The Meaning of Cost

What, then, is the cost of producing machines in Economia? In general, what is cost? Here we return to a topic briefly considered in Chapter 2. What is cost? It may seem that the answer is too simple -- that everybody knows what cost is. But commonsense will not help us much here. If we think of cost in commonsense terms, we would express cost in terms of money -- but there is no money in Economia! The Economian economy, simple as it is, is a planned economy and not a monetary economy. If we are to apply cost-benefit analysis to the example of Economia, we must find a way to do it without reference to money.

In fact, that's one of the major advantages of thinking carefully about the allocation of resources, and of thinking, however hypothetically, in terms of a planned economy. In the allocation of resources, as in many other economic topics, "money is a veil," and one of the tasks of economics is to pull away the veil and look at the realities underneath. The realities are the flows of resources and goods and services. We need to find a way to think of cost in terms of goods and services and resources, not just in terms of money.

Let us leave Economia behind just for a moment and think a bit about an economic topic much closer to home: the local Mom-and-Pop store. Recall, the chances are that Mom and Pop don't pay themselves salaries. When they need some money for the family, they take it out of the till. What is the cost of the labor that Mom and Pop devote to their store? If the "cost" is the money paid for the labor, then the "cost" seems to be zero -- but that's not right. What is the cost of Mom and Pop's labor? The answer is that the cost of their labor is the opportunity foregone.

What is true of Mom and Pop is also true of Economia. The cost of a certain quantity of machines is the food Economia must give up in order to free up resources to produce the machines.

In general, the cost of any good or service is the goods or services that could have been produced with the same resources, if those resources had been used in a different way. In economics, when in doubt, cost is the alternative foregone. Always.