The concept of the opportunity cost of an action being used to determine economic behavior was well explained in the two written articles, and clarified in the pod cast. The applications that were provided for examples demonstrated how the theory opportunity costs applies to current situation. However, the last section of “Getting the Most out of Life: Opportunity Costs” by Russell Roberts, self-sufficiency vs. relying on others, made me wonder how the ability to determine an opportunity cost has adjusted to the technological advancements and globalization that have taken place thus far, and how it will continue to adapt to changes in the future. Roberts asserts that, “Ultimately, anything close to genuine self-sufficiency is the road to poverty.” As society becomes more dependent on a local, national, and global level, the ability to understand and calculate opportunity costs is increasingly tied to the capacity to act in a way that will maximize utility.
Two of the four prominent economists mentioned in regard to their economic theory in the beginning of the essay, Adam Smith and Alfred Marshall, both made their contributions before many of the significant advancements in communication, transportation, production, and social justice that we enjoy today were either developed or widely recognized. Several notable effects of the progression in these areas have been: an increase in the availability and variety of goods and services, shifts in religious and political institutions, globalization, and an increase in the accessibility of information and education. Although the other two economists who were noted, Friedrich Hayek and Milton Friedman, were able to witness many of these changes, their last scholarly economic contributions were published in 1988 and 1982, respectively. I am not questioning the validity of these men or their theories, I am merely suggesting that their perception on determining the opportunity cost of an action might not give adequate consideration to additional factors that have been created by our constantly evolving global environment.
This caused me to consider several question. How have opportunity costs been affected by the technological and cultural changes that have transpired over the last century? Or on the other hand, how are changes in our ability to predict opportunity costs affecting individual and collective values and resource allocation? Do individuals faced with making decisions, both personal and corporate, have access to enough information about their options to make the choice that will maximize their utility?
The dilemma of inadequate information is also presented in the Roberts’ article in the section “the return on your investments”. The example given about a given mutual return investor only having a 12% return, which was 3% less than the average return, demonstrates the difficulty of making decisions that will maximize utility because there is insufficient information about all of the available options. As number of options for investment is positively correlated with the amount of goods and services being developed, it is increasingly difficult to have sufficient information about each option to determine the opportunity cost before making an investment. However, lack of information, even though technology has made it more accessible, is at fault for more than just the undesirable opportunity cost in regard to mutual funds that is given as an example in Robert’s article.
Charles Wheelan explores the problem of imperfect information and how it contributes to economic issues, as well as social issues, in his book, Naked Economics.
What we don’t know can hurt us. Economists study how we acquire information, what we do with it, and how we make decisions when all we get to see is a book’s cover. Indeed, the Swedish Academy of Sciences recognized this point in 2001 by awarding the Nobel Prize in Economics to George Akerlof, Michael Spence, and Joseph Stiglitz for their seminal work on economics and information. Their work explores the problems that arise when rational people are forced to make decisions based on incomplete information, or when one party to a transaction knows more than another. Their insights are relevant to some of our most pressing social issues, from genetic screening to discrimination in the workplace. (82)
Wheelan concludes his discussion on the topic by stating:
In the world of Econ 101, all parties have ‘perfect information.’ The graphs are neat and tidy; consumers and producers know everything they could possibly want to know. The world outside of Econ 101 is more interesting, albeit messier. A state patrolman who has pulled over a 1990 Grand Am with a broken taillight on a deserted stretch of Florida highway does not have perfect information. Nor does a young family looking for a safe and dependable nanny or an insurance company seeking to protect itself from the extraordinary cost of HIV/AIDS. Information matters. Economists study what we do with it, and, sometimes more important, what we do without it. (96-97)
A person’s ability to determine opportunity costs certainly has an impact on the course of action that they will pursue. Even though understanding opportunity costs is increasingly more important as society becomes more dependent, the developments that have contributed to many recent social and economic advancements have also made it more difficult to accurately predict the opportunity cost of an action. Fortunately, we have economists like Akerlof, Spence, and Stiglitz who have concentrated their research to better understand the impact that information, or lack thereof, can have on an individual’s ability to make decisions that will maximize their utility.
Wheelan, Charles. Naked Economics. New York: W.W. Norton & Company, 2002. 82-97. Print.