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On Two Meanings of “Cost”

When my intrepid colleague Veronique de Rugy informs me – as she did this morning – that my use of an analogy is confusing, I can only agree. The analogy that is confusing is one that David Henderson explicitly challenged in his recent EconLog post on what David thinks to be an error that I committed.

I explain here why I disagree with David that I committed an error, but perhaps my analogy is indeed so unhelpful that my use of it spawned unnecessary confusion. I hope to write a longer post on that analogy later.

But very quickly here, it occurs to me – from my conversation a few minutes ago with Vero – that when I and other free-traders insist that “exports are a cost,” a confusion is sparked because the word “cost” has two very different meanings, but ones that are close enough to each other as to be a source of confusion.

One way in which English-speakers use “cost” is to convey the notion of loss. One among countless examples is when someone laments leaving his car unlocked upon discovering that his wallet was stolen from it: “My carelessness really cost me,” says the theft victim. Here, the speaker means to convey the notion that he has been made worse off. He has suffered a loss.

But a second meaning of “cost” refers not to any loss, but instead to that which is sacrificed in anticipation of a greater gain. “That bottle of zinfandel cost me twenty-five dollars” expresses what the buyer of the bottle of wine gave up in order to get something that the buyer values more highly than whatever else the buyer would have spent the $25 on. But this cost is not a loss. This cost is a sacrifice that was necessary in order to obtain a gain.

Of course, the wine lover would have preferred to have the bottle of wine materialize before him without him having to sacrifice anything at all for it. But the fact that in reality he incurred a cost to acquire the bottle does not mean that he lost.

When people hear that “exports are a cost,” I suspect that they often hear “exports are a loss” – a claim that clearly isn’t correct. Exports are not a loss. But exports are a cost, and they exist only because those who export expect that, in paying this cost, they will receive in exchange something of greater value.