Why Economists Aren't Experts on What Is a Cost or Benefit

In the comments below, Robin Hanson writes:

I can’t imagine what you are thinking in saying economists have no competence to say what is a cost or benefit. That seems to me to be one of the things we know best. And the market interest rate clearly gives the opportunity cost of resources spend in the future. You complain about cost-benefit analysis, but seem to have nothing to offer in its place.

I will help you imagine! I am thinking that the meanings of “cost” and “benefit” are either contested, due to diversity in reasonable evaluative standards, or their meanings are stipulated for technical purposes.

If the meaning is plural and contested, economists have no special comptence to decide between the different evaluative standards underlying different meanings of “cost” and “benefit”. Economists are people, and people can make arguments and exchange reasons for an against various evaluative standards, but economists do this as people with a conception of value, not as economists.

If the meanings are stipulated to make a kind of a toy analysis tractable or determinate, that’s fine. But then the toy analysis has force only for those who already accept the stipulated meaning of the terms.

I have to get on the plane, but when I get home, I’ll say something about policy evaluation that takes evaluative pluralism seriously.

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23 thoughts on “Why Economists Aren't Experts on What Is a Cost or Benefit

  1. You are making an excellent point. Outside of price systems, economists do have no competence on costs or benefits. For that matter, neither do politicians. The is the well-known externalities argument, from economics, and the problem of representative governance in politics. But it goes, as you suggest, beyond that. Any specified price defines things in monetary terms alone obviously. Money doesn't address the interests of large numbers of persons and addresses those who are interested in very unbalanced ways. So price driven options are often suboptimal at social and individual levels. People make choices all the time without resort to cost/benefit…they choose how to live, how much education to get, how healthy to be, etc. even though some of those choices are not optimal on a cost/benefit basis. The same is true of communities. Being for closed borders is idiotic on a cost/benefit basis for the US, but large numbers hold that view. It is equally easy to give a left-oriented example. In short, cost-benefit is a hugely flawed approach compared to conventional deliberative democratic approaches where economic costs are a piece of information.Worst of all, cost/benefit analysis requires some stipulation of a discount rate on the future. Such a rate cannot be accurately determined; it may only be determined from a current perspective. People have intuitive apparatus that addresses these challenges and behavioral economists amongst others are only beginning to uncover their insights–originally taken to be “errors.”

  2. You and Hanson are talking past each other. He's saying economists are good at separating cost from benefit… for thinking in that mode of thought. You're saying its not always obvious what the meaning of a particular cost or benefit is.There's no reason why you can't do plural cost/benefit analyses, one for each of your plural meanings. Of course, in this case CBA doesn't resolve the conflict.I'm sympathetic to this concern about cost/benefit analyses, but I don't think its that important. Most times everyone shares the same objectives (e.g. help poor people) and because people are bad at cost/benefit analysis they pick the wrong policies to meet those objectives (e.g. minimum wages)

  3. What's strange is that Hanson has a more expansive view than you do of what costs and benefits are. All your talk about reasonable pluralism and reasonable evaluative standards is really your own normative effort to create a subset of “valid” reasons within some kind of contractual space. By limiting the kinds of reasons that pass your normative test–what counts as “reasonable”–you hope the outcome will tilt in your preferred direction. It is in just this way that moral philosophers criticize economists, not because they weigh the pros and cons, but because they count too many pros and cons as reasonable. Always the reasons with these guys. However, the truth is much less tidy. Moral debates are Coasean transactions in which each player arrives equipped with emotional bumpers to prevent self-destruction and ensure some cooperation and gain. Don't confuse that bargaining game with cost-benefit analysis. Or rather: openly admit you're engaging in it.

