Hi Jurrian (and others),
The original meaning of “opportunity cost” was the opportunity cost *of capital*. It has since been broadened to all kinds of decisions (labor vs. leisure, whether to go to college, etc.), but the opportunity cost of capital is the most important. The opportunity cost of capital is a *cover-up* for the fact that neoclassical economics has no theory of profit. In the neoclassical theory of the firm, a firm decides the quantity of output to produce, on the basis of a *given price *and *given costs *of the inputs. The cost of labor is the actual wage and the cost of capital is – guess what? – the “opportunity cost of capital”, which is not an actual cost of the firm, but is instead the average rate of profit that the owners of capital could earn in alternative investments; i.e. it is the average rate of profit in the economy as a whole. This “opportunity cost” is classified as an “implicit cost” of the firm, as opposed to the “explicit costs” of wages, raw materials, machinery, etc. And my main point is that this prevailing average rate of profit (aka “opportunity cost”) is *taken as given* (like all other costs in this theory) and not explained by this theory. Similarly, in the marginal productivity theory of capital and interest, the “price of capital” consists of two components: the actual depreciation costs of the capital goods *plus* the “*opportunity cost*” of the owners of the capital goods (usually assumed to be capital goods rental firms). Again the “opportunity cost” is the average rate of profit that the owners of capital could earn on alternative investments. And again this crucial variable – the prevailing average rate of profit in the economy – is *taken as given* and not explained by marginal productivity theory. Marginal productivity theory is supposed to explain the “return to capital”, but instead it takes the return to capital as given, and covers up this fatal flaw by calling the given average rate of profit an “opportunity cost”. Jurrian, I don’t think there is a “rational kernel” to the “opportunity cost of capital”. I think this concept is rather an irrational ideological concept that hides this crucial emptiness of neoclassical economics (no theory of profit), that we should expose every chance we get. Fred On Sun, Mar 10, 2013 at 5:35 PM, Jurriaan Bendien <[email protected] > wrote: > The concept of opportunity cost, to be operable, certainly depends > crucially on the ability to compare opportunities along some kind of scale > or measure. It assumes that the various costs and benefits are knowable > variables. If it is simply not possible to specify alternative options and > their consequences in a comparable way, we don’t get very far with > evaluating opportunity costs. At that point we only have a speculative > hypothesis that there are opportunity costs of some sort. > > I proceed with the assumption that there is a “rational kernel” of truth > in the concept of opportunity cost, but, as often happens in social > sciences and humanities, a concept can be extended far beyond its > appropriate limits of application, so that its real function becomes more > justificatory and apologetic, than scientific (it hides as much as it > reveals). > > A concept should, I think, ideally speaking, not be asked to do more work > than it was really designed to do, or than its intended purpose really was. > Of course there are also cases of fruitful interdisciplinary transfers of > concepts, but they seem to be fairly rare. > > I wasn’t aware of Michael’s discussion of opportunity costs in the > Invisible Handcuffs book, so thank you Michael. It is on my reading list, > as well as the Railroad Economics book. > > Jurriaan > > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l > >
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