GOAL: Post a comment with questions about a part of the video.
CAVEAT: I’m not very familiar with economics concepts that I’m asking about. I haven’t finished the video yet. I’m only just past the part that I’m asking about.
I don’t understand the part starting at 31:55 Finding Errors in _The Case Against Education_ by Bryan Caplan | Screen Recording - YouTube, about the cost of the cruise being different than the fare.
I don’t think I get what Caplan is saying or ET’s critique of Caplan. I think I’m confused about the cost concept used in each of their discussions. It seems like it might be related to a confusion about tradeoffs and costs versus opportunity costs.
Caplan says the cruise costs $2,000 but you value it at $800. Then he says you’re only “forking over” $1,200 because that’s the difference between the cost and the value to you. Why does the cost change based on the cruise’s value to you? I think the cruise costs $2,000. The full $2,000 should be included in price of the investment in future earnings (0.1% higher pay year for life). Whether you value the cruise at $100,000 or $0, the cruise is still a cost of $2,000. You can’t make a profit off the cruise just because you value it a $100,000.
ET says the cost of fare is more than $2,000 because of the time cost of the entire cruise. I think every activity has a time cost in this sense, including writing a book or going on the best vacation of your life. Is the time cost different for different activities or the same for any activity? Why would the time cost be different for different activities? Is the time cost idea like opportunity cost? I know George Reisman criticized the idea of opportunity costs but I can’t tell if that’s what ET is talking about. My understanding is that missed opportunities shouldn’t count as costs. There is a tradeoff between valuable alternatives and some alternatives offer less benefit than others.
It makes sense that doing the cruise could take away from time available for other things. I think ET is saying that you should consider more than just the cost of cruise, the value of the cruise to you, and the impact on future earnings. You also need to consider the things that you aren’t pursuing because you went on the cruise. I think part of my confusion is that it seems like there is always a more beneficial thing to be doing no matter what someone does. I think that would mean every activity has huge costs.
From Capitalism: A Treatise on Economics:
6. Critique of the Opportunity-Cost Doctrine
An opportunity cost is an imputed cost—a cost which does not actually exist in the sense of an expenditure of money being made, or having been made, but which is treated as though it existed. An opportunity cost is said to exist by virtue of the failure to earn a revenue or income that otherwise might be earned or might have been earned. It represents the absence of a revenue or income, just as imputed income represents the absence of a cost.
Suppose you’re a person who wouldn’t want to buy the cruise. The price is $2000. How much do you lose if you buy it? He’s saying not the full $2000. It’s worth something to you. So your loss – how much worse for you this is than doing nothing – is only the difference between the price and the benefit you gain. In other words, he claims, you would be indifferent between:
- not buying the cruise
- buying the cruise with a $1200 discount
I think time costs are real costs – you actually use up time when you do things. Alternatives have time costs too, yes. Time costs are often useful to consider because they’re different for different options. Some things take longer. E.g. you might have two ways of making $100, but one takes 3 hours and the other only takes 1 hour. You could only compare things that use equal amounts of time – e.g. take the 1 hour money making plan and combine it with reading a book for 2 hours before comparing – but often it’s convenient to compare alternatives that take different amounts of time.