What Is Economics

May 23, 2016

GrantGolson-be718-m1

Prompt 1

Explain how the ideas of valuation and costing (opportunity cost) expressed by Alchian relate to the question “What is economics?” defined and articulated by Sowell. Support your reasoning with quotations from the Alchian and Sowell readings.

Alchian makes a distinct differentiation between valuation and cost in his article “Cost,” even though the two concepts go hand-in-hand.  Alchian states that, “The value of a given event is obtained by weighing its good and bad consequences against each other… but the cost of that event is still not revealed.  The highest-valued forsaken option must still be ascertained in order to determine the cost” (Alchian 404).  He makes the point that good and bad consequences must be weighed in order to obtain the value of a decision or transaction.  Only when we discover the highest-valued option to be forsaken can we discover cost.  Furthermore, Alchian discusses how the two affect one another by pointing out the effect of a decrease in value.  He writes that, “one could even call this effect a decrease in costs- since the best valued options are now lower valued.  The costs are lower because the values are lower, for that is what cost reflects” (Alchian 405).

Sowell’s concept of “What is economics” in that the more scarce an item, the higher its value.  In chapter one he gives the definition penned by Lionel Robbins stating, “Economics is the study of the use of scarce resources which have alternative uses” (Sowell 2.)  He goes on to write, “without scarcity, there is no need to economize- and therefore no economics” (Sowell 2).  Sowell’s firm belief in scarcity directly relates to Alchian’s theory of valuation and cost.  For a good or service to be scarce, it stands to reason that it must hold value.  Otherwise, there would be no desire for the good/service.  Like Alchian states, Sowell agrees that economics are “a systematic study of cause and effect, showing what happens when you do specific things in specific ways” (Sowell 5).  This basis of economics according to Sowell, that is, his belief in cause and effect, aligns perfectly with Alchian’s theory that when values are lowered, the cost is reflected.  

Sowell also writes about “enduring institutions” as he explains that there are certain rules in economics that have stood the test of time.  These institutions have endured because they have held true for centuries.  Alchian’s ideas on valuation and cost are two perfect examples of these enduring institutions.  As Alchian states throughout “Cost,” without valuation and cost working hand-in-hand, we would not be able to sustain a free, decentralized market.  These “enduring institutions” have stood the test of time and form the backbone of our economy.