The Royal Swedish Academy of Sciences added three more economists this week to the ranks of academic stars who have won the most prestigious award in economics, the Nobel Prize. There’s no doubt that David Card, Joshua Angrist and Guido Imbens deserve to be recognized for their work on improving the statistical analysis that now dominates modern microeconomics. That said, not all Nobel Prizes are created equal, and not all Nobel laureates’ ideas are of equal value. So we should celebrate the contributions of the 2021 winners but keep in mind that awarding the prize carries some danger as well.
Anyone who has read a Paul Krugman column or caught a few minutes of a Joseph Stiglitz lecture knows that many renowned academics have a tendency to wax poetic about topics that go beyond their area of expertise. Just because someone has won a Nobel Prize for research into the economics of information or international trade doesn’t mean we should listen to their opinions about inequality or President Biden’s latest spending plan.
Moreover, just because Nobel laureates do outstanding work in one area of economics doesn’t mean that their other work in economics is just as impressive. Sometimes the ideas of Nobel laureates enjoy a high status by association. That is, some less-outstanding ideas get more respect just because they come from a Nobel laureate.
This doesn’t happen only with progressive scholars such as Krugman or Stiglitz. Consider the late right-leaning laureate James M. Buchanan. He, like Krugman and Stiglitz, was brilliant. Along with fellow George Mason University professor Gordon Tullock, Buchanan invented the field of public choice economics, which applies an economic lens to political science topics. He won the Nobel in 1986 for his contributions in this area and brought welcome attention to the then little-known university in Northern Virginia.
Is Cost a Subjective Concept?
That said, not all of Buchanan’s ideas were as powerful as those that emerged from the public choice revolution. One example comes from his 1969 book, “Cost and Choice.” In that work he argued that cost is a subjective concept, that it exists only in the mind of a person making a choice, and as soon as a choice is made, cost (in terms of the forgone alternative options) vanishes.
It’s an interesting idea, albeit one that comes across in the book as underdeveloped. I’ve read and reread the book a handful of times, and Buchanan’s views on cost continue to be perplexing. There’s something to what he’s saying, sure, but there are also ways in which cost as he frames it seems fundamentally wrong, or he just conflates the act of choosing with cost itself.
Consider, for example, a hypothetical policy that lowers the annual GDP growth rate of the U.S. from 3% a year to 2%. It’s easy to see why the cost of this policy is not over-and-done-with the instant the decision to proceed is made. It doesn’t exist only for the policymaker. Rather, millions of people are affected.
Unlike cost in his theory, Buchanan’s ideas have had a real-world impact. His “subjective” approach has been highly influential among a subset of economists, especially in libertarian circles, where Buchanan has many followers. The libertarian economist Murray Rothbard is one example. He was even more explicit than Buchanan that cost is only a temporary, forward-looking and ephemeral concept, existing as purely a psychic phenomenon in the mind of the chooser.
Misunderstanding Opportunity Cost
Buchanan’s views, to be fair, may have been more nuanced than Rothbard’s. Buchanan talked of “choice-influencing” and “choice-influenced” cost. He distinguished between notions of cost before and after the choice is made, and between accounting and more classical versions of economic cost (which often saw cost in terms of alternative applications of labor). Nevertheless, even if he carefully worded his arguments to avoid the strong assertions made by Rothbard, his practical influence has clearly been to steer economists in the Rothbardian direction.
This has done a lot of damage because it has led many professional economists to downplay (and to some extent misunderstand) opportunity cost, which is about comparing how resources are used with and without some course of action taken. On Twitter, many free-market economists rightfully mocked President Biden’s recent claim that his multitrillion-dollar spending bill wouldn’t cost anything. Yet, those who see cost as a fleeting, psychological phenomenon also underappreciate what society gives up if this spending bill is passed into law.
There is one sense in which the subjectivists are right, which is that the value of resources—as expressed by their market price—is ultimately a reflection of the subjective evaluations of individuals. But even this notion of value isn’t entirely subjective. The “general equilibrium price” for a resource in the economy—meaning the market-clearing price in a perfectly functioning economy where markets are complete and all clear simultaneously—is, too, an objective fact about the world. One can discover this equilibrium price, at least in theory, even if it is difficult to do so in practice.
Plato and Ayn Rand
In this sense, not only is cost an objective quantity represented by what is given up when a policy or other action is undertaken. The value of those forgone benefits is also objective because there is some amount that represents their value to society.
Free-market economists would be wise to look to another libertarian to gain a better understanding of cost: Ayn Rand. Having defined herself as an objectivist, perhaps she would have recognized the objective character of cost. The philosopher Plato also can be a source of inspiration here. He imagined an objective, pure form of reality, distinct from our perceptions. Neither Rand nor Plato won a Nobel Prize in economics, of course; they weren’t even economists. This explains their unfortunate lack of influence in the theory of economic cost.
It’s a troubling sign of our times that economists don’t take much inspiration from other thinkers. Another Nobel laureate, F.A. Hayek, once argued that “nobody can be a great economist who is only an economist.” By this he meant good economists read and are informed by ideas outside of their narrow subject areas, without falling prey to the temptation to lecture about topics they have no expertise in. Presumably these sources of inspiration should include the classics and modern dystopian fiction. What if economists heeded Hayek’s advice? Now that seems like an idea worthy of a Nobel Prize.