Knowledge And Decisions

Value being ultimately subjective, it varies not only from person to person but from time to time with the same person, and varies also according to how much of the given good he already has. Obviously a man in the desert dying of thirst would sacrifice much more for a glass of water than he would in his home, with water available from his faucet. In short, even for the same individual, the value of water can vary from virtually everything he has down to zero — or even below zero, since he would pay to have water taken away if his basement were flooded.

The cost of a given good can be determined in purely physical terms. If so many gallons of milk are required to produce ten pounds of yogurt, and if we know how much ice cream could have been produced with that same amount of milk, then we know the physical rate at which ice cream can be “transformed” into yogurt through incremental substitutions in the production process. However, this statement of physical possibilities says nothing about how much yogurt will in fact be produced relative to ice cream. That depends also on the relative values of these goods to their respective consumers. The knowledge of these changing values may be transmitted by price fluctuations in a market economy, or by voting changes in a politically-controlled (“planned”) economy, or by direct orders in a nondemocratic, politically-controlled economy (communism, fascism, etc.).

In other words, while an individual or an economy may appear at first to be weighing the subjective value of a good against its objective cost, ultimately what is being weighed is the subjective value of one good against the subjective value of another good. Faced with identical technology and resources setting the limits of what is possible at a given time, different combinations of goods may be produced, according to the subjective preferences of the decision makers, whether those decision makers are consumers, central planners, or royalty. None of these differing assortments of goods — and therefore different resource uses — need be more “efficient” than any other. Efficiency in turning inputs into outputs can be measured only after specifying the subjective values involved. Even in the apparently objective physical sciences this is also the case. The objective “efficiency” of an automobile engine can be determined only after specifying the subjectively determined goal as the forward movement of the automobile. Otherwise, every engine is 100 percent efficient in the sense that all the energy input is used, either in the forward motion of the car, overcoming the internal friction of engine parts, or in random shaking of the automobile.

Although neither value nor efficiency is wholly objective, the idea that they are dies hard. Denunciations of “inefficiency” and “waste” are often nothing more than statements of a different set of preferences. Schemes to turn particular decisions or processes over to “experts” who will promote scientifically neutral “efficiency” are often simply ways of allowing one group of people to impose their subjective preferences on others. For example, proposals for a city-manager form of government to take municipal decisions “out of politics” are in reality proposals to make local decision making responsive to a different set of interests other than the general electorate. The merits of such a change can be debated from various viewpoints in particular cases, but the point here is the inaccuracy of the usual description of what is going on, and the misconceptions (or dishonesty) behind such descriptions. As a mechanism for the utilization of knowledge in society the city manager arrangement screens out some of the knowledge (from the electorate), allowing more weight to the knowledge of others who have greater access to, or implicit control over, the administration.¹

AVERAGE VERSUS INCREMENTAL COSTS