Adjusting for Opportunity Costs, Rather Than Inflation

A follow-up to yesterday's Why Do We Use Inflation Adjusted Prices?

When we adjust for inflation, our unit of measure tends to be something like "1982 dollars". But the entire concept of 1982 dollars is a rather meaningless one, for reasons I describe here. A basket of goods in services in 2008 (or 2009) is fundamentally different than those in 1982. Without access to a time-machine, I cannot go back in time to 1982 so I can buy a brand new Colecovision at Woolco. I can't even do that in 2008. 1982 dollars is not a unit of measure that is relevant to my life today.

What does matter, from an economic point of view is opportunity costs. In his best post of 2008, John Whitehead writes:

Opportunity cost is a strange notion to some (especially intro micro students) ... it is the value of the next best alternative whenever a choice is made. For example, if I purchase a $1000 flat panel LCD TV, the true cost of the TV is not $1000, but what I could purchase instead (such as $500 in each kid's college education 529 plan [sorry kids]).

John is absolutely correct. This is why measuring price in terms of labor hours, rather than dollars (as I argued yesterday) makes far more sense. While this not identical to opportunity costs; the opportunity cost of buying a gallon of gasoline may not be working an extra 5 1/2 minutes - it may have instead been not buying a pack of hockey cards. But it gets us far closer than measuring prices in terms of 1982 dollars, which, unless you have access to a time-machine, are not an opportunity cost for anyone.