Eco-Watch Dialogues
6/8/99

Critiques of Cost-Benefit Analysis
by Dave Iverson

What follows are 'quotable quotes' from 17 of my favorite sources of critique of applied welfare analysis. I put them together in 1994, the last time I gave this topic serious consideration. I added an 18th in 1996. My bias is that economics is useful as an "aspect" of choice in aligning means with ends, but ONLY WHEN ENDS THEMSELVES CAN BE DISTINGUISHED IN ORDER OF IMPORTANCE (by individuals, and by society at large if economics is being used in a "social choice" context). This line of reasoning stems from Lionel Robbins (among others) as outlined in his classic, if seldom read, An Essay on the Nature and Significance of Economic Science.

The upshot is that in most "preservation" versus "use" debates, society has NOT distinguished "ends" in order of importance--therefore economics has little to say. It may be more useful to say that when and where debates rage over any social-choice topic, economics can not resolve such debates because the body-politic has not appropriately sorted ENDS relative to one another and relative to means to each end. About all economics can do is to help cost out alternative courses of action, and can do even this only if agreement can be reached as to what might be included as costs and receipts in any such analysis.

What can be said, according my read on the subject, is that economics can not judge the worth of "ends" in any way--these are moral judgements. We should be wary of analysts who argue that alternatives leaning toward "use" are somehow better (more efficient?) than alternative leaning toward preservation since they have higher index numbers, never bothering to ask: Efficient at what? Efficient for whom? Efficient for how long? Efficient by what standard? AND THEN WHAT? The same case can be made for wariness of analysts championing preservation alternatives on similar bases. Dave Iverson

Recent Critiques of Applied Welfare Analysis
D.C. Iverson
7/12/94
(additions 12/96)

In their popular book For The Common Good, Herman Daly and John Cobb state their belief that "the failures of the discipline of economics as now practiced have to be shown before there is much chance of reconstructing economics on a different basis." Daly and Cobb's book is one of several notable sources on that subject. In this note I try to sketch out a few of these 'failures' with quotable quotes from various sources. This is not an exhaustive list, but represents some of my personal favorites for this narrow-niche of economic reasoning.

Note that the classes of arguments used against applied welfare analysis (especially in the area of government cost-benefit analysis) are varied. When taken together, though, these arguments lead to the conclusion that we had better abandon many of our current practices in government economics, especially in the area of cost-benefit analysis. Instead, we need to embrace our emergent role as participants, along with other specialists, in the very public and political process of discovering the public interest by working through public problems and working to avoid such problems in the future.

In this approach economists can serve both as participants in the discovery process and purveyors of information. But they cannot serve as judges -- evaluating the so-called economic worth of projects, programs, or policies. You will note some internal inconsistency among the arguments presented below. Daly and Cobb, for example believe that efficiency measures can serve a broader purpose than do Iverson and Alston. Such disagreement aside, when taken collectively the arguments call-out for a reconsideration of the role for economics in decision-making.

* For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future, by Herman E. Daly and John B. Cobb, Jr., (Beacon Press, Boston, 1989):

... the primacy of deduction and the focus on mathematical models ... are the hallmark of current practice in the discipline. Such elaborate and beautiful logical structures heighten the tendency to prize theory over fact and to reinterpret fact to fit theory. (p 38)

... economic theorists have long recognized the distinction between optimal allocation and optimal distribution. The distinction we have been urging, between optimal allocation and optimal scale, is entirely analogous. Just as the concept of optimal distribution is based on ethical criteria of justice and is not definable in terms of efficiency, so the notion of optimal scale is defined in terms other than efficiency, namely ecological sustainability. (p. 145)

... if projects or combinations of projects must be sustainable, then it is inappropriate to calculate the net benefits of a project or policy alternative by comparing it with an unsustainable option -- that is, by using a discount rate that reflects rates of return on alternative uses of capital that are themselves unsustainable. ... The present net value criterion itself is not irrelevant because we are still interested in efficiency -- in choosing the best sustainable alternative. But the discount rate must then reflect only sustainable uses of capital. The allocation rule for attaining a goal efficiently (maximum present net value) cannot be allowed to subvert the very goal of sustainable development that it is supposed to be serving! (p. 75).

