Saturday, October 8, 2011

Opportunity Cost

 Of all the quacks that ever quacked political economists are the loudest. Instead of telling us what is meant by one's country, by what causes men are happy, moral, religious, or the contrary, they tell us how flannel jackets are exchanged for pork hams, and speak much of the land last taken into cultivation.
—Thomas Carlyle       
Opportunity cost reaches down into one of the fundamentals tenants of economics, which is that everything has a cost.  In a world of infinite wants and finite means, individuals, firms and nations must constantly make decisions about their consumption subject to their own budget.  It is only the few and sometimes lonely “dismal scientists” that fully embrace this accounting of costs.  Thomas Carlyle, who labeled political economy the “dismal science” after reportedly reading Malthus, was at a loss to understand our fundamental principal of opportunity cost and how it is intrinsically related to the happiness of the individual.
In the quote above, Carlyle pens his umbrage with political economists for what in his view was hokum.  Men are not made happy by trade according to Carlyle, and maybe they are not “happier” per say, but they are made better off.  One man or one nation could foolishly seek self-sufficiency, but at what opportunity cost?  The cost would be the gains that could have been made in national income and welfare from specialization and trade.  Opportunity cost allows us to allocate our means into the most productive uses, from individuals to states.  Looking through the economic “lens” we are able to see what obscurants like Carlyle could not.  By taking into account the true costs of our actions, we can maximize our happiness by making informed, rational decisions.


  1. Bravo! I hate when someone tries to tell me america should be self sufficient and close our borders. This is a well made argument to the contrary.

  2. I could agree with Carlyle that people are not necessarily made happier by trade, even when it has benefit to them. On an interesting day, I'd argue that while trade increases the capacity for persons to be happy, it does not directly restrict them to feeling the emotion.

    Great post.