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Cost and Choice (Collected Works of James M Buchanan) Paperback – December 1, 1999
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Buchanan describes the development of the `London tradition' at the LSE. Thirlby, Coase, Hayek, and Robbins were all involved in developing the modern opportunity cost doctrine. Buchanan also inquires into the idea of social costs and public choice. The idea of opportunity cost is, of course, at the center of the socialist calculation debate. The opportunity cost concept raises a number of issues as far as the Coase theorem and public goods theory are concerned. Who chooses over what alternatives in the public sector?
Cost and Choice is a great book to use in undergraduate microeconomics. Some grad students should read it too: especially those who majored in engineering or one of the physical sciences as undergrads. It is also a worthwhile read for the educated public.
Buchanan accomplishes a lot in this book. Not only does he give a clear presentation of subjectivist cost theory, but he also explores the historical development of this intellectual tradition. The Austrian school is correctly credited for both coining and developing this concept. The tradition then settled and thrived under the aegis of Lionel Robbins and the London School of Economics (LSE).
It is best to grapple with the notion of cost as a consequence of planning. To try to tackle the problem of cost at the resource expenditure stage is to miss the point. A decision must be made for purposes of production (or human action generally). One is confronted with a variety of choices in this respect. The appraisal of these many alternatives is a subjective phenomenon. The weight one attaches to opportunities forgone cannot be measured, examined or compared. It would be difficult even to know what alternatives the planner was aware of. Cost then must be understood as an act of choosing. The cost in the act of decision making represents the plan one wishes to pursue at the expense of other alternatives. In short, if one wishes to understand what led to "direct outlay cost", one must understand the plan which gave rise to this expenditure and the setting in which that decision was made.
Let me also recommend another book (much better in my opinion, but entirely neglected) is L.S.E. Essays on Cost, edited by James M. Buchanan and G. F. Thirlby. There are some extraordinary essays contained in this volume, especially those of Thirlby and Wiseman.
As others mention, this book explains and expands on the subjective theory of costs. Simply stated, economists of the classical sort liked to think of 'cost' and 'value' in objective terms - 'cost' referring to the measurable expenditure. Thus, the opportunity cost for buying a candy bar is simply all of the other financial options the buyer forgoes in spending that money here, rather than another place.
Buchanan's book first recaps the history of thinking about cost and the gradual emergence of a subjective theory of cost. Under the subjective theory that Buchanan endorses, cost means basically any opportunity that buyer anticipates giving up for sake of the choice being made. In other words, instead of the cost of a candy bar being limited to anything else the buyer could have bought for the price, it can also include such things as the anticipated disappointment when one weighs oneself the following morning or the dissatisfaction that comes with knowing that one broke their diet. So as not to sound frivolous, the reason these are actual costs is because, in a very real way, they are things the chooser considers when making their choice. As the very word 'choice' implies that there is a weighing of pros and cons, any 'cons' that the chooser anticipates are opportunity costs.
As other reviewers mention, I am not sure how necessary the last two chapters were. They are quite hard to follow and seemed more suited to a separate essay where themes from this book are put into practical contexts.
All in all, Cost and Choice gave me a lot to think about. Buchanan is a good explainer and arguer and provides a very rich history of the evolution of "opportunity cost" as a concept. Good book for those interested in the subjective theory of cost and the microeconomic idea of opportunity cost in general.