Prices and Values

August 9, 2005

Why economics fails as a sole foundation of public policy.

The economist . . . keeps the motivations of human beings pure, simple and hard-headed, and not messed up by such things as goodwill or moral sentiments... [T]here is ... something quite extraordinary in the fact that economics has in fact evolved in this way, characterizing human motivation in such spectacularly narrow terms. One reason why this is extraordinary is that economics is supposed to be concerned with real people. It is hard to believe that real people could be completely unaffected by the reach of the self-examination induced by the Socratic question, "how should one live?"

Amartya Sen

Immediately upon assuming office in 1981, President Ronald Reagan issued an Executive Order requiring all federal administrative agencies and departments to justify proposed regulations with a cost-benefit analysis.

Similarly, on his first day in office, January 20, 2001, George Bush ordered all cabinet officers to withhold implementation of more than fifty federal regulations that had been approved late in the Clinton administration. They were to be kept ¡§on hold¡¨ until Bush¡¦s Office of Management and Budget determined that their benefits exceeded their costs.

As Amanda Griscom (of grist.com) reported in Spetember 2003 ¡§The frozen rules included more than a dozen significant environmental ones. They called for less arsenic in drinking water, a ban on snowmobiles in national parks, controls for raw sewage overflow, stronger energy-efficiency standards, and protections against commercial logging, mining, and drilling on national lands. Of the environmental regulations that came under scrutiny, only half have since made it past the cost-benefit analysis and into the Federal Register. ¡¨

Cost-benefit analysis (CBA), an exclusively economic assessment of public policy proposals, is based upon the assumption that the public values that enter into policy decisions can all be quantified in monetary terms. This is a remarkably impoverished concept of "values" to be coming from an administration that proclaims its commitment to "moral values."

But does anyone really believe that values can be reduced to (monetary) costs and benefits? Apparently more than a few economists believe this. Consider the following comments from standard economic texts and publications: ¡§All goods that matter to individuals ... must be capable of being bought and sold in markets.¡¨ (A. Myrick Freeman) "The benefit of any good or service is simply its value to a consumer." (J. Seneca and M. Taussig) " In principle, the ultimate measure of environmental quality is the value people place on these services ... or their willingness to pay." (Freeman, Haveman, and Kneese) And finally, "anything that is valued instrumentally ... can in principle be handled by economics, be it acts of friendship or love." (Steven Edwards).

While historically utilized by both Democratic and Republican administrations, cost-benefit analysis is especially favored by corporate and business interests, and not surprisingly, the Bush administration ¡V described by two CBA critics as ¡§populated by the most ardent defenders of cost-benefit analysis in executive branch history.¡¨ These critics, Frank Ackerman and Lisa Heinzerling continue:

The administration of George W. Bush is the most hostile to environmental protection of any in recent memory. It is also the most enthusiastic about the use of cost-benefit analysis to screen proposed regulations. Perhaps this is only a coincidence. Perhaps [this] process of carefully summarizing people¡¦s preferences has found that the American public wants to weaken the Clean Air Act, drill for oil in the Arctic National Wildlife Refuge, ignore the dangers of global warming, allow more polluting snowmobiles into national parks, use cheaper and less effective safeguards against SUV tire blowouts, accept high levels of mercury in our food and water, and so forth.

However, Ackerman and Heinzerling tell us, ¡§we don¡¦t believe it.¡¨ Cost-benefit analysis and the monetization of values are somehow failing to measure the authentic values of the American public. They continue:

Gamblers know that dice that always roll snake-eyes are loaded. The same holds true for a decision-making method that repeatedly tells us to do less about environmental protection, even when public opinion polls tell us that the American people want to do more. The problem ... is that cost-benefit analysis is incapable of making meaningful choices about things that matter to most people.

Why, therefore, are the Republican administrations of Ronald Reagan and George W. Bush, not to mention many economists and policy analysts (worthy exceptions noted below), so eager to apply monetary prices to values? And why is CBA ¡§incapable of making meaningful choices about things that matter to most people?¡¨

To these two questions we now turn.

First of all, why is "the economic approach" to public policy ¡V cost-benefit analysis and the monetization of values -- so attractive to legislators and policy makers?

