Risk, Uncertainty, and Profit - Free

credits are equal. There is a sort of Emersonian principle of Compensation applicable to every item; each is worth what it costs, but also costswhat it is worth.It does not at all follow that we have proved the pleasures of life just equal to its pains. That question is irrelevant to our problems, and our analysishas nothing to say about it. It is not the province of economics to determine the value of life in "hedonic units" or any other units, but to work out, onthe basis of the general principles of conduct and the fundamental facts of the social situation, the laws which determine the prices of commoditiesand the direction of the social economic process. *18 It is therefore not quantities, nor even intensities, of satisfaction with which we are concerned(though the limitations of language compel the use of these terms at times), or any absolute magnitude whatever, but the purely relative judgment ofcomparative significance of alternatives open to choice. Now, for conduct, it is self-evident that the importance of anything is the effort or sacrificenecessary to get it. Two things, each of which can be obtained at will by the sacrifice of the other, cannot conceivably have any other than equalimportance from this point of view, and it is meaningless to speak of a surplus. The situation is especially clear in an exchange system which fixedprices where things can be converted at will at known rates by purchase and sale. We submit that it is clearly impossible, in such a situation, toconceive of things serving as motives to action in any other than the established ratios of conversion or substitution.For understanding the psychology of valuation, the two points are equally important: (1) that, logically, choice is a matter of comparing alternativesand combining them according, to the law of rational procedure above formulated, *19 and (2) that there is none the less a practical differencebetween two kinds of alternatives in an ordinary situation. This difference is perhaps connected with the distinction between our feelings ofpainfulness and pleasantness, but in its essence it relates to the quantitative character of the alternatives (in their physical aspects, not the psychicstates involved). In the case just considered, of the boy and berries, the difference is evident from the fact that we use the berry alternative tomeasure the leisure alternative. We speak of a certain quantity of berries and the sacrificed alternatives corresponding to them, not of a certainquantity of alternative independently determined. The "trouble," "exertion," or what-not is not quantitative on its own account, it is measured by theberries; it is "the" amount of exertion, etc., connected with a specified amount of the measurable commodity. This result is inevitable because, asremarked above, "the" alternative is not in fact some particular alternative, but any alternative; it is not merely not measurable, but isheterogeneous and wholly indeterminate. It is this fact which throws us back on the conception of "resources" for rationalizing the deliberativeprocess, making of it a quantitative comparison; it is this fact which gives its great importance to the "time" measure of effort. Time does not in anytrue sense measure the alternative or sacrifice, and, as we have seen, its employment in any use is a sacrifice in the first place only because thereare other uses for it, which are the real sacrifice; but it is measurable, and our intelligence, forced to have something quantitative to feed upon, likethe proverbial drowning man catches at any straw.In spite, therefore, of the purely relative character of pain and pleasure and of the essential parity as motives of all alternatives of conduct, it ispragmatically necessary to distinguish in productive activity between the incoming "economic" utility and the sacrificed (resources, representing)non-economic, unspecified alternatives in general, between utility and disutility, or commodity and cost. "Cost," in this sense, is "pain cost," or"opportunity cost," as one prefers; there is no real difference in meaning between the two.From this long but apparently necessary discussion of the fundamentals of valuation of psychology, we may proceed to consider a somewhat morecomplicated situation, as an approach to the study of the principles as manifested in the field of exchange relations. We will suppose an individualchoosing between the production and consumption of a large number of "commodities," in addition to the alternative of not producing any of them,but of putting his time, etc., to "noneconomic" uses. This is the situation of Crusoe on his island, of which many economists have made use. Thesame law of choice will hold as before; between any two alternatives or among all that are open, the man will choose such amounts, or divide histime and "resources" among them in such proportions, that the physically alternative or correlated quantities of all are to him equally desirable. Theonly difference is that the alternatives are more complicated than in the case of the boy and his berries, and of a somewhat different character; inparticular, the presence of a number of economic alternatives, involving concrete, measurable sources of satisfaction, is important.In Crusoe's mind there would undoubtedly be built up something of the nature of a price system or value scale, if he seriously attempted to get themaximum of satisfaction out of the conditions of his environment. For an "intelligent" use of his opportunities can be arrived at in no other way. Hemust ascertain the ratios in which different goods are to be obtained for subjectively equivalent sacrifices in "effort," and similarly form judgments oftheir relative subjective importance to him, and attempt to bring the two sets of ratios into coincidence. But a set of equivalence ratios or scale ofequivalent amounts of things is the essence of a price system. Exchange is a means by which things may be conveniently converted into orsacrificed for each other in determinate amounts, and substantially the same result follows from choosing between different lines of production in aCrusoe economy. It is sufficiently evident that the quantities involved in such a calculation are quantities of things and not of satisfaction or anypsychic magnitude.The rôle of the "resource" idea and the concept of "cost" will also take on characteristic form in the Crusoe case. The mental labor of evaluatingeverything in terms of everything else must force recourse to a crude measurement of "effort" as the common standard of value or "medium ofexchange" (it is almost like that) for mediating the comparisons. It is clear that this is an "instrumental" but none the less very important device."Really," it is purely a question of combining alternatives, among which are those indefinite, "non-economic" occupations, exploring the island,chatting with the parrot, sport or recreation of any appealing kind, or "loafing and inviting the soul." But the indefinite, heterogeneous, and uncertaincharacter of these last, and the convenience of "time" as a rough basis for an approximate evaluation of the stuff they are made of, make it a matterof economy to resort to its use as a common denominator of alternatives. It will not be true that all things produced in equal times will be equated,for there are elements of "irksomeness," etc., which have to be taken account of. Crusoe's value scale will probably be based on time as a "firstapproximation" with mental allowances for the other factors to be considered.Measurement relations will be reciprocal, in this case as always. The use of effort to measure other things amounts to an evaluation of effort interms of other things. Thus we get the concept of a quantitative outlay cost meaning something more than merely any sacrificed alternative. Aspointed out before, in stating in terms of "resources" the general law of choice among alternatives, this concept of cost has no very substantialindependent meaning; "when pressed" we reformulate our resource or effort (or money) costs in terms of positive alternatives we might have had;but as a mediating, instrumental idea, it is none the less a useful and universally used notion. There is, however, no occasion to speak of a possibledivergence between outlay cost and value return, of anything like a "profit" from operations.