* "Policy Analysis and the Administrative State: The Political Economy of Cost-Benefit Analysis," by John Bryne, in Confronting Values in Policy Analysis: The Politics of Criteria, Frank Fischer and John Forester, eds., (Sage Publications, Newbury Park, 1987):

... Cost-benefit rule imputes little value to democratic processes of decision making, preferring calculation to consent as the basis of public choice. It ascribes no special importance to the ideals of democratic freedom and justice, reserving ideal status instead for the purportedly objective and efficient decision. Ultimately it is right reason, not democratic participation or values, that is cherished and nourished under cost-benefit government (p. 82).

The fundamental problem with cost-benefit reasoning on this score, however, is that it mis-represents the issue. By challenging democracy to yield utilitarian results, advocates presume the normative legitimacy of the criterion on net benefit while completely devaluing democratic results. It is as though the choice of democracy were inherently utilitarian. The possibility that decisions arrived at through democratic participation and consent could be valued in themselves independently of their economic implications is simply not recognizable from a cost-benefit perspective.... (P. 83).

* The Economy of the Earth, by Mark Sagoff (Cambridge University Press, Cambridge, 1988):

.... [The] solution is to recognize that utopian capitalism is dead; that the concepts of resource and welfare economics, as a result, are largely obsolete and irrelevant; and that we must look to other concepts and cultural traditions to set priorities in solving environmental and social problems. (p.22).

In this book I shall argue against the use of the efficiency criterion in social regulation, and against the idea that workplace, consumer-product, and environmental problems exist largely because 'commodities' like environmental pollution, workplace safety, and product safety are not traded in markets. I shall argue, in contrast, that these problems are primarily moral, aesthetic, cultural, and political and that they must be addressed in those terms. The notion of allocatory efficiency and related concepts in the literature of resource economics, as I shall show, have become academic abstractions and serve today primarily to distract attention from the moral cultural, aesthetic, and political purposes on which social regulation is appropriately based. (p. 6)

... I shall argue, however, that although many important virtues may underlie a free market -- freedom, autonomy, competitiveness, respect for property rights, and so on -- efficiency is not one of them. Free markets are rarely if ever efficient. Efficiency, I shall contend, functions not as a vindication of personal or property rights but primarily as a pretext for centralized governmental planning. (p. 6)

... Discussions of the 'trade-off' between efficiency and equality have become a useless academic pastime to which this book seeks to write an epitaph. These discussions have little to contribute to the practical and political concerns of social regulation. (p. 60)

Economic analysis has much to contribute not only in discovering the least costly methods to accomplish social goals but also in determining what these goals should be. This is because economic analysis may appear within ethical deliberations to adjust ends to means and thus help us define what we ought to do in relation to what we can achieve. ...

In the past, economists have too often proposed that society pursue efficiency in the allocation of resources rather than the ethical and cultural goals stated in public law. In previous chapters, I argued that a more efficient allocation of resources, all else being equal, is no better than a less efficient one; efficiency has no normative or ethical worth. By insisting on this worthless concept and by pursuing the many methodological and theoretical questions its application would raise, these analysts have limited the contribution economic theory might have made to policy analysis and social regulation.

Many other economists, on the other hand, have shown regulators not only how to achieve legislated goals more effectively but also how to adjust these goals to the obstacles that might otherwise reduce statutes to policy fictions. The role of good policy analysis and economic assessment is not to determine the goals of society in advance on a priori grounds on the basis of an academic theory. It is rather to inform the political process by which society chooses its own objectives. It may do this by appraising the goals of public policy in relation to the means, for example, the costs, actions, and materials, that society must employ to accomplish them. (p. 217)

* Benefit-Cost Analysis: A Political Economy Approach, by A. Allan Schmid, (Westview Press, 1989):

... Still, politicians keep asking technicians to derive some formula to determine the worth of environmental or health products. They ask because of the myth that market prices are somehow natural or right. .... [Politicians] do not need the crutch of an economic or scientific formula derived without political input; these formulas are often a lie or a mask for the personal preferences of the economist who derived them. (p. 293)

