Knowledge And Decisions

Neither in production nor consumption does substitution imply total substitution. More likely, it means an incremental substitution, accepting somewhat less of one thing in order to get somewhat more of another. We almost never have to attempt anything as difficult as deciding categorical priorities — whether vegetables are more important than shoes, or vacations more important than music. Moreover, because we usually decide to have some of each option, even the relative importance of each possible choice changes as the respective quantities that we already have change. For example, if we had a dozen oranges and a bushel of apples, we would probably be less interested in another bag of apples than in another bag of oranges, and we might give up either for one pineapple or a pound of grapes, even though we might have the opposite preferences if we started from a position in which we had no fruit at all, or in which we had a bushel of oranges and ten pounds of grapes. In other words, substitution ratios are incrementally variable rather than categorically fixed.

Simple as all this is, it goes completely counter to rhetoric that is often heard, and sometimes heeded, about the urgent need to “establish priorities” either nationally or in a business or other organization. At the instant that such rhetoric is uttered, there may indeed be an urgent need for more of one thing at the expense of something else, but it is only a matter of time before the changing proportions of the two things change the relative urgency of adding more of each. Categorical priorities ignore this fact, unless they are very flexible and reversible — in which case they are not really “priorities.” But because sober analysis seldom has the appeal of ringing rhetoric, priorities often do get established, and outlive the necessities that gave rise to them. One of the major problems of public policy is to determine what kinds of social institutions lead to flexible and reversible transformations, which permit continuous adjustment to changing circumstances, and which kinds of institutions lead to enduring categorical priorities, which can become as counterproductive under new circumstances as they may have been necessary under the old.

COSTS AND VALUES

Once it is clear that an economy — any kind of economy — is basically a system of rationing inadequate supplies, and a system of incremental substitutions, the concept of “cost” assumes a new significance. The cost of any good is the cost of its ingredients, and their cost, in turn, is whatever alternative good had to be foregone in order to use them where they are used. For example, the real cost of a piece of cheese is the ice cream or powdered milk that could have been produced with the same original resource. Indeed, if more cows had been slaughtered instead of being kept alive for their milk, there would have been more steaks, baseball gloves, and other cowhide products, so that the real cost of yogurt includes catchers’ mitts.

This is not merely a philosophical way of looking at things. It is the way economies operate in the real world. If the demand for yogurt increased many times, yogurt production would absorb milk that would otherwise have gone into ice cream, cheese, and other dairy products. This would cause more cows to be used to increase total milk production and fewer to be slaughtered — and this in turn would mean less cowhide and higher prices for catchers’ mitts. In an economy not coordinated by prices but by government directives, the same end result could occur through an issuing of orders by a central economic planning board, and the more stringent rationing of catchers’ mitts would be accomplished by waiting lines or waiting lists instead of by higher prices. The physical dissimilarities between dairy products and cowhide products has nothing to do with their substitutability in the production process. How much, and in which direction, the incremental substitution takes place depends upon their respective values. These values are wholly subjective. To say that people want more yogurt is to say that yogurt has become more valuable to them. Either statement conveys exactly the same information. There is no “objective” value of yogurt which could be determined in a chemical laboratory or under a microscope, nor would any political or philosophical process determine what it is “really” worth.