Not the promised post on ‘Structure, Sign and Play…’, but a quick aside on opportunity cost.
The heading’s quote comes from Krugman, Wells and Graddy, chapter 1, page 7.
“The concept of opportunity cost is crucial to understanding individual choice because, in the end, all costs are opportunity costs. Sometimes critics claim that economists are concerned only with costs and benefits that can be measured in terms of money. But that is not true…. [T]he cost of [something] is what you must give up to get it. All costs are ultimately opportunity costs.”
Which seems to make a lot of sense. But notice just how much uncertainty the idea of opportunity cost brings into one of the most fundamental concepts of economics. Opportunity cost opens the concept of cost (which is, superficially, both concrete and already-quantified) to an infinity of doubt.
Here’s K, W & G again, p. 165:
“What do Bill Gates, David Beckham and Kylie Minogue have in common? None of them has a university degree. All three are no doubt clever enough to have degrees. However, they made the rational decision that the implicit costs of getting that degree would have been too high – by their late teens, each of these three had a very promising career that they would have had to put on hold in order to get a university degree. Ms Minogue would have had to postpone her acting and singing career; Mr Beckham would have had to put off his incredibly successful football career; Mr Gates would have had to delay developing the most successful and most lucrative software ever sold, Microsoft’s computer operating system.
In fact, many extremely successful people – especially those in careers like acting or athletics, where starting early in life is especially crucial – do not attend university. It’ a simple matter of economics: the opportunity cost of their time at that stage in their life is just too high to postpone their careers for a university degree.”
Gates, Beckham and Kylie all chose to junk university, in favour of a career that promised extraordinary success. They all, apparently, made the right choice. But (my point is) extraordinary success is always a possibility. As is extraordinary failure. Every hypothetical opens up an infinity of possibilities. By what mechanism are we to calculate which alternative world should be substituted, in our calculations, for the one we inhabit? By what mechanism are we to calculate opportunity cost?