Recasting “opportunity costs”

Start with a 1977 conversation between Nicholas Kaldor, the Cambridge economist, and his Colombian counterpart, Diego Pizano.

Kaldor asserts: “There is never a Pareto-optimal allocation of resources. There can never be one because the world is in a state of disequilibrium; new technologies keep appearing and it is not sensible to assume a timeless steady-state” (Pizano 2009, 51). Pizano counters by saying the concept of opportunity costs still made sense, even when market conditions are dynamic and unstable. But Kaldor insists,

Well, I would accept that there are some legitimate uses of the concept of opportunity cost and it is natural that in my battle against [General Equilibrium Systems] I have concentrated on the illegitimate ones. Economics can only be seen as a medium for the “allocation of scarce means between alternative uses” in the consideration of short run problems where the framework of social organization and the distribution of available resources can be treated as given as heritage of the past, and current decisions on future developments have no impact whatsoever. (Ibid, 52)

Consider the scorpion’s sting in the last clause. Even if one admitted uncertainty into the present as a function of the past, a dollar spent now on this option in light of that current alternative could still have no impact on the allocation of resources for a future that is ahead of us.

Why? Because markets generate resources and options, not just allocate pre-existing resources over pre-existing alternatives. “Economic theory went astray,” Kaldor added, “when theoreticians focused their attention on the allocative functions of markets to the exclusive of their creative functions, which are far more important since they serve as a instrument for transmitting economic changes” (Ibid, 52).

Source

Pizano, D. 2009. Conversations with Great Economists. New York: Jorge Pinto.