Social Cost Benefits
Mark Sagoff
Economists in the 1940s and 1950s, who developed cost benefit analysis, analogized the government to a firm. They thought that public works projects, such as dams, should return a profit to society on its investment. The Flood Control Act of 1938 required a weighing of eco nomic pluses and minuses; for example, the value of irrigation and electricity against the amortized capital cost of building a dam. It per mitted the government to finance water projects only when ‘‘the benefits to whomsoever they accrue [are] in excess of the costs.’’
A cost benefit approach is uncontroversial in relation to governmental projects – including ‘‘pork barrel’’ projects – that provide goods and services, such as electricity and irrigation, for which ordinary markets set prices. It becomes controversial, however, insofar as it replaces public deliberation and legislative intent in the administration of laws that express public values and morality. When Congress outlawed child labor, for example, it regulated markets for moral not economic reasons.
Similarly, Congress has passed environmental laws largely because of ethical concerns, for example, about the extinction of species and the protection of public safety and health. Can the cost benefit approach apply to public policy in the area of the environment, civil rights, education, the support of the arts, and so on? These policies at present follow from political deliberation through which we form and express our values as a nation. Should they be based instead on the preferences of individuals determined and aggregated by the techniques of cost benefit analysis?
Cost benefit aggregation presupposes that all values are subjective. It assimilates ideals and moral commitments to wants and preferences of the sort individuals satisfy in markets. The cost benefit approach enters these preferences into a social welfare calculus on which policy is then based. Moral deliberation, in contrast, is supposed to be educative. Rather than depend on the ‘‘given’’ or ‘‘exogenous’’ consumer preferences of individuals, it seeks to inform, educate, and constitute public opinion within legitimate democratic political institutions and processes. According to this approach, the public consists not of consumers seeking to promote their own welfare, but of citizens deliberating over shared values, objectively grounded moral beliefs, or conceptions of the common good.
The cost benefit approach begins with an answer to the moral question: What is the goal of public policy? The goal of public policy, it assumes, is the same as that of the market, namely, to elicit and satisfy consumer wants and preferences. The theory of welfare economics on which cost benefit analysis rests equates the public good with the maximum satisfaction of preferences that individuals are willing to pay to satisfy. The theory defines ‘‘welfare’’ or ‘‘well being’’ in terms of the satisfaction of those preferences.
Critics of the cost benefit approach, including many environmentalists, believe, on the contrary, that democracy is seized with ethical questions, not just economic ones. Environmentalists argue, for example, that persons and property should be protected by right from pollution, as from any form of invasion or coercion. Accordingly, legislation seeks to minimize pollution rather than to maximize welfare. What is more, environmentalists do not believe that smoking, pollution, and other assaults on health improve welfare even if people voluntarily smoke, accept risky jobs, and so on. The role of government may be to create new options and to educate and improve preferences, rather than simply to take them as they come.
Those who defend cost benefit analysis reply that if people are assumed to be the best judges of their own well being, the economically efficient outcome – that is, the one that maximizes the satisfaction of preferences weighted by willingness to pay – will (tautologously) maximize the well being or welfare of those individuals. A perfectly competitive market – that is, a market in which all goods are fully owned and people can trade costlessly – would allocate resources to those willing to pay the most for them, and it would therefore reach the welfare maximizing, efficient outcome. If the role of the government is the same as that of a perfectly competitive market, that is, to allocate resources to those willing to pay the most for them, then cost benefit analysis is a legitimate basis for public policy. Since markets often fail to capture all willingness to pay, especially in relation to the environment, managers trained in cost benefit analysis should determine these ‘‘unpriced’’ preferences and allocate resources accordingly.
Many economists are developing techniques to ‘‘price’’ ethical values and political convictions as if they were subjective or personal ‘‘consumer’’ preferences. The primary technique, contingent valuation methodology, involves asking people how much they are willing to pay for outcomes to which they are morally commit ted (for example, the existence of an endangered species or a wilderness area they do not expect to visit). Even if citizens would pay only a few dollars each for these ‘‘existence’’ values, the aggregate sum might be substantial.
Cost benefit analysis, insofar as it treats principled beliefs, moral commitments, and reasoned positions as ‘‘externalities’’ consumer markets have failed to ‘‘price,’’ raises several difficulties. First, preferences, being mental states, are unobservable. Analysts must infer them from what a person says or does. However, anything a person says or does – including the answers he or she gives on surveys – can be interpreted in any number of ways. Accordingly, cost benefit analysis greatly extends the power of governmental officials who, by asking questions and interpreting answers in one way rather than another, obtain the results they want. Since market ‘‘failures,’’ ‘‘existence’’ values, and other ‘‘unpriced’’ preferences are pervasive and ubiquitous, moreover, the cost benefit approach, for all its insistence on free markets, opens the door to centralized planning.
Second, the worth of an ideal or a principle cannot be determined by asking what people are willing to pay for it. Nobody asks economists how much they are willing to pay for their view that social welfare, as they define it, should be a basis of regulatory policy. Why should willing ness to pay measure the importance of opposing principled positions and moral theories? People who believe that it is wrong to accelerate the extinction of species, for example, do not express a subjective preference. They affirm a policy position opposed to the assumptions of a cost benefit approach.
Third, having a preference, however ill informed or poorly considered, may give the individual a reason to try to satisfy it, but what reason has the government to seek to satisfy that preference? The reply that the satisfaction of preference maximizes well being is trivially tautological if ‘‘well being’’ or ‘‘welfare’’ is defined in terms of preference satisfaction. Otherwise, it is false. For example, people as a rule do not report they become happier when their incomes rise, and they can satisfy more of their preferences.
Plainly, cost benefit analyses have an import ant role to play in reviewing ‘‘pork barrel’’ public works projects and subsidies to industry. One may question the applicability of cost benefit analysis to regulatory policies, however, in which a nation attempts to do what is right but not necessarily what cost benefit analysts say is efficient.
Bibliography
Hart, H. L. A. (1979). Between utility and rights. Columbia Law Review, 79, 828 31.
Kelman, S. (1981). Cost Benefit Analysis: An Ethical Critique. Washington, DC: American Enterprise Institute for Public Policy Research.
Posner, R. (1979). Utilitarianism, economics, and legal theory. Journal of Legal Studies, 8, 103 19.
Sagoff, M. (1981). At the shrine of Our Lady of Fatima or why political questions are not all economic. Arizona Law Review, 23, 1283 96.
Sagoff, M. (1984). On preserving the natural environment. Yale Law Journal, 297, 205 67.
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