  4. Mike, here's a short way to make Will's point: (i) If economists employ a purely formal conception of costs and benefits, then they will have to answer serious normative questions they aren't uniquely equipped to address when they decide what conception of costs and benefits connects their analysis to the world.(ii) If economists employ a substantive conception of costs and benefits, then they are already playing the normative game. To know what to count as a substantive cost (which you eventually need in (i) and you need upfront in (ii)), you have to employ a notion of well-being. But in fact there are many differing conceptions of well-being. Some are purely subjectivist, and among those are various types, such as hedonism, and within hedonism there are distinct conceptions of what count as pains and pleasures. Another set of conceptions of well-being are 'informed-desire' theories, where what brings about your well-being is the satisfaction of desires you would have were you properly informed of the relevant facts and able to process them correctly. To give substance to this theory, you also need a theory of proper information and cognition. Finally, there are objectivist conceptions of well-being, where you have well-being if you are flourishing, regardless of whether you realize it or not. And theories of flourishing vary wildly. Some think you flourish when you are autonomous, others when you are in union with God, and so on.And you can combine these views in various ways.Our conceptions of costs and benefits will vary according to which theory of well-being we select. Suppose that I employ an objectivist conception of well-being, and I think this conception includes the fact that homosexual practices thwart my perfection (if you count Catholic philosophers, this may be a dominant view). On this view, if a man enjoys sex with another man, he is paying a cost to his well-being. Whereas on a (naive) subjectivist, hedonist view, if a man stabs another man and enjoys it, he gets a benefit.

  5. To clarify, I take the standard economic meanings of “cost” and “benefit” to be any effect of a policy on any outcome that anyone cares about. If someone prefers that outcome (relative to a reference) positively, that is a benefit to that person; if negative, it is a cost. We have a larger standard library of patterns of such preferences to look for, and we typically do look for them when considering the effects of policy.

  6. So what Robin seems to be saying is that economists are good at determining one giant category called “results”. It is then up to anyone to categorize such results, or place them along some spectrum of negative to positive, based on their own preferences. I see what economists do as very useful, and it is only when they conflate calculations of various outcomes with preferences for particular outcomes when they run into trouble.

  7. It seems to me that the main advantage that economists have in discussing costs and benefits is that they are more likely to be familiar with any conceptual problems that may be involved. But no economist could seriously argue that the quality of any comment about any evaluative standard is determined by the professional label attached to the person making the comment.

  8. “If someone prefers that outcome (relative to a reference) positively, that is a benefit to that person; if negative, it is a cost.” With many government policies we have 50% positive and 50% negative with the continuance of the policy being decided by which 50% is in power. I'm not sure where economists fit into this except justifying their side if in power, or criticizing if not in power.Is there a more objective approach that's reliable?

  9. In general, economists adopt a utilitarian framework. In service of political goals, they are often drafted to produce reports that ignore one form of cost or benefits. Even in adopting a utilitarian framework, they make other choices, such as considering only the wishes of (often adult) humans.

  10. You can't possibly mean (only) this, because this entails that you can't actually make policy recommendations. Actual, physical, people do not have complete or consistent preferences. This means costs and benefits are not well-defined, because there's no reason to expect that a utility function exists which describes their actual preferences. Therefore, you need some notion of an ideal or formal completion of actual preferences in order to get a preference relation that we can derive a utility function from, before you can apply cost-benefit analysis. That completion is where normative assumptions must be made.

