Excellent! This latest essay addresses important questions head on in clear language. Your essay deserves nothing less than careful parsing and rejoinder, but the limitations of a comment text box are too confining. I will pick up the gauntlet in my next essay in Economics and Freedom. 😊
If value is psychic satisfaction that occurs in an individual mind, which it seems your agree is the case, and if cost if value forgone, then it follows that cost is psychic satisfaction forgone.
In the end, it seems to me that the proposition that cost is objective depends on the proposition that $1 is somehow a standard, immutable measure of value, pretty much in accord with the completely debunked notion that somehow an hour of labor was supposed to be a standard, immutable measure of value.
Some of the issue is just terminology. I say cost is foregone utility translated into dollars. It's fine if you want to label forgone utility itself "cost", but then what would you call what I am talking about?
The reason we should care about what I call cost is scientific. Every day in the market people translate what they give up in terms of utility into monetary prices for purposes of trade.
I had not focused enough on this comment from you. My bad. Oh, by the way, I read your WSJ article today, April, 17; I loved it. Congrats on getting your piece into the WSJ. That's no mean feat. In my experience, it's difficult to justify most regulations.
Back to your comment. Let's suppose we agree to define "utility" to be psychic satisfaction that occurs in individual minds. Suppose we agree to define "cost" as utility forgone, which is consonant with defining "benefit" as utility received.
Defining cost as utility forgone is also consonant with the economic insight we call "opportunity cost." I used to have a professor at NCSU who quipped, "if it ain't an opportunity cost, it ain't no cost at all." I always liked that observation, because it is consistent with the subjective theory of value, which I believe most economists accept these days, right?
Back to your comment. What would we call "forgone utility translated into dollars"? As much as I dislike two-word terms, we could call it "market cost." If we did, that would seem highly descriptive, and it would focus our attention on the fact that we now have to be completely concrete about the translation, how it happens, and what it means.
By the way, one of the reasons I use the word "value" instead of the word "utility," which I take to be an exact synonym, is because the word "utility" sort of implies "usefulness" in my mind, but the word "value" does not. The word "value," at least for me implies only psychic satisfaction or approval or "good."
Continuing on, "market cost" requires a price times a quantity. If the price happens to be a true market price generated by a price-takers market (the outcome of a so-called "perfectly competitive market"), then "market price" becomes is the "market cost" of one unit of whatever good we have in mind. But what if the price happens to be the a price generated by an exchange between just two people? We need another term; perhaps we define it to be a "transaction price," which can give rise to a "transaction cost." Clearly, we have a different animal with a transaction price compared to the case of a "market price"
For me at least, I agree with you that part of the issue is terminology. But I would not say "just" terminology, because semantics is not "mere" semantics; semantics is what we mean by words. In my opinion, economists have not been consistent with what they mean by words, and have pretty much mangled the concept of cost, which has led to unfathomable confusion and ambiguity, which in turn has lead to misuse and intended abuse of CBA.
This reply has got too long, and I'm going to send it now before I touch the wrong key an it is gone forever. I do intend to write up something in response to your article that generated this reply, because I think your ideas are provocative and important.
Thanks for reading the WSJ piece. In your example, I do think there’s a clear correspondence between the market example and the two-person example. I agree that the “market cost,” as you call it, would be the perfect market price multiplied by the quantity of the resource foregone. Of course, most real-world markets aren’t perfect, so the observed market price typically deviates from the theoretical perfect market price.
The same logic applies in the two-person example. There’s some price that would facilitate a trade maximizing total surplus across the individuals. That ideal price—what I would refer to as the “shadow price”—times the quantity gives you the objective "market cost" of the resource. Even though the actual bargain struck between these people in the real world may occur at a different price, the market cost remains the same because the underlying shadow price hasn’t changed.
It seems that mostly economists use the word "price," as if it is the easily observable outcome of a so-called "perfect competition" market, which as you say, characterizes few lived world markets. As a matter of empirical fact, there really is no "price of autos," "price of bread," and so on.
Yes, we sometimes have observable prices, but mostly those prices are nothing like the notion of a market price that economists speak of. Mostly prices are episodic, transitory, changing, and peculiar to specific transactions between specific parties to the transaction, aside from commodities like field crops.