... A major theme of this book has been that analysts must be more interactive with politicians and other clientele if analysis is to play its role in demonstrating the systematic effects of implementing more generally stated objectives. The analyst need not be apologetic for asking questions rather than supplying independently determinative project values and rankings. ... To conclude, there is no way politicians can regard BCA as independent information to be weighed, somehow, along with other inputs to make a decision. BCA is either the politician's decision, or it is nothing at all. (p. 306)

* "Ethics and Values in Environmental Policy," by Paul Craig, Harold Glasser and Willett Kempton, Environmental Values 2(2), Summer, 1993:

[Senior policy advisors from four European governments] are expressing concern over the in-built tendency for economics [as commonly practiced in governmental decision-making] to obscure both the distinctions and linkages between natural capital (environmental resources and services), human-made capital (that we produce from natural capital using technology and labour), and cultural capital (the dynamic stock of information, values, and intuitions that shape how we choose to modify and 'manage' natural capital).

Economics, because of its high level of aggregation, makes it nearly impossible to assess the 'costs' and extent of reversibility of transformations between different forms of capital. Reliance upon a highly abstracted, single attribute sense of value -- money -- inexorably leads to decoupling from both physical reality and human values. (p. 143)

* "A Rhetorical Critique of 'Nonmarket' Economic Valuations for Natural Resources." by Markus J. Peterson and Tarla Rai Peterson, Environmental Values 2(1), Spring 1993:

... by excluding non-economic social spheres, economic valuation techniques produce a terministic screen that deforms policy makers' vision of the ecological problems faced by society. ... we demonstrate that when natural resource managers privilege economic motives, they trivialize other social functions such as education, politics, religion, and law. This process presents a significant ethical dilemma for democracies by first naturalizing, then ethicizing, existing patterns of domination. (p. 47)

* "'Ask a Silly Question . . .:' Contingent Valuation of Natural Resource Damages," Harvard Law Review 105(8), June 1992:

Society's growing concern for the environment and its recognition of natural resources' nonmarket values have elevated the need for accurate methods for measuring those values. [Contingent Valuation] CV is a novel and ambitious attempt to do so, but unfortunately, it is a fatally flawed one. Because new data and analyses suggest that CV does not provide even a rough estimate of people's true preferences for nonuse values, CV estimates of nonuse values should be excluded from federal damage assessment regulations and from the courtroom. (p. 2000)

* "From Plastic Trees to Arrow's Theorem," by Daniel A. Farber, University of Illinois Law Review 1986(2), 1986:

... economic efficiency does not have a particularly good claim as a rational method of combining individual value judgements to reach a social decision. More simply, economic efficiency is not a rational voting method. Of course, as Arrow's Theorem shows, there is no entirely rational voting method, which meant that economic efficiency might be as good as any other voting method.

Nevertheless, the argument is significant; majority voting scores as well as efficiency as a rational social choice decision method. Because the rationality standard provides no basis for selecting between the two methods, other attributes of majority rule versus economic efficiency deserve scrutiny.

... If efficiency scores poorly on the rationality scale, it scores ever worse as an equitable voting scheme. (p. 354)

... leaving it to a neutral decisionmaker to maximize the arbitrary preferences of individuals, leads to the dead end of Arrows Theorem. (p. 358)

* Environmental Justice, by Peter S. Wenz, Especially the chapter titled "The Nature and Limits of Cost-Benefit Analysis," (State University of New York Press, 1988):

"One result of the foregoing analysis is that proponents of utilitarianism and CBA [Cost-Benefit Analysis] are caught in a bind. If, as in CBA, benefits are measured in terms of people's willingness to pay, then public policies will be found best which do not accord equal importance to the basic well-being of rich and poor people. This contravenes basic notions of political justice. In addition, there will be no direct consideration for the well-being of nonhumans, including sentient nonhuman animals. These deficiencies can be largely overcome if benefits are identified instead, as in utilitarianism, with good experiences. Then the good experiences of animals count as much as those of people, and people's interests are given equal consideration, regardless of income. But we have no way of making interpersonal (much less interspecies) comparisons of winsomes and irksomes.... So we can never know the net effects of the various available alternatives. We are incapable of determining net effects also because the future is difficult to predict.... Thus we are unable to determine, as utilitarians (sometimes) must, which of the available alternatives produces the best net effects. The bind, then, is that things do not work out either way, whether benefits are measured in terms of people's willingness to pay or in terms of their inner experiences. (p. 219)

