Opportunity Cost, Liberalism, and Effective Altruism

Every choice has a cost. Choose wisely.

My latest post at EconLog discusses opportunity cost, as well as how it relates to both liberalism and effective altruism.

Opportunity cost refers to the next best alternative to the choice someone made. In other words, it’s the most valuable thing you gave up by making a choice. As I explain in the post:

We live in a world where resources, including time, are scarce. As a result, whenever you make a choice, you necessarily give something up. Time you spend reading this blog post is time that you’re not spending on some other task. The money I spent on coffee today is now money that I cannot use to buy concert tickets. The workers in the coffee shop spent time making me coffee, and they cannot use that time for other purposes. Every day, we make choices, and every one of those choices has a cost. Choose wisely.

Liberalism and effective altruism both take opportunity cost seriously. Liberalism takes opportunity cost seriously by offering an institutional framework where individuals are free to choose how to spend their time and use their property. This means that they are free to act on their own subjective preferences, to only give up their property when doing so is worth the cost, and to engage in mutually beneficial exchanges with others. These exchanges “give rise to exchange ratios, which we call prices.” These prices then convey knowledge about the relative scarcity of resources, and therefore the opportunity cost of using those resources. They also provide an incentive to economize on scarce resources as they become relatively more valuable to others or relatively less available. In other words, the institutional environment created by liberalism provides both incentives and knowledge that encourage self-interested individuals to coordinate their plans with one another in a manner that takes opportunity cost seriously.

But when it comes to altruistic action, our ostensible goal is to help others rather than just do what’s best for us. Given that we can’t peer into the minds of those we’re trying to help, this poses a difficult problem. In our efforts to help others, we might squander scarce resources in a way that disappoints those we’re trying to help. We might do bad in our efforts to do good.

The effective altruist movement represents a concerted effort to take the challenges posed by opportunity cost and unintended consequences seriously. Yusuf’s recent post on the SNT method offers a good intro to some of the ways effective altruists have been thinking about these issues.

In a world of scarcity, doing good requires taking opportunity cost seriously. At the level of institutions, this provides a good reason to embrace liberal institutions of property rights, freedom of choice, freedom of contract, and freedom of exchange. At the level of individual action, this provides good reasons to embrace effective altruism as an invitation to both action and inquiry.