November 26, 2006

Sunk Costs

Professor Steven Bainbridge, of my law alma mater, has no less than three blogs. I attempted that, but gave up one and don't regularly post on t'other. Bainbridge is a smart law prof of the "law and economics" variety.

Sometimes economists who hew too strictly to their paradigm end up with strange results, but in discussing Iraq, Bainbridge makes an important point, using the concept of "sunk costs."

If you decide to open an upscale restaurant, sign a lease and make the tenant improvements, and then discover it's next to a sewage plant and the neighborhood is full of gang-bangers, it makes no sense to stay there because of all the money you've invested. It's gone. You have to choose between the future costs of staying and continuing to pour in money, opening a new restaurant somewhere else with new money, or becoming an encyclopedia salesman. Your past rent payments and improvement costs are "sunk costs" and you ain't never gonna get them back. They're like last week's lottery ticket.

Bainbridge, without saying much about what we should do, points out that the costs to date in lives, treasure and reputation of the Iraq war must be analyzed the same way. The costs to date are sunk. The question is, what do we do going forward? I've looked at some of the costs of withdrawal, which anyone who advocates that position must consider. There are, of course, costs of staying, too, some predictible and some not. Bainbridge is right, though, that any analysis of our future costs most necessarily regard what's been done up to now as sunk costs.

(I don't mean to day, by the way, that the loss of credibility likely to result from withdrawal is to be ignored--that's a cost attendant upon future action. The same would be true off the effect on our credit if we abandoned our ill-fated restaurant, and then defaulted on the loans we took out to build it--that's a cost for future action, too).

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