Development and Underdevelopment in the History of Economic Thought

Beginning and evolution of the idea of opportunity cost

Bharat Sheetal, Bengaluru Dr B R Ambedkar School of Economics University

The idea of opportunity cost is attributed to von Wieser. It is unclear based on the translation whether his 1888 work mentions the term opportunity cost; Green (1894) certainly seems to have been the first to use it. While disintering the identity of the scholar who birthed the concept, I arrive at the conclusion that it is Ricardo (1817) who deserves credit. His idea of assessing rent based on the value of alternatives is key. Seven decades later Classical and Austrian scholars debating value added further dimensions to this concept; and over a century later LSE scholars carried out a more practical analysis of opportunity costs. A close following of these discussions yields all pieces required to build the concept fully to the form in which it is currently understood. It is important to note, in this build-up of the idea that unmeasurable elements were properly recognised as important factors in decision-making - a feature that seems to have lost importance since quantification has gained importance. Modern economics research most often measures opportunity cost through interest or other earnings foregone. Textbooks too only consider measurables. The discrepancy arrives when we note that teachers do mention unmeasurable factors when teaching the concept of opportunity cost in their introductory classes. There seems to be a gap between what textbooks say, what teachers teach and how researchers interpret the concept. The reason for this focus is that opportunity cost has the potential to explain almost every human decision with near-perfect accuracy (the raison d'être of economics), if only all measurable and unmeasurable factors in decision-making will be acknowledged. Considering unmeasurables also vests the idea of opportunity cost with the power to channel economic decisions at every level towards multidimensional sustainability. That these factors too often do not appear in the lexicon of the decision-maker is a failing of the discipline.

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Keywords: Opportunity Cost, Wieser, Ricardo, Explicit Costs, Implicit Costs, Economic Costs, Unmeasurable