I recall having to do lived world CBA studies and reports for EPA while working with RTI International. We needed prices; we had none, so we calculated estimates based on averages of limited numbers of transactions, transactions of which we had only second-hand or third-hand information coming from companies in industries. In what sense were these prices even remotely like prices economists have in mind? These prices were even more remote from the theoretical notion of "shadow prices," so aptly named because they truly are in the shadows, completely unobservable.
How can we think of shadow prices as "objective" since they are unobservable? Yes, surely for any exchange transaction, there is some conceptual price that maximizes total surplus for the transactors. But all we see is the actual transaction price. How is it sensible to use the observed transaction price as if it were the surplus maximizing price?
Your first sentence declares that a translation of utility to dollars is possible, does it not? Would such possibility not declare at the same time that a dollar can be taken as a standard measure of utility?
My claim is that many economists are not careful with their definition of the concept of "cost," but James Buchanan was. My further claim is that variability among economists about the idea of cost is the source of considerable confusion, ambiguity, and just outright nonsense.
We should definitely care about what we call cost. It seems to me that what you tend to call cost is "price." Price does not mean cost in my lexicon of economics.
Every day in their voluntary exchanges we get information about how many dollars people are willing and able to give up to transact. We do not get information about the utility that people forgo when they make a purchase, do we? Therein lies the problem.
If we say that benefit is utility received, which is indeed what I say, then we must say that cost is utility forgone, do we not. The concepts are symmetrical, are they not? Is it not the case that your conception of consumer surplus and producer surplus belie the possibility that prices can measure utility?
I think you are confirming one of my core concerns about Buchanan, which is that if you accept his definition of cost, you become a kind of nihilist who sees no value in either government or market allocation of resources.
Beyond that, I've been quite clear that cost and utility are different. Cost is a translation of utility into dollars, but I never said that translation was perfect.
I thought I would also add this since it might help address some of your concerns. It is my view that, beyond the empirical result that markets tend to deliver many good outcomes, a reason to like "efficiency" as a welfare measure is that social welfare and efficiency tend to converge over the long run. I forget if it was Kaldor or Hicks who also pointed this out, but I think that assessment was correct. I might write a blog post about why I think this is the case. Note I use the term "long run" here as "in the limit" as opposed to "when prices adjust," which is sometimes the convention of economists.
I definitely think voluntary exchange is the only way to achieve anything like economic efficiency.
Government allocation of resources is definitely out for me. Can you think of even one reason why government operatives would achieve anything like economic efficiency? I cannot.
You offer as a definition that "cost is a translation of utility into dollars.” Okay. So now tell me about the “translation,” because without it, your definition is not at all understandable. So far as I can see, your meaning of cost is nothing more than accounting cost, which we both know is based entirely on the mistaken idea that a dollar is a standard measure of value.
I see very little value in government operatives allocating scarce resources. That's true. I do so because of the overwhelming evidence that just as public choice theory predicts, government operatives are really amazingly inept at allocating scarce resources. Mine is not mere speculation; mine view is based on 50 years of both watching and participating in the actions of government operatives. For 10 year I worked with RTI International for DC agencies. I have first-hand data to buttress the observations so ably made by Milton Friedman and many others about choices of government operatives.
No, you have not said that the translation from utility to dollars was perfect. You have said it is possible, and the the translated values can be added, subtracted, and all the rest, which is in mind not just difficult but ruled out by the subjective theory of value, which we all accept as enlightening, if not out right correct.
If you have worked with as many government operatives as I have, I wonder if you would retain confidence in their supposed magical abilities to discern the greatest good and set aside their own human frailties.
James Madison wrote in Federalist 51, “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” Government operatives also are not angels.
I imagine my statement sounds political, but it is not. I am a classical liberal, not a partisan. I consider myself a scientist. So far as I can tell, both theory and empirical data belie the possibility of quantitative CBA. There is no science of measuring utility, because value is utterly subjective. When it comes to measuring cost and benefit, many economists seem to become accountants, even though they profess to accept the theory of subjective value. Quantitative CBA analysis proceeds as if demand and supply curves were real and could be measure, at least approximately; they are not and cannot. Yet, the concepts of supply and demand curves is amazingly useful for understanding the lived world, so long as we do not as of the market model that which it is incapable of delivering.
