever wider principles of economic action can be had from them. It is the nature of Economic Man, objective value, and rational action, that determine the method by which one identifies and draws the appropriate abstractions, and helps you figure out how to integrate them into wider principles. You have to ask: What have actual men done to gain value? What were the actual consequences? What would be rational for Economic Man to do in this situation? What are the full consequences for the economy should Economic Man act like that? How do I prove this this? And so on. Mr Salsman did this very thing in his course "Economics and Rational Self-Interest," which is the main one I recommend for economic methodology. By contrast, von Mises, in Human Action, called the "What would man do?" question "The principle of methodological individualism". The idea is right, but his problems were erroneous conceptions of man and rationality, and his method of working from that was rationalistic deduction. That's invalid: you have to work from observations, including the initial analysis of what man, rationality and proper epistemology consist of, and lots more besides.

I can go on from there, but this much so far is already heaps and getting into more of my own thoughts. You've got enough to work with, anyway: what's most important for methodology is the use of induction by making constant observations of the real world and other sciences known for dealing with the real world (which includes Objectivism), using those observations to develop the necessary tools (such as objective value and Economic Man) that then help in making yet further observations (such as what is a consequence worth paying attention to, what to focus on in other fields), then abstracting and integrating all of this to arrive at some laws of economics, then going on and on building up a larger and more integrated picture from ever more observations and thinking. In many instances what you will be doing is proving for yourself the validity of many laws already known, but you will also find yourself challenging laws that had been taken for granted. One that stands out the most in this regard is the Law of Supply and Demand, which Dr Buechner has demonstrated (in "Theory of Objective Prices") is no good because among other things the "Law of Supply" is questionable ("incoherent" is his description). His approach was the right one: take a look at how prices are in fact set in the real world, and work from there.

JJM

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Here’s how I approach the issue. To begin economics, one has to know a considerable amount about core philosophy....

The first step in economics itself is to go over the nature of value and man again, all the while grounding it in various relevant concrete observations.

In an Economics 101 class in a university, you are saying that this should be the first thing discussed? That the professor should establish a proper philosophical grounding before expounding on any actual economic theory?

As to the latter part of your post, it IS difficult to conduct economic experiments. Nevertheless, I see your point on the observation of history and how it provides controlled experiments. I would ask as a follow-up how one takes the fact (what is) and prescribes the theory (ought). Most economists seem to make an error here. They would say what ought to be is determined by the final state of the economy after a given policy takes effect, (i.e. If it causes GDP to increase, then the policy is proper). Your quote ("What are the full consequences for the economy should Economic Man act like that? ") seems to subscribe to a version of this notion as well. What, if anything, is wrong with this approach I cannot put my finger on.

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In an Economics 101 class in a university, you are saying that this should be the first thing discussed? That the professor should establish a proper philosophical grounding before expounding on any actual economic theory?

No, that's the progress of development that someone should undertake instead at the post-grad level if they want to get right into the philosophy of economics and apply it with considerable depth either as an academic or a high-level practitioner in industry. Undergrad teaching would start more simply, taking a much broader array of things for granted and just plunging in with the basics of value, trade, and the constituents of the economy. It would not show how the laws of economics were developed, only present them at the right time. At the same time, the undergrad student should also be taking intro philosophy courses, equally simplified for freshman or sophomore level students and leaving the depth for actual philosophy students. However, that's my present thinking and it's considerably open to change because sorting all that out isn't my aim.

I would ask as a follow-up how one takes the fact (what is) and prescribes the theory (ought). Most economists seem to make an error here. They would say what ought to be is determined by the final state of the economy after a given policy takes effect, (i.e. If it causes GDP to increase, then the policy is proper).

At the outset of my whole thinking I recognised that a number of sharp distinctions had to be made. First and foremost was the division of economics into economics-proper and political-economy. Modern economics theory pays no heed to that division. The very term "political economy" fell into disuse about a century ago - I decry that and demand its reintroduction. Economics-proper is not a political tool, but instead a business and personal tool, used to figure out what one should do in certain situations. One example I gave of that was a vice-president making his case about whether or not to invest in a major project, based on his projections of the nature of the economy and over that time frame and what it meant in detail for their project. Political-economy, OTOH, uses economics-proper in combination with political theory developed by philosophy to help guide the politician in the laissez-faire world on answering the legitimate questions about economic policy insofar as it is the government's authority to deal with. PE is even more derivative than economics-proper, and takes up much less text space.

