Leaving Economics Be

Accepting the market, with all its limitations. 

I’m going to admit it — I’m an Ec10 slut. Even though I took a similar introductory economics class in high school, which even used the same Mankiw textbook, I still read for each section with anticipation, salivating over what mysterious circumstance N. Gregory might unravel next.

Ec10 appeals to me to because I am the type of person always looking for answers, and the basic conservative economics that the course preaches gives them to me within the simple parameters of supply and demand. When something in the real world confuses me, I always like to think of it within the parameters of economics; its rules and principles allow me the chance to find tangible answers to life’s confusions.

Despite the intensity of my devotion to all things Mankiw, when I heard that a visiting a scholar was giving a talk about alternatives to cost-benefit analysis, I welcomed the opportunity to challenge the economic approach I had developed. Despite its utility, economics can at times seem cold and harsh. It’s easy to cherish conservative economic principles as a privileged citizen of an extremely prosperous country, but whenever I look outside my Harvard bubble and see the gross inequities — the pain and suffering — that permeate a huge number of human lives, it becomes much harder to justify those same principles.

Unfortunately, the talk given by Barbara Fried, a visiting law professor from Stanford, entitled “Is There a Coherent Alternative to Cost-Benefit Analysis?” didn’t offer that much in the way of coherence. As the professor labored on about ex-ante this and prima facie that, she failed to elucidate an overall message. I admit that I left the talk early and without any answers, but I still wanted to know if there was in fact any “coherent alternative.”

Critics of cost-benefit analysis bemoan the prevalence and acceptance of economics in our society today as the best means for determining public policy. While most scholars won’t argue against the proposition that, in a hypothetical, simplified world, the logic of economics works, they point out that in the real world unambiguous markets just don’t exist.

Sometimes you just can’t assign a cost or a benefit to every situation. Many proponents of the application of economics to public issues are drawn to cost-benefit lines of thought because of its straightforwardness, as well as the perception that such analyses work as unbiased “machines” that will spit out positive and accurate answers to complex problems. As J. de. V. Graaff wrote in his book Theoretical Welfare Economics, “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.” But these proponents, critics argue, are overlooking many failings.

The most commonly used of the arguments against cost-benefit analysis is the claim that many things defy labeling with an accurate price, either because they don’t really fit into a market or because they are “goods” that have a moral rather than monetary value. In order for economics models to work properly, say critics, the inputs into the equation have to be accurate or the outputs will be worthless.

“The trouble is that this [cost-benefit] approach generally assumes that the problems are well defined, that the options are well defined,” wrote M. Mitchell Waldrop in a 1992 book. “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.”

Although I understand the aforementioned argument, opponents of conventional economics have failed to offer a truly “coherent alternative” to cost-benefit analysis. There’s a desire to de?emphasize or temper the current system, but without a more sensible option ready to take the place of what we have now, matters will only be made worse. Economists, at the least, try hard to make the most accurate and impartial analysis of a situation, and have developed impressive tools for coming pretty close.

One example from the Mankiw textbook I enjoyed described an economist’s method for estimating the value of a human life. Where most thinkers would be hard pressed to answer this question, and many might rate a human life “priceless,” the book points out that, empirically, our moral feelings about the value of life simply aren’t applied. If they were, there would be traffic lights on every street corner. And by analyzing the wages of people with high-risk jobs and examining how much people needed to be compensated for the risk of losing their lives, the economist was able to place the value of a human life at approximately $10 million.

This number certainly isn’t perfect, and many would take offense at the idea of trying to put any dollar value on a human life, but isn’t some data better than no data? Economists can estimate the value of environmental goods in similar ways, at least giving policy makers a number or baseline to work with instead of forcing regulators to espouse lofty ideals that are neither tangible nor sensible.

When we use the tools that economics give us, we need to be sure that the complexity of the models we use match the complexity of the real world situations. Economics embodies a different and valuable approach to public policy, one that strives to apply rigorous scientific standards to what can often seem like fuzzy questions. And when economics solutions fall short of the ideal, it is a signal that the specific methods employed are flawed, not that economic science as a whole needs to be scrapped.

Joseph Jampel ’11 (jjampel@fas) tries not to salivate over economics in public.