Excellent! This latest essay addresses important questions head on in clear language. Your essay deserves nothing less than careful parsing and rejoinder, but the limitations of a comment text box are too confining. I will pick up the gauntlet in my next essay in Economics and Freedom. 😊
I appreciate it, and look forward to a response! These topics can be confusing and hard to explain, so I'm happy to hear it made sense.
If value is psychic satisfaction that occurs in an individual mind, which it seems your agree is the case, and if cost if value forgone, then it follows that cost is psychic satisfaction forgone.
In the end, it seems to me that the proposition that cost is objective depends on the proposition that $1 is somehow a standard, immutable measure of value, pretty much in accord with the completely debunked notion that somehow an hour of labor was supposed to be a standard, immutable measure of value.
What am I missing?
Some of the issue is just terminology. I say cost is foregone utility translated into dollars. It's fine if you want to label forgone utility itself "cost", but then what would you call what I am talking about?
The reason we should care about what I call cost is scientific. Every day in the market people translate what they give up in terms of utility into monetary prices for purposes of trade.
I had not focused enough on this comment from you. My bad. Oh, by the way, I read your WSJ article today, April, 17; I loved it. Congrats on getting your piece into the WSJ. That's no mean feat. In my experience, it's difficult to justify most regulations.
Back to your comment. Let's suppose we agree to define "utility" to be psychic satisfaction that occurs in individual minds. Suppose we agree to define "cost" as utility forgone, which is consonant with defining "benefit" as utility received.
Defining cost as utility forgone is also consonant with the economic insight we call "opportunity cost." I used to have a professor at NCSU who quipped, "if it ain't an opportunity cost, it ain't no cost at all." I always liked that observation, because it is consistent with the subjective theory of value, which I believe most economists accept these days, right?
Back to your comment. What would we call "forgone utility translated into dollars"? As much as I dislike two-word terms, we could call it "market cost." If we did, that would seem highly descriptive, and it would focus our attention on the fact that we now have to be completely concrete about the translation, how it happens, and what it means.
By the way, one of the reasons I use the word "value" instead of the word "utility," which I take to be an exact synonym, is because the word "utility" sort of implies "usefulness" in my mind, but the word "value" does not. The word "value," at least for me implies only psychic satisfaction or approval or "good."
Continuing on, "market cost" requires a price times a quantity. If the price happens to be a true market price generated by a price-takers market (the outcome of a so-called "perfectly competitive market"), then "market price" becomes is the "market cost" of one unit of whatever good we have in mind. But what if the price happens to be the a price generated by an exchange between just two people? We need another term; perhaps we define it to be a "transaction price," which can give rise to a "transaction cost." Clearly, we have a different animal with a transaction price compared to the case of a "market price"
For me at least, I agree with you that part of the issue is terminology. But I would not say "just" terminology, because semantics is not "mere" semantics; semantics is what we mean by words. In my opinion, economists have not been consistent with what they mean by words, and have pretty much mangled the concept of cost, which has led to unfathomable confusion and ambiguity, which in turn has lead to misuse and intended abuse of CBA.
This reply has got too long, and I'm going to send it now before I touch the wrong key an it is gone forever. I do intend to write up something in response to your article that generated this reply, because I think your ideas are provocative and important.
Thanks for reading the WSJ piece. In your example, I do think there’s a clear correspondence between the market example and the two-person example. I agree that the “market cost,” as you call it, would be the perfect market price multiplied by the quantity of the resource foregone. Of course, most real-world markets aren’t perfect, so the observed market price typically deviates from the theoretical perfect market price.
The same logic applies in the two-person example. There’s some price that would facilitate a trade maximizing total surplus across the individuals. That ideal price—what I would refer to as the “shadow price”—times the quantity gives you the objective "market cost" of the resource. Even though the actual bargain struck between these people in the real world may occur at a different price, the market cost remains the same because the underlying shadow price hasn’t changed.
It seems that mostly economists use the word "price," as if it is the easily observable outcome of a so-called "perfect competition" market, which as you say, characterizes few lived world markets. As a matter of empirical fact, there really is no "price of autos," "price of bread," and so on.
Yes, we sometimes have observable prices, but mostly those prices are nothing like the notion of a market price that economists speak of. Mostly prices are episodic, transitory, changing, and peculiar to specific transactions between specific parties to the transaction, aside from commodities like field crops.