* "Ecosystem-Based Forestry Requires a Broader Economic Focus," by David C. Iverson and Richard M. Alston, Journal of Sustainable Forestry 1(2), 1993:

In forest planning, as in other settings, evaluation of alternatives is often flawed by a misunderstanding of the appropriate use of efficiency analysis. When analyzing alternative means to achieve given ends net present value calculation may prove useful in identifying inefficient means. Those means that survive this efficiency test emerge as alternatives to be further considered in the planning process -- a process that ends, ultimately, by choosing the most efficient means to achieve specified ends. By eliminating inefficient means, the choice would be among alternatives, each of which efficiently achieved different goals or goal sets. This suggests that for the final choice -- between efficiently designed alternatives -- ends, not means, and certainly not efficiency, would be at issue.

Few would argue that whatever alternative is chosen as a preferred plan should be efficient. But choice among efficiently arrived at alternative ends should not necessarily be guided by monetary considerations. ... The most efficient way to achieve ends emphasizing commodity forest outputs for which market-based prices could be established inevitably have net present net values different from those associated with the most efficient means to achieve ends emphasizing nonmarket forest outputs and values. The point is: once the most efficient way to achieve a given theme is identified, further comparison between ends or goals using present net value as a basis makes no sense. (pp. 101-102)

* Theoretical Welfare Economics, by J. de V. Graaff, (Cambridge University Press, Cambridge, 1975 (first published 1957)):

... Much of the appeal of what we might call laissez-faire welfare theory, which is largely concerned with demonstrating the optimal properties of free competition and the unfettered price system, is undoubtedly due to its elegance and simplicity. Admit the existence of external effects [the so-called externalities] and both disappear. Even under ideal circumstances, price no longer measures the marginal contribution a good makes to social welfare--it measures the contribution it makes to private welfare, which may be something quite different. ...

... In my view the job of the economist is not to try to reach welfare conclusions for others, but rather to make available the positive knowledge -- the information and understanding -- on the basis of which laymen (and economists themselves, out of office hours) can pass judgement.

It is for this reason that I choose to regard aggregate index numbers of output or consumption as mere providers of information which may or may not be useful in themselves, but which are certainly devoid of normative significance. ...

No doubt many professional economists are reluctant to abdicate what they may like to regard as their traditional prescriptive role, and are uneasy at the prospect of becoming mere purveyors of information. If they are, it is up to them to show how welfare economics can be set upon a basis which is even reasonably satisfactory--or can be made to yield conclusions with which a significant number of men are likely to concur. (pp. 170-1)

* Complexity: The Emerging Science at the Edge of Order and Chaos, by M. Mitchell Waldrop, (Simon and Schuster, 1992):

At the first level ... there is the conventional cost-benefit approach: What are the costs of each specific course of action, what are the benefits, and how do you achieve the optimum balance between the two? "There is a place for that kind of science," says [Brian Arthur, Stanford Univ.]. "It does force you to think through the implications of the alternatives. ... The trouble is that this approach generally assumes that the problems are well defined, that the options are well defined, and that the political wherewithal is there, so the analysts job is simply to put numbers on the costs and benefits of each alternative. It's as though the world were a railroad yard: We're going down this one track, and we have switches we can turn on to guide the train onto other tracks," Unfortunately for the standard theory, however, the real world is almost never that well defined -- particularly when it comes to environmental issues. All too often the apparent objectivity of cost-benefit analyses is the result of slapping arbitrary numbers on subjective judgments, and then assigning the value of zero to the things that nobody knows how to evaluate. "I ridicule some of these cost-benefit analyses in my classes," [Brain Arthur says]. "The 'benefit' of having spotted owls is defined in terms of how many people visit the forest, how many will see a spotted owl, and what it's worth to them to see a spotted owl, et cetera. It's all the greatest rubbish. This type of environmental cost-benefit analysis makes it seem as though we're in front of the shop window of nature looking in, and saying, 'Yes, we want this, or this, or this' -- but we're not inside, we're not part of it. So these studies have never appealed to me. By asking only what is good for human beings, they are being presumptuous and arrogant." (pp. 331-2)

* "The Emperor's Old Clothes: The Curious Comeback of Cost-Benefit Analysis," by John Adams, Environmental Values 2(3):247-260, Autumn 1993.