  11. I'm going to give three and a half semi-different issues with the past two blog posts:Part 1:Will, you are not an expert on what economists are or are not an expert on. You should not be commenting on the nature of what economists are or are not an expert, or what fields or fields they should or should not talk about.You have a standard that you don't apply to yourself. When you become an expert on what Economists have expertise in, then you can come back and say what they should or should not talk about, but until that time, you kind of look stupid.How about a post showing some evidence for this claim:economists have no special comptence to decide between the different evaluative standards underlying different meanings of “cost” and “benefit”For instance, an analysis of say, a variety of textbooks or a standard course curriculum at your local university could be helpful. Or an interview with the local head of the economics department Uni of Iowa (I'm guessing that's the closest). You might learn something about why economists have competence to give the “appropriate discount rate to apply to future costs and benefits”. But these are just examples of how I'd go about doing it to prove or disprove such a weighty hypothesis. I'm sure arm-chair philosophizing works almost as good right?Aside:This is what bothered me most about Yglesias's original point that sparked this whole debate. His statement (generalized to: People who are not experts in field X, should not be given special weight on Field X) really fails the halting problem, since he himself is not an expert in the field of 'when people can't and can't talk outside of their expertise'.Come on people, at least make your arguments Turing complete.I think that bothered me more then that it ignores the importance of cross-field pollination in science.-Part 2:It seems more likely at this point that you are assigning prescriptivist biases in the language of words. I'm guessing that your logic goes like this.1: Costs and Benefits have meanings that I know of that economists may not have special privilege over due to the nature of those meanings.2: Therefore economists have no special privilege over costs and benefits.This seems like the fallacy of Equivocation. Understanding that language is descriptivist helps overcome this problem. Whatever ever it is that economists are calling 'Costs and Benefits' that they are referring to in their expertise, is something they have an expert opinion on, even if they don't have an expert opinion on all possible definitions of 'Costs and Benefits'. They use the term 'costs and benefits' to describe something, and WHAT they are describing has a lot of really really really important points in terms of the decision of “Should I do this action or not.”==Part 3: Your claim “But then the toy analysis has force only for those who already accept the stipulated meaning of the terms.”Um, yes? Can't you say that about everything ever?Example:Physics analysis has force only to those that already accept the stipulated meaning of work, energy, and force.Or even:Our conversation about anything only has force to those who accept the stipulated meaning of words in the English Language.That is NOT an argument. Well, it is in philosophy and language, and was an important leap in linguistics and philosophy. But it's NOT an argument relevant here. You have to make the case that this stipulated agreement should not be applied in the case that economists have presented before you. That's a huge burden of proof on you. I don't find your examples given in any of your posts especially weighty towards over turning it.Because everyone else knows what we are talking about when we say, “What is the costs and benefits of proposal X?” when they ask economists.They (mostly) mean it in the sense of, “If I put in a new energy efficient heating/air in my house, how long do I have to own the system until it pays for itself (if ever), and are there any extra issues I should worry about (maintenance and warranties, it's appearance, ease of use and effectiveness).” Language is always imprecise, but this is the closest definition I can give you.And you're going, “Well, you are putting costs and benefits in terms of things like money, and ease of use, and so on. But a cost and benefit could mean anything. Some people might enjoy the hassle of a new system, and a hypothetical person might like it if it's really noisy in the summer and winter. Some people might think that homeostasis of temperature is not a very exciting benefit, and saving money? Money won't get you into Heaven, Jesus said something to that effect. Better to be poor and give more money to faceless corporations, since it's good for America.How can anyone but philosophers give an appropriate analysis of what a cost and benefit? Certainly not this furnace guy. Why, he didn't even bring up these possibilities!”This is what you sound like to me. And while, this contrarianism is kind of fun? It's also doesn't add anything. Economists are deeply aware of the problems you put forth, but that's not what people mean when they ask them “What is the cost and benefits you put forth for this policy proposal”, so they don't spend a lot of time on them. You haven't helped anyone here by bringing up these points.Final Point:Will, how would you like it if someone did this about a field you are an expert at, like the relationship of happiness research to public policy, or CATO, or the liberalitarian movement?How can anyone say what policies make people happy? Some people find work and toil happy? Happiness varies from person to person. The happiness researchers say that children make people unhappy, and Europeans are happy, but since we know this is wrong I don't see why we bother with these things. How can you even measure something as different as happiness? Therefore, Happiness researchers have no special bearing weight in measuring happiness.I hope you see things outside of your position. You can see how some people might be insulted about these things. As the old saying goes, you should really walk a mile in the feet of a macro-economist sometime.

