I like this letter because it mentions the concept of opportunity cost.
Here’s a fairly standard definition of the term:
“In microeconomic theory, the opportunity cost, or alternative cost, of making a particular choice is the value of the most valuable choice out of those that were not taken.”
In my mind the most important thing to know about opportunity cost is how it relates to government spending. You could say that every single penny of government spending is a penny not spent on something else.
There’s nothing unique about government in this, but there is a consequence. Because government doesn’t produce any goods, for the most part, the real opportunity cost of government is the loss of goods that would otherwise have been produced.
Consider the case of a war ship. All the goods that go into it become set aside from the remainder of the economy while the warship is in use. Then, ultimately, those goods are either lost in battle, sunk for a reef, or just decay into nothing.
You can expand this out to think of whole industries. The garment industry, for example, takes goods in and puts goods out, whereas the defense industry takes goods in and puts nothing out.
Obviously, the defense industry produces substantial benefits that we need and want, but you can’t eat them, wear them or get out of the rain in them.
Nearly all of government is like that. The ultimate effect it has on the world we live in is that the totality of money remains the same, but the totality of goods goes down.
That’s opportunity cost.