Governments frequently, and legitimately, over-ride the passionately held convictions of minorities in pursuit of policies that they deem to be for the wider public good. They do so, and have done for centuries, on the basis of political judgement. Such judgements ought not to be assisted by juggling with the combination of biased, arbitrary, and plain meaningless numbers to be found in most environmental cost benefit analyses. (p. 255)

All the problems with willingness-to-pay measures rehearsed above suggest that they will almost always yield nonsense results when used to measure environmental losses. But are they also immoral? The answer appears to be yes. ... Substituting a willingness to accept value instead of a willingness to pay measure does not make the method moral. To ask the aboriginal inhabitants of Kakadu what they would be willing to accept for something that their culture holds sacred would be to attempt to corrupt them; that which is truly sacred is not for sale. Many non-market goods, the most important non-market goods, are defiled by attempts to measure them with the measuring rod of money. (p. 257)

Why has the Department of the Environment [in England] not only resuscitated [cost-benefit analysis] as a method for project assessment but promoted it to a central role in the formulation of environmental policy? ....

One reason.... The rewards for believing are great. Believers are offered a Solomon Machine -- a machine that embodies in quantified form the principles of profit maximization, and distributive justice, a machine into which can be fed accurately measured valuations of all the relevant facts, and out of which will flow wealth and even-handed justice for all. For a judge whose working life involves balancing probabilities and weighing up incommensurables, it must be tempting. For civil servants and government ministers, faced with decisions about environmental problems of enormous scale and complexity, and who are unfamiliar with the method's dubious past, its charms must be equally difficult to resist. (p. 258)

* "The Ideology of Efficiency: Searching for a Theory of Policy Analysis," by Daniel W. Bromley, Journal of Environmental Economics and Management 19: 86-107, (1990)

The fact that belief in the objectivity of efficiency is widely shared does not make it so. (p. 95)

In the absence of a clear social consensus for the Pareto test, efficiency via this metric is advocated by economists quite without support from the collective unit onto which it is being imposed. In Dorfman's terminology, benefit-cost analysis has evolved as an effort to impose an economic approach into a political problem. Economists who have persevered in this tradition seem content to overlook the logical inconsistencies in welfare economics, this obduracy apparently being justified on the grounds that a little economic analysis -- even if indefensible on theoretical grounds, and therefore bogus -- is better than a political process left to its own devices. Bad economics is offered up as being superior to politics. (p. 97)

The economist as policy analyst will continue to face a difficult task. It is not always easy to maintain a sharp distinction between policy objectives and policy instruments. ....

The feasible thing for the policy analyst, it would seem, is to become involved in the policy process in a way that will facilitate the dialectical evolution of both policy objectives and policy instruments. In some instances productive efficiency will be the objective, while in other settings economic opportunity will be purposely reallocated. Yet other situations will see conscious efforts to redistribute income. An objective scientist can further the cause of economic rationality given the evolved policy objectives of the collective and the decision makers therein. This neither suggests, nor requires, that false notions of scientific objectivity hamper or delude the economist. (p. 105)

* "Choices without Prices without Apologies," by Arild Vatn and Daniel W. Bromley, Journal of Environmental Economics and Management 26: 129-148, (1994)

... To be less subtle, there is nothing in economics in general -- or in hypothetical valuation in particular -- that can address the optimal level of air or water quality, or of land devoted to parks and wilderness.

... pricing is not sufficient to ensure informed and coherent collective choices about environmental goods and services. ... Because most environmental programs are the result of new technical information about the health effects of certain economic processes -- or because the individual and collective value of many amenities is itself undergoing continual change in an evolving world -- hypothetical valuing and pricing of environmental goods and services necessarily fails to provide decisive information about what is "efficient" and what is "welfare enhancing."