In the case the Bush administration, the White House¡¦s Office of Management and Budget has managed, through subtle and arbitrary ¡§pricing¡¨ of costs and benefits, to come up with cost-benefit analyses that support pre-determined administration policies ¡V i.e., policies favorable to business and corporate interests, and critical of the federal regulation of these interests. Chief among these devices is the inflation of costs and the exclusion of benefits that can not be measured economically. To put it bluntly, Bush¡¦s OMB ¡§rigs¡¨ the cost-benefit analyses to favor corporate interests. As Public Citizen reports in a February, 2004 news release:

Cost-benefit analysis attempts to assign a monetary value to the costs and benefits of regulations, with an eye toward eliminating rules with a higher cost than benefit. The method ignores benefits that cannot be expressed in terms of money and disregards the principle that industry should bear the cost of alleviating the harm it causes.

"Regulatory accounting [i.e., CBA] suffers from fatal flaws that make it useless for any purpose other than lending a false appearance of technical objectivity to a political decision that regulated industries¡¦ interests trump the public¡¦s interest," [Public Citizen President, Joan] Claybrook said.

OMB¡¦s report to Congress is misleading also in that it ignores the costs to the public of scores of public health, safety and environmental protections that have been weakened and blocked during the past three years.

Bush administration aside, economists and policy analysts cite these general advantages of cost-benefit analysis and the monetization of values:

„h They appear to be sensitive to particular and identifiable facts - namely consumer choices, market prices, etc.
„h
„h They employ precise, formal modes of quantification and calculation that are public and replicable, and thus appear to be "scientific."
„h
„h They are "democratic," reflecting the actual (rather than the "desirable") values of the public.
„h
„h They are tolerant and libertarian, assuming that "each individual is the best judge of his own welfare" (William Baxter).
„h
„h They commensurate values in terms of a common and quantifiable denominator: cash. (Thus enabling the aforementioned advantages of quantification and formalization).
„h
„h They are determinate: they arrive at unequivocal conclusions - the so-called "bottom line."
„h
That final advantage ("the bottom line") may suggest why, at congressional hearings, economists are many and philosophers are few. The former are willing to supply answers, while the latter are disposed to raise further questions.

With advantages such as these, why not base policy on economic values? As many critics have pointed out (among them such economists as Kenneth Arrow, Kenneth Boulding, Herman Daly and Amartya Sen), many of the values most cherished by cultivated human beings are either independent of, or even inversely related to, economic values. Four such categories of values immediately come to mind: those of the scholar and scientist, the citizen, the moral philosopher, and the friend and lover.

(a) The primary value of the scholar and scientist, of course, is truth -- as supported by evidence and sound argument. An authentic scholar will say, "show me your evidence, and if it is well-founded and your argument is sound, then you will convince me." Never will he, qua scholar, say, "how much are you willing to pay to have me believe you?" Similarly, judges and juries ideally decide their verdicts on the weight of evidence. A purchased verdict is not only invalid; it is quite properly regarded as a crime. And even classical economists, when they publish their theories, offer arguments, not bids.

(b) What an individual values (as a citizen) for his community may be quite contrary to what he might value for himself as a consumer. Mark Sagoff vividly illustrates this contrast:

Last year I bribed a judge to fix a couple of traffic tickets, and was glad to do so because I saved my license. Yet, at election time, I helped to vote the corrupt judge out of office. I speed on the highway, yet I want the police to enforce laws against speeding. I used to buy mixers in returnable bottles -- but who can bother to return them? I buy only disposables now, but to soothe my conscience, I urge my state senator to outlaw one-way containers. ... I send my dues to the Sierra Club to protect areas in Alaska I shall never visit... And of course, I applaud the endangered Species Act, although I have no earthly use for the Colorado Squawfish or the Indiana bat... I have an 'ecology now' sticker on a car that drips oil everywhere it's parked.

In fact, as these examples point out, a complete human being is both an individual with consumer preferences, and a citizen with loyalties and moral aspirations, which frequently over-ride the self-serving, "utility maximizing" motives of homo economicus. The consumer views the world through "the mind's I." The citizen takes "the moral point of view," perceiving oneself as an equal member among many in a community. "The governing impulse of the consumer is "I want." The governing impulse of the citizen is "we need." (See my "Consumer or Citizen?")