The other key division is not unique to me, and that is the split between the positive and the normative. The positive takes the general philosophic work in ethics and politics for granted, drawing in some material as required (eg core value-theory), and just describes what is and how things work in the context of the sociopolitical milieu as a given. Of course, the right thing to do is to first assume that this given milieu is the laissez-faire world populated largely by Rational Man actually being rational, which can be justified (though not in a totally intellectually-satisfying way) without knowing a jot about economics. This is what is meant about economics only completing the case, not itself making the case, for laissez-faire. Once you've got that in place then you are able to handle departures from laissez-faire. In normative economics, this is where one takes what has been ascertained by positive analysis and uses it to develop the oughts from the is's, such as again that vice-president. Following that later, again, is a description of what the politician ought do, this being the one of the last things in the entire structure of economic thinking. It is an important part, but certainly not the great culmination that modern economics treats it as. That, I believe, is the nature of the error made by economists and politicians that you are presently unable to put a finger on.

Your quote ("What are the full consequences for the economy should Economic Man act like that? ") seems to subscribe to a version of this notion as well. What, if anything, is wrong with this approach I cannot put my finger on.

That's getting into the extra material I didn't discuss. As it is, if you took what I said straight and didn't develop it then it suggests that what follows next is an unstructured sprawling mass. In reality, what follows on from that is to build up a coherent picture step-by-step, using the spiral-theory of knowledge, developing key concepts as indicated as warranted by previous concepts and what you can sort out from observation as possibly being the next valid step. For instance, the next thing I do is to examine further what the context of valuation is, what "wealth" means, then the broadest principles of wealth-creation and pursuit of one's goals, the general principles of production of wealth and the nature of capital, then beginning to apply that specifically to the context of living in society. It then goes on in ever widening scope from there, and I still haven't even mentioned things like symbiotic relationships between economics and the other business sciences the economist must pay heed to - sorting out that difficulty becomes doable when one figures out how to apply the spiral-theory intelligently.

JJM

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  • 3 weeks later...
Yup, I've already signed up for it in week 1! It will indeed be interesting to see what the good doctor has to say is the meaning of economics. So, thanks for reminding me of Dr Binswanger's course, because now I wont submit anything I write until after I have attended. Sorry Adrock :lol:

Other topics of interest to me are his take on the epistemological meaning of money, his definition of inflation (I still stand by mine), and what he identifies as an application of the reification fallacy (I know what the fallacy itself is). I'm scratching my head about that last one, but my guess is that it's chiefly in reference to the fallacy of treating opportunity cost as an actual cost and all the myriad ways in which this fallacy is in use.

JJM

I was wondering if you could elaborate on that last part a bit (about the fallacy of treating opportunity cost as an actual cost). I can fully understand what you mean by mistaking a potential cost for an actual cost. I'm sure I can think of some examples. But you say that there are a myriad of ways this fallacy is in use today. Do you see this as prevalent in business, for individuals outside of business...both??

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I was wondering if you could elaborate on that last part a bit (about the fallacy of treating opportunity cost as an actual cost). I can fully understand what you mean by mistaking a potential cost for an actual cost. I'm sure I can think of some examples.

Say you have two alternative course of action: you can use your present resources to obtain A or to obtain B. If you pick A, you give up the opportunity to obtain B, and vice-versa. Thus the theory says the opportunity cost of A is the value of B, and the opportunity cost of B is the value of A. If B is more valuable than A the theory says that if you go for A you are taking a loss because your costs are higher than your revenues. This is a fallacy because opportunity cost is not a real physical cost: the actual cost is only the resources you used to enact your choice. Whatever your history is up to that point, you have those resources and you are better off whichever purpose you choose for them, so there is no loss in reality. The fallacy reifies the lost opportunity as an actual cost and treats it as deductible from revenues.

In economic theory itself, if memory serves me its about messing with students' heads and making it difficult for them to understand the nature of what is going on. I recall something in along the lines of saying that someone is taking a loss by conducting a business using a certain amount of capital when that someone could get a higher return by investing it and doing other work elsewhere. That is then claimed to be a detriment to society because resources are not being allocated in the most efficient way for society's purposes. In that way the opportunity cost theorem is used to smear full freedom of trade and hint at externalities in such cases. The reality is that the someone is still making a profit and a nice living in a line of work they like, and that's that.

The fallacy can get complicated and include attempts at valuation of the resources themselves by reference to opportunity cost. One actual example that comes to mind of this is imputation of values for tax purposes. If you sell something for less than the market price then some tax authorities will assess tax as though you had sold at the full market price even though your actual revenue was less than that. Tax-related transfer pricing rules for businesses operating in multiple jurisdictions are similarly based. The business has the opportunity to sell goods at a given market price, so that's their deemed value and that's what tax is based on irrespective of the actual price realised.

