Prices and Values
Why economics fails as a sole foundation of public
policy.
Ernest Partridge, Co-Editor
The Crisis Papers
| |
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
Nobel Laureate
Economics, 1998 |
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
September, 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 –
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 –
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 – 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:
-
They appear to be sensitive to particular and identifiable facts -
namely consumer choices, market prices, etc.
-
They employ precise, formal modes of quantification and calculation
that are public and replicable, and thus appear to be "scientific."
-
They are "democratic," reflecting the
actual
(rather than
the "desirable") values of the public.
-
They are tolerant and libertarian, assuming that "each individual
is the best judge of his own welfare" (William Baxter).
-
They commensurate values in terms of a common and quantifiable
denominator: cash. (Thus enabling the aforementioned advantages of
quantification and formalization).
-
They are determinate: they arrive at unequivocal conclusions - the
so-called "bottom line."
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) 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.
(f) Values, for
from being described by prices, logically precede prices. 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 pay for X? Before I can answer
that, I must first assess the value of X?" And that "value" will, of
necessity, be normative or even moral, 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 – 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 NewAlchemy").
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
At the opening of his ill-fated campaign of 1968, Robert F. Kennedy
eloquently expressed the limitation of the Gross Domestic Product (then
called “the Gross National Product) as a measure of the value of a society.
Too much and for too long we seem to have surrendered personal
excellence and community values for the mere accumulation of material
things. The Gross National Product .., if we judge the United States by
that, counts air pollution and cigarette advertising, and ambulances to
clear our highways of carnage. It counts special locks for our doors and
the jails for the people who break them. It counts the destruction of the
redwoods and the loss of our natural wonders in chaotic sprawl. It counts
napalm and nuclear warheads and armored cars for the police to fight the
riots in our cities. It counts [the killer's] rifle and [the rapist's]
knife and the television programs which glorify violence in order to sell
toys to our children. Yet the Gross National Product does not [include]
the health of our children, the quality of their education, or the joy of
their play. It does not include the beauty of our poetry, or the strength
of our marriages, the intelligence of our public debate or the integrity
of our public officials. It measures neither our wit nor our courage, our
wisdom nor our learning, neither our compassion nor our devotion to our
country. It measures everything, in short, except that which makes life
worthwhile, and it can tell us everything about America, except why we are
proud that we are Americans.
This essay is adapted from the second section of my published paper,
“In Search of
Sustainable Values.” Endnotes and references may be found with
that paper, which is located at my personal website, “The Online Gadfly.”
The third section is an extended analysis of the Price/Value distinction.
Follow this
link.
Ernest Partridge's Internet Publications
Conscience of a Progressive:
A book
in progress.
Partridge's Scholarly Publications. (The Online Gadfly)
Dr. Ernest Partridge is a consultant, writer and lecturer in the field
of Environmental Ethics and Public Policy. He has taught Philosophy at
the University of California, and in Utah, Colorado and Wisconsin. He
publishes the website, "The Online
Gadfly" and co-edits the progressive website,
"The Crisis Papers".