(c) Distributive justice. As economists and utilitarian philosophers have long acknowledged, "economic efficiency" and "utility maximization" do not, by themselves, touch upon the essential moral issue of justice. Economic theory is silent on the question of whether the wealth of the cooperative enterprise which is society, goes to those who most deserve it. "Just desert" is a moral, not an economic, concept. ¡§Pareto optimality¡¨ is the economist's term for that condition in society of "perfect efficiency" whereby there are no further transactions that can benefit anyone without making another individual worse off. It is noteworthy that "Pareto optimality" can describe a slave economy. For while justice demands the emancipation of the slaves, this can not be accomplished without making the slave owners "worse off."

(d) Love, friendship and loyalty that is bought is less valuable than that which is given freely. Economists enjoy telling the tale of new member of the Economics Department encountering a colleague in the Quad. "How do you like it here?" asks the veteran. "OK, I guess," replies the newcomer, "intelligent students, good research facilities -- trouble is, I don't seem to have many friends." His colleague suggests, "well, if you value friendship that much, why not buy a friend?" Elaboration is clearly superfluous.

As for love, Mark Sagoff makes the point with characteristic wit and eloquence: "A civilized person might climb the highest mountain, swim the deepest river, or cross the hottest desert for love, sweet love. He might do anything, indeed, except be willing to pay for it."

(e) Finally, the market place can obscure Adam Smith's essential distinction between "values in use" and "values in exchange." "The things that have the greatest value in use," he writes, "have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value is use." As examples, Smith cites diamonds, which have little value in use but great value in exchange, and water which has effectively infinite value in use (we can not survive without it), but very little cost (exchange value). Significantly, "environmental values" such as clean air and water tend to be "values in use," and thus greatly undervalued in markets.

Neo-classical economists are quite correct when they state that theirs is a "positive discipline" that attempts to report values, rather than prescribe values - and, as we have noted above, only a limited realm of values at that. For while they might tell us what is valued by "the consuming public," they can not tell us what is valuable. But the latter question, "what is valuable," is of most basic and urgent concern to the policy-maker, the legislator and the citizen. Ask an uncritical economist, "what is the value of X?" and he will likely ask in reply, "what are you (or 'the market') willing to pay for X?" The astute citizen, asked such a question, will reply: "What am I willing to payfor X? Before I can answer that, I must first assess the value of X?"

And that "value" will, of necessity, be normative, not economic. And if this value is environmental - for example, the value of clean air, access to wilderness, biodiversity, and the availability of these amenities into the remote future - or political ¡V the rights of life, liberty, property, free speech, free association, free exercise of religion, etc. -- then the most appropriate means of assessing that value just might be not an assessment of the marginal price in a "free market" to self-interested, utility-maximizing individuals (¡§how much are you willing to pay¡¨) but rather a consensus through evaluation in a forum of informed and deliberating citizens or their elected representatives. (See my "The New Alchemy")

Fairness requires that I anticipate a rebuttal by the economist: "We never meant to suggest," he might reply, "that homo economicus describes all dimensions of human existence, and thus we do not contend that prices are the only values. While agreeing with the gist of your argument above, we would only insist that economic motives and values happen to be the subject-matter of our discipline. In some conditions of ordinary life, and even of public life, human beings, both individually and collectively, act upon economic motives. When they do, the concepts and methods of economics might prove to be illuminating."

Fair enough! I have little quarrel with economists who thus qualify and confine the application of their methodology and concepts. Unfortunately, such commendable modesty is not universal. Moreover, these wise qualifications are more likely to be found among scholars, especially as they write papers for, and discuss public issues with, their colleagues. My quarrel is with opportunistic politicians, such as those who labor in the Bush administration and in Congress, who have no use for such qualifications, and who instead employ cost-benefit analysis as a device to justify the elimination of laws and regulations put in place to protect the general public, and to justify policies design to benefit their corporate ¡§sponsors.¡¨

Copyright 2005 by Ernest Partridge

Bio Tag: Dr. Ernest Partridge is a consultant, writer and lecturer in the field of Environmental Ethics and Public Policy. He publishes the website, "The Online Gadfly" (
www.igc.org/gadfly) and co-edits the progressive

website, "The Crisis Papers" (
www.crisispapers.org). Send comments to:
crisispapers@hotmail.com.

ENDS

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