Opportunity cost issues – Econlib

My friend Yusuf and I recently started a substack called Longterm Liberalism, which aims to combine insights into classical liberalism and functional altruism. Yusuf has two posts that introduce the blog. One covers the motivation to start a blog, the other discusses our policies He also recently published a post that discusses how effective altruists evaluate what issues need to be addressed.

In this post, I want to discuss a big reason why I think EconLog readers should appreciate both functional altruism and classical liberalism. Realization of the reality and importance of both philosophies Opportunity costs.

We live in a world where time and resources are scarce. As a result, whenever you make a choice, you inevitably give up. The time you are spending reading this blog post is not the time you are spending on anything else. The money I spent on coffee today is now money that I can’t use to buy concert tickets. The coffee shop staff spent time making me coffee and they couldn’t use that time for other work. Every day, we make choices, and each of those choices has a cost. Choose wisely.

Classical liberalism is a philosophy of freedom. Liberals support the assumption of independence and support a wide range of opportunities for individuals to make choices about their lives as well as to make voluntary agreements and exchanges with others.

What does this opportunity have to do with cost? First, we must understand that opportunity is costly Subjective. James M. Buchanan emphasizes this thematic nature of spending in his excellent book Cost and choice. Since costs are thematic, an external observer cannot directly understand how much another person values ​​one option or another. So people probably understand better what they are giving up when making a choice for themselves than an external authority when imposing a choice on another.

But the question remains: when it comes to a rare resource, Who can decide How will it be used? Liberals usually use this to solve the question Property rights. Property rights are an institution, a rule. When individuals have the right to exchangeable property, they can choose to keep or trade the assets they have the right to. If they value their own use of these resources more than others offer them, then they can keep these resources for themselves. On the other hand, if someone offers them something that they value more than the next best use of their resources, they will probably make an exchange. Thus, mutually beneficial exchanges occur and products and services flow into more highly valued uses.

Exchanges give rise to exchange ratios, which we call Price Prices reveal knowledge about the relative deficit of different resources. When prices rise, due to a decrease in supply or an increase in demand, there is an incentive for more people to enter the market as sellers. And there is an incentive for potential buyers to economize the use of high-value resources, because they have to give up more to achieve it.

Vendors invest in production plans. The scarce resources invested in these production plans are necessarily removed from alternative use. Because capital is multifaceted, each capital can be better used for some alternative projects. Furthermore, since capital is heterogeneous, if a production plan fails, it cannot be immediately redistributed for any other use. Therefore, whenever an entrepreneur starts a production plan, they take the risk of wasting resources. They don’t necessarily know what consumers will value in the future and their expectations about the future may be wrong. However, if they sell their products in a relatively free market, the profit and loss response will tell them whether consumers value their product more than the opportunity cost of inputs. If they win, it is a signal to continue what they are doing. If they are at a loss, it suggests that their plans should be revised, as their products or services may not be worth the price.

Liberalism provides an institutional environment by which to characterize Private property rightsWhich enables its emergence Price Which acts as a guide and Profit loss Which provides feedback. Together, Of three P’s Property, price, and profit and loss Enables individuals to adjust their plans and consider the cost of opportunities to use their scarce resources.

Note, however, that most of the people involved want to satisfy their own thematic preferences. What happens when people want to act Kindly, To help improve the lives of others by their own light? Functional altruism is a movement that applies the logic of spending opportunity in the case of personal altruistic action. As Yusuf explained:

“What makes these (functional candidates) unique is that they take the lack of resources very seriously. They acknowledge that our ability to improve the world, whether through political processes, advocacy or charity, is limited by limited time, money and energy. “

There is a lack of strong response to political advocacy, charities, and similar non-market activities that markets provide. Philanthropists cannot look into the minds of others and understand what their thematic choices are. An effective altruistic approach will not provide a real alternative to property, price, or profit-loss responses. However, thinking carefully about the cost of opportunities and the relative effectiveness of different ways to change the world can help us use our resources and time more effectively.

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