The concept of opportunity cost

[nirgrahamUK]

he explicitly says that he is going to use a narrow and concocted definition of profit, names it ‘money profit’, and then says he’ll refer to it just as profit to save space on the page. so he;s not really talking about ‘profit’ in the widest sense, but in the particular/peculiar sense that he defines

I seem to remember a post exactly about his definition of profit where we already talked about this

[freiheit]

@nirgrahamUK

he explicitly says that he is going to use a narrow and concocted definition of profit, names it ‘money profit’, and then says he’ll refer to it just as profit to save space on the page. so he;s not really talking about ‘profit’ in the widest sense, but in the particular/peculiar sense that he defines

I seem to remember a post exactly about his definition of profit where we already talked about this

Ah, I see. I think the fact that he switched over from “money profit” to calling it plain old “profit” got me confused in retrospect. Yeah, this thread on opportunity cost was an outgrowth of the thread on the conception of profit. I just started this new thread because I didn’t want to derail the other thread on to a totally different topic.

[Prashanth_Perumal]

There is no point in calculating something that is not there.

Praxeology is just about how human beings actually act in order to remove their uneasiness. The fact that people don’t invest in the most profitable venture (and thereby maximize profits) does not contradict his rational existence. That’s since he still maximizes his personal utility preference by choosing an investment offering lower profits (perhaps because it’s less risky–thereby providing him extra utility in the form of safety)

[Austroglide]

@Prashanth Perumal

There is no point in calculating something that is not there.

Praxeology is just about how human beings actually act in order to remove their uneasiness. The fact that people don’t invest in the most profitable venture (and thereby maximize profits) does not contradict his rational existence. That’s since he still maximizes his personal utility preference by choosing an investment offering lower profits (perhaps because it’s less risky–thereby providing him extra utility in the form of safety)

Very nice.

Also, is it not true that Austrians conceive of “value”, and therefore cost and opportunity cost, in ordinal terms rather than cardinal? I’m thinking of Murray Rothbard’s example in Chapter 1 of Man, Economy, and State where the actor chooses to continue watching a baseball game in lieu of going for a drive. In this case, he values watching the game more than going for a drive, and for him the opportunity cost of watching the game is the foregone going for a drive.

EDIT: At root, the value the actor from Rothbard’s example attributes to ‘going for a drive’ is less than the value of ‘continuing to watch baseball’. I would interpret such an example - based as it is on subjective valuation of different opportunities - to mean that it is appropriate to concieve of entrepreneurial calculations of opportunity costs similarly. Specifically, that it is correct to conceive of entrepreneurial calculation in terms of the subjective - and the necessarily limited - knowledge of the actor in question, at the moment of decision. Otherwise, an analysis of opportunity cost would have to assume perfect knowledge of alternatives, no? I imagine this would by necessity move one away from the methodologically central realm of individual subjectivity.

Indeed - and I’m about to butcher an interpretation of Hayek - doesn’t Hayek conceive the great the value of free markets to be the coordinating of local, specific knowledge (i.e. imperfect and limited knowledge) through the price mechanism? The central thesis is the very impossibility of perfect knowledge.