Inorder to better tackle the question of “What is economics?” we must firstdefine two components that provide a foundation for its basis: valuation andcost. Alchian (1969) defines valuation (value) as “obtained by weighing its anevents good and bad consequences against each other” (p.
404); in order todetermine the cost of an event, “The highest-valued forsaken option must stillbe ascertained in order to determine the cost” (Alchian, 1969, p. 404). Thisdistinction is imperative in understanding economics.Valuepinpoints an events’ desirable—or undesirable—traits, thereby promoting arank-based system that enables better decision-making; in doing so a decision-makercan analyze the limitations (scarcity) of those resources and whether theinputs available render the type of output he or she requires.
Here is whereAlchian’s understanding of value delves into economics, as described by LionelRobbins in Sowell’s work: “Economics is the study of the use of scarceresources with alternative uses” (2011, p. 18). It is this very scarcity whichimpacts an events necessity—its value—because “there is simply not enough to goaround to satisfy all our desires to the fullest” (2011, p.
20). Thus, economicconsequences are determined via this cause and effect relationship betweenscarcity and desire; because if an event exists in scarcity, then it surelymust harbor some value for its proliferation. Opportunitycost takes into consideration the repercussions of all the other options thatwere not selected during decision-making. Alchian’s expression of cost furtheraligns with Sowell’s understanding of causality—particularly in regard to “alternativeuses” (2011, p. 22)—in economics, because it focuses on the consequences due tothe incentives that may or may not have been foregone.
Therefore, opportunitycost helps establish efficiency and inefficiency in relation to an event—or objects—alternativeuses. Such discrepancies in cost lie at the heart of each economy and,oftentimes, are the underlying reason for its success or failure. It is withthese assessments that more informed decisions regarding the distribution ofscarce resources can be implemented. Additionally,Alchian relates both opportunity cost and value to each other; this is done byinterpreting the results when value is decreased; Alchian (1969) expresses thatsuch an impact could translate into decreased costs, as all other options alsoexperience a similar decrease (p. 405). The understanding that “the costs arelower because the values are lower, for that is what cost reflects” (Alchian,1969, p.
405) relate to Sowell’s (2011) expression of “cause and effect,showing what happens when you do specific things in specific ways” (p. 25). Furthermore, Sowell (2011) presents “differentinstitutional ways of making trade-offs that are inescapable in any economy” (p.21).
These methods lead to Alchian’s interpretations of cost and value—two long-termexamples of Sowell’s “trade-offs.” Alchian further explains that bothcomponents are necessary to maintain the market-economy that presently exists.Thus, these “trade-offs” form the foundation of Sowell’s economics. In summary, economics is a function ofvaluation and cost and the differences between both. Their interactions providean understanding of scarcity and its implications on a society.
This veryscarcity impacts the demands of a people and pays heed to the give and takenecessary for their proliferation.