  12. This whole topic is becoming absurd. Various commentators are using different definitions of terms that have different definitions in different fields and assuming that the definition they prefer is somehow superior to all others. But the overriding point is that cost-benefit analysis does not provide THE answer to policy questions, but rather a way of comparing costs and benefits. Not the ONLY way, nor maybe even the BEST way, but a method that can be examined and criticized to allow humans to make choices. The alternative is to simply say “the costs and benefits of any proposal are impossible to define or compare. So let us just flip a coin.” The coin flip removes all moral concerns since it removes human decision. There is no such thing as morality in the absence of human thought.These discussions were lots of fun late at night in the dorm when we were young and in college. But they never generated a completely flawless answer, did they?Move on people, there is nothing to see here.

  13. Will, if you're in the business of taking requests, I wonder if, in your to-be-done post on evaluative pluralism, you might connect this with your recent (OK, recentish) posts on Mill and the harm principle. I've long thought that Mill quite obviously wants to defend a substantive conception of virtue, under which being a moral busybody is immoral. To MIll, there's just something horribly wrong with people who lie awake at night thinking about the terrible things that other people are doing behind closed doors. If i can borrow the Greek word, it's weirdly akratic. Millian virtue consists in a humane independence from the concerns, or affairs, of others, and the achievement of self-government, in all the senses of that word.To be sure, in On Liberty the authors (huzzah for Harriet Taylor!) sometimes try to defend all this in neutral-sounding language, which can be quite frustrating. But On Liberty is best understood as part-political tract and part-manifesto, and it leaves the underlying, meaty liberalism unexplored. I don't think that's necessarily a flaw, but I rather like overblown rhetoric, especially when very well done.To return to the present dispute, it seems that you (Will) are pretty obviously right. So much so, in fact, that I fear that I'm missing something.

  14. This is actually a normative, not descriptive, stance, and it's one with very strong and surprising consequences. So, I was specifically talking preferences themselves, and not inferences about them from actions. For reasons of computational complexity, we know that preferences cannot possibly be complete in general. Likewise, peoples' preferences are endogenously-formed and change over time. These are both simply descriptive facts about preferences, and they both mean that we have no reason to expect that people have a stable, complete, preference relation. Which, of course, means we have no reason to expect that people have preferences that can be described with utility functions. Therefore, if we want to do cost-benefit analysis, we have to have advance a normative theory of how people should want things and how they should make decisions based upon those wants. We need this in order to rule certain observed actions as irrelevant, and to rule others in, and then we need some deductions to fill in the gaps on what's left over, in order to get a preference relation that can be described with a utility function. But this is by no means a neutral move! For example, if we assume that everyone has a stable preference relation, then this commits us to the position that inalienable rights (ie, rights that we possess but cannot surrender) are a bad idea. This is because by hypothesis such surrenders can only occur as part of mutually-beneficial exchange, and so inalienability means that we will achieve less efficient outcomes. But, on the other hand, if we don't expect preferences to be stable over time, then strategies based on precommitment can be a good idea (and can be a bad idea in other circumstances).

  15. Patrick, straw men will get you anywhere. But you havent really addressed Will's point. Let's say we want to set up a carbon tax. (or a cap and trade) We are basically trying to internalise the costs of polluting right?So there are issues of what exactly goes into an account of the costs of emmissions, and what are the benefits. There is also a question of how much of the costs you want to internalise. The answers are not obvious.Will's point is that these types of questions also involve ideology. How much exactly is the environment worth? How much money or any other types of good should we exchange for the environment?A person who doesnt give a shit what happens ten years from now is going to have a very different answer than an ardent environmentalist. These, as Neel has said, are normative questions a moral philosopher is more suited than anybody else to answer. So yes, Will, a moral philosopher, is more suited than an economist in these matters.

  16. Pingback: Understanding Markets | The League of Ordinary Gentlemen

  17. To return to the prior post, I'm stuck thinking about this early claim by Will, “But the economist has no competence whatsoever to tell us, say, the appropriate discount rate to apply to future costs and benefits, to take one important example.”If what Will means is that economists have no competence to dictate a discount rate, with dictate being one possible reading of “tell us,” the he seems clearly right.But another way to read “tell us” is as inform us, and it seems that here economists do have professional competence to inform us about discount rates, at least if discount rates are facts about evaluative systems. Economists know how to collect facts about evaluative systems; this is one of the things economists do.(On the other hand, if discount rates are tools of political discourse by which elites contest over present-day disposition of social surplus, then perhaps political scientists, politicians, or priests are the relevant professionals.)

