Israel M. Kirzner, “Another Look at the Subjectivism of Costs”

This single-authored 1986 scholarly essay/chapter in Austrian economic theory revisits opportunity cost after Wieser and Buchanan. Its scope is conceptual: Kirzner clarifies what economists mean by “cost” when they explain choice, compare alternatives, or speak of social loss. His main thesis is that cost, in the decision-relevant sense, is neither an external object displaced nor a money outlay, but the chooser’s own perceived sacrifice at the moment of action.

The final concern which may inspire attention to the cost of building the swimming pool, may be to understand why the homeowner in fact decided to build the pool.

The opening section, built around Alchian’s swimming-pool example, separates several meanings often run together: disadvantages attached to an act, objective private opportunity cost, objective social opportunity cost, and subjective opportunity cost. The decisive conceptual move is to make cost explanatory of action only when it is tied to the actor’s own view of what is being surrendered.

The emphasis (in this subjective opportunity cost notion) is upon the moment of decision, and upon the way in which the decision maker himself sees the alternative opportunity which he must sacrifice.

Kirzner then tests the distinction against familiar confusions. In the “noisy neighborhood children” case, he modifies Alchian’s sharp exclusion of undesirable attributes from opportunity cost. If the homeowner foresees that the pool will destroy backyard quiet, the lost quiet of the rejected alternative can enter the sacrifice as he experiences it.

Thus, in choosing the pool, the homeowner is consciously sacrificing the peace and quiet which he recognizes will be destroyed by the noisy children.

The same logic exposes the comic error in Gary North’s “opportunity cost of marriage” argument, and Kirzner’s criticism of Stigler’s response. The educated wife’s forgone professional income may be a cost to her, or to a later household decision that she remain at home, but it is not a cost to the groom’s decision to marry her, because he never possessed that income as an available alternative.

Before this marriage decision the prospective groom had no alternative prospect whatever of enjoying the woman’s high professional income; his decision to marry her involved no sacrifice by him of her income at all (even if it is understood from the start that marriage calls for her staying at home).

The paper’s central theoretical section deepens the point. Two people facing outwardly identical opportunities may not face the same costs because they may perceive present facts differently, forecast future consequences differently, or attach different significance to the same anticipated consequence. This is where Kirzner links subjectivism to entrepreneurship: cost depends not only on preference but on alertness, expectation, and possible error.

To rank the costs faced by different decision makers is as conceptually impossible a task as is that of comparing utilities interpersonally.

Kirzner next addresses equilibrium arguments, especially Baumol’s claim that under specified conditions money outlays can represent subjective opportunity costs. He grants that equilibrium can align marginal rates and relative prices, but denies that this turns private sacrifices into public magnitudes. Money payments are observable; the perceived future enjoyments sacrificed by making them are not.

The discussion of “social cost” carries the argument further. In strict subjectivist terms, cost belongs to choosing persons, not to society as an acting mind.

The subjective notion of the term “cost” is necessarily always private. It has no meaning outside the context of a decision. All decisions are made by individuals; hence all costs (in this usage) are private costs.

Yet Kirzner does not simply discard social-cost language. He argues that even apparently objective claims about displaced social output usually smuggle in an imagined decision: the economist asks whether “society” should have chosen otherwise, or whether a hypothetical planner would have rejected the project. Thus objective social cost is not truly subjective cost, but it still depends on a quasi-subjective act of imagined valuation.

The cost notion, even in its apparently objective versions, ultimately expresses an implicit subjectivism.

The essay’s relevance lies in its methodological discipline. It warns economists not to treat equilibrium outlays, physical alternatives, or social aggregates as if they automatically explained choice. Kirzner’s core moves are to relocate cost at the instant of decision, to distinguish perceived sacrifice from displaced output, to deny interpersonal measurability, and to show that welfare judgments about cost depend on hypothetical choice.