I recall having to do lived world CBA studies and reports for EPA while working with RTI International. We needed prices; we had none, so we calculated estimates based on averages of limited numbers of transactions, transactions of which we had only second-hand or third-hand information coming from companies in industries. In what sense were these prices even remotely like prices economists have in mind? These prices were even more remote from the theoretical notion of "shadow prices," so aptly named because they truly are in the shadows, completely unobservable.
How can we think of shadow prices as "objective" since they are unobservable? Yes, surely for any exchange transaction, there is some conceptual price that maximizes total surplus for the transactors. But all we see is the actual transaction price. How is it sensible to use the observed transaction price as if it were the surplus maximizing price?
Your first sentence declares that a translation of utility to dollars is possible, does it not? Would such possibility not declare at the same time that a dollar can be taken as a standard measure of utility?
My claim is that many economists are not careful with their definition of the concept of "cost," but James Buchanan was. My further claim is that variability among economists about the idea of cost is the source of considerable confusion, ambiguity, and just outright nonsense.
We should definitely care about what we call cost. It seems to me that what you tend to call cost is "price." Price does not mean cost in my lexicon of economics.
Every day in their voluntary exchanges we get information about how many dollars people are willing and able to give up to transact. We do not get information about the utility that people forgo when they make a purchase, do we? Therein lies the problem.
If we say that benefit is utility received, which is indeed what I say, then we must say that cost is utility forgone, do we not. The concepts are symmetrical, are they not? Is it not the case that your conception of consumer surplus and producer surplus belie the possibility that prices can measure utility?
I think you are confirming one of my core concerns about Buchanan, which is that if you accept his definition of cost, you become a kind of nihilist who sees no value in either government or market allocation of resources.
Beyond that, I've been quite clear that cost and utility are different. Cost is a translation of utility into dollars, but I never said that translation was perfect.
I thought I would also add this since it might help address some of your concerns. It is my view that, beyond the empirical result that markets tend to deliver many good outcomes, a reason to like "efficiency" as a welfare measure is that social welfare and efficiency tend to converge over the long run. I forget if it was Kaldor or Hicks who also pointed this out, but I think that assessment was correct. I might write a blog post about why I think this is the case. Note I use the term "long run" here as "in the limit" as opposed to "when prices adjust," which is sometimes the convention of economists.
Why is it that you don't answer the questions I pose?
I definitely think voluntary exchange is the only way to achieve anything like economic efficiency.
Government allocation of resources is definitely out for me. Can you think of even one reason why government operatives would achieve anything like economic efficiency? I cannot.
You offer as a definition that "cost is a translation of utility into dollars.” Okay. So now tell me about the “translation,” because without it, your definition is not at all understandable. So far as I can see, your meaning of cost is nothing more than accounting cost, which we both know is based entirely on the mistaken idea that a dollar is a standard measure of value.
I see very little value in government operatives allocating scarce resources. That's true. I do so because of the overwhelming evidence that just as public choice theory predicts, government operatives are really amazingly inept at allocating scarce resources. Mine is not mere speculation; mine view is based on 50 years of both watching and participating in the actions of government operatives. For 10 year I worked with RTI International for DC agencies. I have first-hand data to buttress the observations so ably made by Milton Friedman and many others about choices of government operatives.
No, you have not said that the translation from utility to dollars was perfect. You have said it is possible, and the the translated values can be added, subtracted, and all the rest, which is in mind not just difficult but ruled out by the subjective theory of value, which we all accept as enlightening, if not out right correct.
If you have worked with as many government operatives as I have, I wonder if you would retain confidence in their supposed magical abilities to discern the greatest good and set aside their own human frailties.
James Madison wrote in Federalist 51, “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.” Government operatives also are not angels.
I imagine my statement sounds political, but it is not. I am a classical liberal, not a partisan. I consider myself a scientist. So far as I can tell, both theory and empirical data belie the possibility of quantitative CBA. There is no science of measuring utility, because value is utterly subjective. When it comes to measuring cost and benefit, many economists seem to become accountants, even though they profess to accept the theory of subjective value. Quantitative CBA analysis proceeds as if demand and supply curves were real and could be measure, at least approximately; they are not and cannot. Yet, the concepts of supply and demand curves is amazingly useful for understanding the lived world, so long as we do not as of the market model that which it is incapable of delivering.