The collective choice problem about environmental goods and services is complex and problematical precisely because it entails aspects of our social existence that defy reduction to the venerable fiction of commodities.

Efforts to redefine reality may prove useful in discussing certain aspects of environmental policy in the classroom, but it does not therefore follow that collective choices which reject the commodity fiction are ill-informed, inconsistent, or not in the interest of efficiency. The hypothetical valuation exercise may be its own reward for what it tells us about how individuals value non-ordinary aspects of their lives. But the most fundamental environmental choices will continue to be made without prices -- and without apologies. (p. 145)

* "Thoreau's Insect Analogies: Or, Why Environmentalists Hate Mainstream Economists," by Bryan Norton. Environmental Ethics 13(3): 235-251. (1991)

If environmentalists believe, as I think most of them do, that an important part of the solution to the "environmental problem" must be found in a transformation from a consumer to a conserver society, we can interpret environmentalists gut-level reaction against economists not as a commitment to extra-experiential intrinsic values, but to a rejection of economists' "doctrine" of consumer sovereignty. Environmentalists' rejection of economic analyses can then be understood as a recognition that standard approaches to economic analyses cannot express environmentalists' belief in the dynamic nature of human values. (p. 248)

More practically, environmentalists worry that economists' decision to accept all demands as equally valid will fail to focus attention on reducing demands. ... More generally, environmentalists believe that strategies to reduce demand are preferable to strategies of supply development. (p. 250)

* Our Limits Transgressed: Environmental Political Thought in America. Bob Pepperman Taylor. University of Kansas Press, Lawrence. (1992)

... [Following Mark Sagoff's reasoning] a policy question can be analyzed at two distinct levels. The first level is utilitarian and simply tallies consumer preferences. The second, however, involves a moral evaluation of the proposed policy.

The problem with cost-benefit analysis, and the utilitarinism on which it is built, is that it considers only the first level of analysis and ignores the second. ... Cost-benefit analysis conflates our values with our preferences, our public interests with our private interests, and our citizenship with our consumershsip. In doing so, cost-benefit analysis replaces moral judgment with a scientific method for calculating individual preferences or utility. In Sagoff's terms, the virtues of moral discourse and evaluation are replaced by a false methodological certainty, and public deliberation is replaced by scientific management. ....

Environmental values--in fact all values--are qualitatively different from consumer or utilitarian preferences and thus the two cannot be equated.....

... Sagoff believes that environmental legislation will only make sense if we think of it as an expression of our moral values as a nation, rather than as the outcome of a struggle between competing interests. ... "This is not a question of what we want; it is not exactly a question of what we believe in; it is a question of what we are." [Quoting Mark Sagoff from his book The Economy of the Earth.] (pp. 72-73).

* The Good Society. Robert N. Bellah, Richard Madsen, William M. Sullivan, Ann Swidler, and Stephen M. Tipton. Vintage Books. (1991)

Cost-benefit analysis has the apparent virtue of allowing a purely neutral weighing of advantages and disadvantages of any given policy in monetary terms, though its critics argue that it systematically over-looks important public concerns that cannot be quantified. The deeper appeal of cost-benefit analysis is that it holds out the possibility, however visionary, of an integrated approach to policy, of doing what is really important rather than whatever happens to be politically popular. Its most fallacious, but equally appealing, claim is that it offers a set of neutral rules, a methodology, for arriving at just decisions. If, as we believe, justice depends on forms of deliberation and judgement that cannot be reduced to rules or derived from a neutral methodology, but must always result from substantive considerations about the common good along with universal concerns about human dignity, then cost-benefit analysis cannot substitute for judgement in the choice of ends, though it can sometimes be a useful tool in choosing among alternative means. (pp. 115-116)

... To substitute this type of thinking for an informed public discussion is to abdicate political responsibility; despite surface appearances, it is undemocratic, for it does not allow a genuine democratic consensus to emerge but depends instead on an uninformed and undebated plebiscite of transitory and unexamined desires. It is an example of the fundamental error of replacing a genuinely democratic process with a consumer market choice model. (p. 119)