Opportunity Cost

Lewis H. Haney
1912 The American Economic Review  
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more » ... out Early Journal Content at http://about.jstor.org/participate--jstor/individuals/early-journal--content. JSTOR is a digital library of academic journals, books, and primary source objects. JSTOR helps people discover, use, and build upon a wide range of content through a powerful research and teaching platform, and preserves this content for future generations. JSTOR is part of ITHAKA, a not--for--profit organization that also includes Ithaka S+R and Portico. For more information about JSTOR, please contact support@jstor.org. OPPORTUNITY COST One of the most fruitful sources of confusion in recent economic thought lies in the difference between the social and the individual point of view. No economist, the writer believes, has ever carried out a consistent analysis from either point of view; and the result has been a notable lack of clarity. The writer suspects that some thinkers have even shifted unconsciously from one to the other way of looking at things, a procedure which, of course, is fatal to precision of analysis. The difference in scope and function of economic factors as viewed from the often divergent interests of mere individual and social individual permeates all the elementary concepts of the science. The concept of cost, however, is one of the latest to have become involved in the confusion, and it is toward that one element that this article is directed. The two points of view, social and individual, as involved iI cost, may be confused in at least two ways. (1) They may both be adopted without logical discrimination and used in a treatment which on the whole is either "societistic" or individualistic. This is the more common fault. It appears, for example, in a widely' used text, through the inclusion in a list of costs of some which are valid only from the one viewpoint and others which are valid only from the other viewpoint.' (2) But a no less serious shortcoming is apparent when the one is adopted, not with due recognition of the existence of the other, but as superseding that other. That, too, is confusion in its way. In the past, certain German "Nationalists" and the Frenchman, Sismondi, in belittling analysis which had proceeded from the individualistic viewpoint illustrated, perhaps, such a confusion. Today, those who would supersede the social viewpoint show this tendency. Professor H. J. Danvenport is undoubtedly the most consistent and vigorous representative of the last mentioned tendency, and his brilliant thought in this field has already exerted some influence. The confusion of the first type is witness to this fact. It is the writer's purpose in what follows to show that the social viewpoint cannot logically be superseded and that a purely individualistic concept of cost is fatal to fundamental economic analysis. For the most part the discussion will run upon the ' Ely et al, Outlines, pp. 125-126; also Taylor, F. M., Principles of Economice, pp. 44-51. Lewis H. Haney [September economists appear to recognize such a cost in that they say that a minimum profit is set by what entrepreneurs could get as wage- earners. This statement is not without foundation, and the writer would here call attention to the fact that unless carefully guarded, the discussion of minimumn profits so common in our texts4 is open to the same criticism as is the "opportunity-cost" notion in general. The trouble sometimes lies in a confusion of wages with profits. If the two are the same sort of return, then they shade into one another and have a common margin of determination. As profits, in this way of regarding them, decline, the entrepreneur at a certain point ceases to get anything but wages. Obviously, however, if profit is to be an independently determined share, this reasoning will not suffice. If we are to retain entrepreneur responsibility as a separate factor, it must have its separate absolute margin of determination, just as labor and capital-formation do, and as long as there is a return in the shape of profits, which covers the costs of independent responsibility for a business unit" so long may the entrepreneur stick to his post without price-determining loss. He will be a marginal entrepreneur in that his peculiar costs as entrepreneur are just covered by his peculiar income. Now both entrepreneur and capitalists may be able to labor and, make good wages. If so, they have alternatives as wage-earners. But there we must apply the analysis of the third paragraph preceding. If the surplus of price-determined income over absolute costs as entrepreneur is less than the surplus of wages income over labor cost, then the entrepreneur may give up his business responsibility. But no price-determining significance attaches to the wage advantage. It is price-determined and merely an index of the forces of demand and supply in the labor market, just as is the relation of profits to entrepreneur's cost in the entrepreneur ability market. Certainly the situation here is complicated by the fact that we are dealing with factors of production the demand for which is reflected back from products they unite to make-a kind of "composite demand." The "opportunity-cost" idea is essentially the same as that of alternative land uses, and the relation of both to price is identical. In a paper on "Rent and