Knowledge And Decisions

Economic trade-offs involve trying to produce the most value at the least cost. An individual or an organization may think of costs in money terms. But from the point of view of the economy as a whole, costs are ultimately foregone opportunities to use the same resource inputs for producing something else. In short, weighing prices against costs is ultimately weighing one resource use against another.

The terms on which one use can be traded off for another use vary incrementally. There are subjective differences in the values of goods to a consumer, partly according to how much of each he already has. There are objective differences in production costs, according to how much of each is being produced. There are objective differences in production costs, according to whether production takes place when equipment is underutilized or when it is already straining at its capacity. The law of diminishing returns applies in both production and consumption, and insures that tradeoffs are incrementally variable rather than categorically fixed in some rigid “priority” ranking. Price fluctuations are one evidence of this incremental variability and a means of transmitting knowledge of current trade-off rates through the economy.

Trade-offs take place not only at a given time, but between one time and another. The value of the same physical good (or sum of money) varies with the time at which it becomes available. “Investment” is the process of postponing the availability of benefits, and the terms of the trade-off of present for future benefits are shown by the incremental difference in value between the two times — the so-called “return on investment.” This is most easily visualized in a money economy, but the principle is the same in an economy run by orders rather than prices. The same principle can also be seen in noneconomic activities, such as putting things away properly to facilitate finding them later, or explaining oneself to others to avoid future misunderstandings.

Price changes convey the changing relative scarcities of different resources, even to persons with no direct knowledge of any of the resources. The results can and must be compared by people unacquainted with the respective processes that produced these results. Price movements economize on the knowledge needed for given decisions. Where such prices are artificially maintained by force, rather than through voluntary transactions, they convey misinformation as to relative scarcities, and therefore lead the economy away from the optimal use of resources. Accurate prices resulting from voluntary exchange permit the economy to achieve optimal performance in terms of satisfying each individual as much as he can be satisfied, by his own standards, without sacrificing others by their own respective standards. The results must, however, appear “chaotic” to any observer judging by any given set of standards applied to all. Third-party assessments of the individual terms of the transactions — or of the “income distribution” totals arising from these transactions — are equally unlikely to coincide with the varying individual assessments of the trade-offs made. Neither in economic nor in moral terms is it the question whether a given set of statistical income results for a given time span is justified. The most basic question is not what is best but who shall decide what is best. The general case for third-party overriding of individual transactors’ preferences is seldom made explicit, and so cannot itself be assessed. Its many oblique versions rely heavily on insinuation, metaphor, and the physical fallacy. Figures of speech about “society” as decision maker ignore the diversity of individual preferences which are responsible for many of the very phenomena in question — whether economic, social, or political.

Perhaps the most widespread misunderstanding of economics is that it applies solely to financial transactions. Frequently this leads to statements that “there are noneconomic values” to consider. There are, of course, noneconomic values. Indeed, there are only noneconomic values. Economics is not a value itself but merely a method of trading off one value against another. If statements about “noneconomic values” (or, more specifically, “social values” or “human values”) are meant to deny the inherent reality of trade-offs, or to exempt some particular value from the trade-off process, then such propositions need to be made explicit and confronted. Dedication to high and selfless ideals can be no more effectively demonstrated than by trading off financial gains in the interest of such ideals. This is an economic trade-off.