JJM

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Say you have two alternative course of action: you can use your present resources to obtain A or to obtain B. If you pick A, you give up the opportunity to obtain B, and vice-versa. Thus the theory says the opportunity cost of A is the value of B, and the opportunity cost of B is the value of A. If B is more valuable than A the theory says that if you go for A you are taking a loss because your costs are higher than your revenues. This is a fallacy because opportunity cost is not a real physical cost: the actual cost is only the resources you used to enact your choice. Whatever your history is up to that point, you have those resources and you are better off whichever purpose you choose for them, so there is no loss in reality. The fallacy reifies the lost opportunity as an actual cost and treats it as deductible from revenues.

I was just thinking about this last week and was trying to use google to see if anyone had already written anything about it. I can't recall exactly what I typed in, but one page that popped up was Wikipedia's entry for "opportunity cost".

I was going to attempt to write an article about it for my website, but chose to finish another article titled "socially responsible investing is irresponsible investing".

In economic theory itself, if memory serves me its about messing with students' heads and making it difficult for them to understand the nature of what is going on. I recall something in along the lines of saying that someone is taking a loss by conducting a business using a certain amount of capital when that someone could get a higher return by investing it and doing other work elsewhere. That is then claimed to be a detriment to society because resources are not being allocated in the most efficient way for society's purposes. In that way the opportunity cost theorem is used to smear full freedom of trade and hint at externalities in such cases. The reality is that the someone is still making a profit and a nice living in a line of work they like, and that's that.

Yeah. I see that a lot too. Another example would be the question of buying a car with cash (after saving up the money), or just financing it and keeping your cash in the bank or another investment at a higher rate of return. The assumption is that the individual is "losing" by financing the car and "giving up" the higher rate of return elsewhere. Even if the car could be financed at 4% and the investment could be 6%, there is no actual loss of 2%.

Another one I thought of would be someone that has a monetary goal they need or want to reach by a certain age (i.e. retirement). They want to get to that point, and there are several ways to get there. Option A is $xxx.xx per month at x%/yr or $xxx.xx - $xx.xx at x+5%/yr. Both are beneficial for the individual and the question is risk vs. return.

Now, let's introduce the concept of leveraging for a moment. By leveraging a certain amount of money, an individual is taking advantage of the time value of money and able to reduce the overall amount of money they need to save to get to their desired goal. Choosing otherwise can mean either choosing a less efficient path to that goal or accepting higher risks in investments. Are they losing money? No (unless you count inflation, then they are losing the value of their money, but not technically losing physical dollars). It's a question of efficiency and risk, not opportunity cost. Yet, I hear and read an awful lot from my peers that suggests that there is a "real" cost to retirement planning called "opportunity cost" which misleads prospects into believing that they are somehow losing money when they aren't - which seems to happen a lot with senior citizens.

The fallacy can get complicated and include attempts at valuation of the resources themselves by reference to opportunity cost. One actual example that comes to mind of this is imputation of values for tax purposes. If you sell something for less than the market price then some tax authorities will assess tax as though you had sold at the full market price even though your actual revenue was less than that. Tax-related transfer pricing rules for businesses operating in multiple jurisdictions are similarly based. The business has the opportunity to sell goods at a given market price, so that's their deemed value and that's what tax is based on irrespective of the actual price realised.

JJM

I was thinking it could also destroy the concept of a hierarchy of values if both choices A and B are deemed equally desirable or of equal value...the situation is treated as a sacrifice resulting in a "zero-sum" solution. I've often noticed that instead of establishing a goal, reverse engineering the desired rate of return to achieve that goal, and then trying to find the most efficient method of achieving the desired rate of return, investors are told simply to either 1) seek the highest return possible by seeking out the highest risk or 2) invest passively in a stock index. Both sides offer their version of "opportunity" cost of course.

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  • 2 months later...

Let me try to answer this question...

we know that language is a glimsp of reality of the world and humans beings. It does not tell us everything really.

economics comes from our observation of our work, money and output level. Through this realities, we come up with economics term.

First there is hypothesis, then there is experiment and formulation of laws. Therefore economics can be seen as science discipline.

It is just that. Economics is just another field of knowledge.

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Let me try to answer this question...

we know that language is a glimsp of reality of the world and humans beings. It does not tell us everything really.

economics comes from our observation of our work, money and output level. Through this realities, we come up with economics term.

First there is hypothesis, then there is experiment and formulation of laws. Therefore economics can be seen as science discipline.

It is just that. Economics is just another field of knowledge.

So, in essence:

"

Language is just labels that humans hang on things. We as humans can only hope to understand only part of reality anyway.

Economics come from what little part of reality we humans can get. Through this tiny amount, we hopelessly try to come up with more labels.

First, we come up with an idea, without any relation to reality ( "First there is a hypothesis" ), then we check to see if it happens to match reality,

and formulate as much as we can to best fit the idea to reality. Therefore, the 'science' is born.

"

?

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