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Cost and Choice: An Inquiry in Economic Theory; Buchanan, James M.
5 paragraphs found.
Ch. 1, Cost in Economic Theory

The value or price of resource units represents, especially for the Austrians (Menger, Böhm-Bawerk, Wieser), the value of product that might be produced by the same resource units in alternative uses or employments. This is the price that the user or employer of resources must advance in order to attract the resources away from such alternative opportunities. At the level of decision for the resource owner, the implicit opportunity-cost notion is identical to that which is present in Smith's deer-beaver model. To the Austrians, and notably to Wieser, rational behavior on the part of resource owners ensured the equalization of return in all employments.


In this 1928 statement of what he considered to be the "correct" definition, Knight was following what he later acknowledged to be the standard Austrian position, especially that represented in Wieser. He also indicated in a later paper that this position was shared by Wicksteed. The cost of producing a unit of a commodity is simply measured by the alternative real product that might have been produced had the resource inputs used in production been rationally reallocated to other uses. The market value of these alternate products provides a common denominator for estimation, a value that is determined in the exchange process. Knight seems to have been correct in claiming this approach akin to that of Wieser who said: "Since each productive process diminishes this possession, it reduces utility—it costs, and it costs exactly as much as the value which the material and labor required would have produced if rationally applied." *9

F. von Wieser, "The Theory of Value," Annals of The American Academy of Political and Social Science, II (March 1892), 618. See also F. von Wieser, Über den Ursprung und die Hauptgesetze des wirtschaftlichen Werthes (Wien, 1884), p. 100.
Ch. 2, The Origins and Development of a London Tradition

In a basic paper published in 1934, *23 Lionel Robbins reacted against the emphasis by Knight and others on an alternate-product conception of opportunity cost, much as Knight himself was led to do in his 1934 and 1935 papers. In so doing, Robbins provided the basis for an opportunity-cost conception that later came to be identified with the London School of Economics. Neither Knight in his 1924 paper nor Robbins realized the importance of the distinction they were making, and Robbins considered himself to be merely clarifying certain ambiguities that had arisen in connection with the emerging Austrian orthodoxy, the source of which he attributed to Wieser. Specifically, Robbins argued that cost must be defined in terms of displaced value and not in terms of displaced real product. He demonstrated that once beyond the Smithian deer-beaver model, displaced real product has little meaning. His illustrative examples were those of final goods produced with wholly different inputs or with the same inputs but in differing and fixed coefficients. Shifts in demand generate shifts in cost under such conditions, and these cannot be interpreted in terms of displaced real-product alternatives. Costs are changed because the relative values of the inputs change, values derived from the demand for final products.


A distinction must be made between the orthodox neoclassical economics which incorporates the subjective-value or marginal-utility revolution in value theory and the subjectivist economics of the latter-day Austrians, notably Mises and Hayek. The dependence of price (value) on marginal utility, subjectively determined, can be fully recognized, while essentially an objective theory of cost is retained. In Jevons' famous statement, marginal utility depends on supply which, in its turn, depends on cost of production. As stated, this theory is wholly objectivist in character, although, of course, the valuation of buyers and sellers is incorporated as a part of the objective data. Costs are objectively determinable, although the theory does not say that costs alone determine value. As contrasted with classical theory, one-way causality is missing, but not the objectivity of the explanation. It is this latter objectivity that is jettisoned, wholly and completely, by both Mises and Hayek. In this respect, they differ sharply with earlier Austrians, although they do not seem fully to sense the distinction. In many respects, they seem much closer to Wicksteed than to Wieser.