  18. Good points. It strikes me as simple-minded to say 'we just have to identify what people want' when most people don't know what they want or if they do, it's a variation on 'I want my cake and to eat it too'.

  19. It is standard econ practice to infer complete and consistent preferences as underlying noisy actions. Such preferences are allowed to change with time. You are complaining that we shouldn't assume that people want their preferences to be complete and consistent?

  20. Hi Robin, I think I phrased things in a way that misled you. It's of course true that someone with a consistent preference relation can prefer A to B at time t1 and B to A at time t2.However, one of the possibilities I wished to draw attention to was the preference relation itself changing over time. This creates a significant difference once we start talking about counterfactual conditionals.As a concrete example, consider something like a Becker-Murphy style rational addiction model. Here, we assume that the addict is engaging in intertemporal optimization of some utility function. One consequence of this model is that it's regret-free: if you ask rational addicts at some t2 > t1 if they would have preferred not to have started taking drugs at t1, they would say no, because they've chosen a dynamically optimal couse of action. On the other hand, we could also model addiction as something that changes a preference relation. This means that time-inconsistent behavior is now possible.This then leads to differences in what sorts of treatments the model suggests. In a rational-addiction model, there are no treatments needed: an addict is already doing the optimal thing, and any “treatment” will merely reduce their satisfaction. On the other hand, with a time-varying preference relation, the model can advise you to keep drugs from an addict, because it is possible that the addict prefer counterfactually to be clean, while presently preferring to get high — that is, the addict can regret their decision.Coming to your question, I'm not saying “we shouldn't assume that people want their preferences to be complete and consistent.” I'm saying, “It's impossible, as a matter of fact, for peoples' preferences to be complete and consistent. Therefore, any use of complete preferences must be justified either positively or normatively.”Note that calling something “standard practice” is not itself a justification! Most disciplines do have standard practices, and also have standard justifications for those practices. But we have to look at those justifications to see whether they actually apply to the situation at hand.Here, I mean “positive” and “normative” in the sense of Friedman's “The Methodology of Positive Economics”.A normative justification is an argument that some other principle argues for using a particular analytical assumption. For example, a libertarian can argue that respect for individual autonomy means that we should analyze situations under the assumption that people are the ideal judges of their own welfare, and model this with complete, consistent preferences. As another example, J.S. Mill argued that envy is a destructive impulse, and therefore a preference that other people suffer should not count in a utilitarian calculus.If we look at the rational addiction model, we see how it formalizes a libertarian ethos: we can see, mathematically, how the assumption that people are the best judges of their own good leads to no-interference conclusions, and how weakening that assumption can justify paternalistic interventions. But as an argument, it's not going to be terribly convincing to people who aren't libertarians. So if we want to actually rationally persuade people, we need stronger justifications.A positive justification is some kind of evidence that the assumption of complete, consistent preferences is a safe analytical tool: that is, it is a calculational device whose use does not change the answer. Friedman advances such an argument for assuming profit-maximizing behavior in competitive markets, based on the loosely evolutionary argument that non-maximizing firms will go broke. (As an aside, algorithmic game theory is very useful as a way of making precise when Friedman's analysis holds. Very lovely!) But it's worth noting that his arguments don't scale down to a theory of individual decision — we need to advance different arguments for that.

  21. You have some outstanding points and I agree with what you have to say all I don't get is how they are economist but, yet they don't know how to differ from “cost” and “benefit”.makes me think.is America really that deep in the hole?

  22. You have some outstanding points and I agree with what you have to say all I don't get is how they are economist but, yet they don't know how to differ from “cost” and “benefit”.makes me think.is America really that deep in the hole?

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