Posted by: graemebird | June 1, 2008

Sloppy Economics Concepts: “Opportunity Cost”:A Better Saudi Arabia Part II

GMB Says: 

September 11th, 2007 at 5:33 pm

Using the same A is A thinking we deep six or pay only scant attention to confused concepts like “Human capital” or “opportunity cost”.

In doing this in a systematic way we can build a science of economics that is worthwhile.

But if you have all these confused concepts getting in the way you wind up with total gibber.”

 

This comment, correct in every way, was written on the 8/9/07 forum at Catallaxy and it launched a cavalcade of idiotic responses leading to a thread with 467 comments. No indication was given that the people there so much as UNDERSTOOD the point I was making.

We don’t judge sloppy concepts by their results. We judge them on first principles. And on first principles opportunity cost has to either be deep-sixed or limited to those situations where you really have only two choices.

Costs are costs and revenues are revenues. And if we want to bundle them up we would do so under the rubrick of “improving cashflow” or “improving margins.” The market-tested discipline of accounting does not use the concept of opportunity-cost. But the economists somehow feel they need to use it.

A lot of bogus concepts seem to be borrowed from theology and mathematics. In mathematics it is deemed to be the case that taking-away a negative quantity is the same as adding a positive. But in the real world this is not necessarily the case.

When you put cash under the mattress there is no cost involved to that. At the very least there is no opportunity cost. However you might be able to get interest from it if you took it to the bank.

What about the cost of the reducing value of the cash notes in your mattress? Well that ought be thought of as a currency debasement cost if it is to be thought of as a cost at all.

If you are to consider the interest earnings a revenue but the putting of cash in the mattress  as involving an opportunity cost equivalent to the revenue foregone at that same bank then that would be double dipping. 

You see its this paradoxical thinking of applying the maths concept of taking away a negative being the same as adding a positive which seems to haunt graduates who are a bit too uppitty about their usually second-rate education. 

Revenues are revenues, Costs are costs, and reducing costs is not the same thing as increasing revenues. Whereas foregoing a revenue is not the same thing as incurring a cost. Forgoing a revenue is foregoing a revenue. Incurring a cost is incurring a cost. This is all so obvious that its embarrassing to have to have sentences where a phrase is constantly repeated. But our economists are apparently so incredibly stupid that this indeed appears necessary.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Now is this nitpicking? The return of the language-nazi? Well you would think so wouldn’t you. But once sloppy concepts are introduced into the mix its not really possible to predict in advance what damage they will do. We don’t know the better way of thinking we might possibly arrive at if we cleaned up our act.

And since the whole of contemporary mainstream economics in Australia is hopelessly sloppy and careless in its thinking, its impossible to directly blame one sloppy definition for specific acts of stupid thinking. (Nonetheless I will have a crack at it.)

We will indeed attempt to see how this one sloppy concept tends to hurt us. Essentially what this concept does is it shuts down the thinking of the economist halfway through the job. Or even one tenth of the way through the job.  As well it tends to reinforce a prominent bad dualist tendency in human thinking. This is a bad tendency that is already a feature of the human mind. But opportunity cost accentuates this terrible tendency to a very great degree.

(Now we wouldn’t have predicted that the introduction of a sloppy concept would do these specific things in advance of introducing it. SO WE MUST GO FOR CLEAR CONCEPTS AND DEFINITIONS ON FIRST PRINCIPLES.)

In practice the use of the concept allows and encourages the economist to PRE-EMPTIVELY THINK OF AN ARBITRARY ALTERNATIVE, at break-neck speed, and then lock this phoney alternative in as if it were the ONLY other alternative.

I was originally going to talk about this with regards to the carbon tax. On the other thread I showed how already malinvestment is being created by the government threatening to punish people, for no reason at all, for emitting CO2.

Now what’s happening is people are already contemplating doing really idiotic things as a result of these hateful threats and lies. An 850 million dollar pipeline is being planned, so that natural gas will be pumped to a gas-electricity plant which will also be built, which everyone, including the proposed investors, know is a malinvestment. 

WELL WHAT IS THE OPPORTUNITY COST OF DOING THIS?

The concept is so flawed that it cannot help us here. But it is a powerful enough concept to shut the economists mind down at this point. You see there is no limit to the foregone revenues that this stupid tax and these stupid malinvestments could be costing us. So the opportunity cost concept tends to blind the economist of the fact that the alternatives are not numbered in ones or twos. But rather that alternatives are UNLIMITED, and each one could be better than the next. 

The process by which the economist thinks of things in relation to opportunity cost appears to go a bit like this:

 

1. A course of action is proposed.

2. A second alternative is furiously searched for.

3. This second alternative, arrived at in entirely arbitrary, and somewhat panicked-fashion, is seized upon and treated as if it were the ONLY other alternative. It may be called the NEXT BEST ALTERNATIVE. Which it never is. Not ever. So now the economist has automatically deemed his own alternative to be the FIRST BEST ALTERNATIVE. And now he is free to shut his mind down.

4. If no second alternative can readily be seized upon to arbitrarily calibrate as the OPPORTUNITY COST then the economists mind shuts down at that point.

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

The other night I was asked why it is we weren’t taking up the opportunity to be A BETTER SAUDI ARABIA. That is to use our gas and coal resources to pump out liquified-coal by the gigalitre.  Obviously its a large foregone revenue to be turning down the opportunity of having an industry whose earnings would top the oil revenues of the Saudi Kingdom.  This is something that would be hard for our economists to miss if they weren’t idiots you would think right?

Well when I was asked this all I could put it down to was 1. CO2-Bedwetting. 2. The poor state of Australian Economics and 3. The lack of serious property-rights in this country, especially as it related to infrastructure.

But within these three categories the sloppy idea of “opportunity cost” must surely be playing a powerful part. Since it is shutting down the thinking as to the myriad of possible alternatives to what we are currently doing. 

There is a myriad of alternatives, both known and unknown, to the way we are doing things now. But the consulting-economists and taxeater economists are never going to think about them because they arbitrarily fixate on one other alternative and then their mind closes down.

If you don’t think that this is the case you haven’t been talking to economists lately.

Just to round this off I want to bring out something that I’ve already mentioned. Economists are always talking about the NEXT BEST ALTERNATIVE. Opportunity cost is thought to be based on the next best alternative. It is thought that what you are doing now is the best possible alternative and the opportunity cost is the second best. 

But the alternatives that the economist comes up with are NEVER the best alternatives. Never ever ever. And the shoddy concept of “opportunity cost” blinds them all to this fundamental reality.

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