The £ value of equity

British poundsIn reality, social policies come about through a mixture of pragmatics, principle, public opinion, politicking, and sheer accident. But in the ideal world of welfare economics,1 we could rationally decide whether to implement a policy by looking at its impact on human welfare. If the benefits of a policy outweigh its costs, then that policy is socially desirable. But is this kind of analysis actually useful for policymakers?

Cost Benefit Analyses (CBAs) are a very attractive tool because they appear to give simple answers to complicated political questions. For example, the related tool of Cost-Effectiveness Analysis is used by the UK organisation NICE to decide whether the benefits of particular drugs outweigh their costs, and therefore whether they should be paid for by the National Health Service. Indeed, in the health field it is widely accepted that this family of economic analyses are an important way of deciding between different treatments.

Where we have a problem, though, is when we start to apply this to social policies. Social policies typically have a number of different goals, typically including efficiency and equity – whereas health policies typically have the single goal of improving health.2 To do a CBA for a social policy, we have to somehow turn all of the different efficiency and equity effects of a policy into a common metric, usually expressed in monetary terms as £ or $.

So how do we put a price on equity? Vining and Weimer – two of the most interesting welfare economists looking at this – suggest that we follow the standard practice in CBAs: if we don’t have a price for something, we need to find out how much people are willing to pay for it. The most common way that we do this is through a technique called ‘contingent valuation’ – which usually means that we ask people how much they pay to avoid a certain situation. Contingent valuation surveys are widely accepted but have lots of practical problems, with the results being very sensitive to the exact question asked.

But more than this, I’m not sure that it’s actually useful to find out how much the average person is willing to pay for a more equitable world. For us to accept the conclusions of a CBA, we have to accept the researchers’ valuation of equity – but all of us will have our own personal valuations of equity.  In fact, to agree with the CBA we have to make a very strong assumption: policy should be based on the average value judgements in society, rather than on democratic debate and reflection.

If research is useful when it helps people make good decisions, then I just don’t see how this research is useful. On the one hand, it may be rejected by policymakers and the public who disagree with its premises. On the other hand – and probably more likely – it may be misinterpreted as being ‘technical’ when it is in fact a highly political statement about the importance of equity.

CBAs can be invaluable aids to good policymaking, if they are done in the right way and understood properly. But my advice is never to trust an economist who claims that a Cost Benefit Analysis should have the final word…

 

Footnotes
1. I realise that this is a very broad-brush explanation of the very sophisticated field of welfare economics.  This is necessary in such a short post, but none of the details affect the point I’m making here.
2. This is true for clinical interventions, but public health interventions tend to be more like social policies in having to balance efficiency and equity goals.

About Ben Baumberg

I am currently a Lecturer in Sociology and Social Policy at the School of Social Policy, Sociology and Social Research (SSPSSR) at the University of Kent. I also helped set up the collaborative research blog Inequalities, where I regularly write articles and short blog posts. I have a wide range of (too many...) research interests, at the moment focusing on disability, the workplace, inequality, deservingness and the future of the benefits system, and the relationship between evidence and policy. You can find out more about me at http://www.benbaumberg.com
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6 Responses to The £ value of equity

  1. Paul says:

    I participated in something of a debate with Weimer recently (very nice guy), and when pressed he accepts that CBA is best construed as telling us only about efficiency. This is basically the line Vining and Weimer set out on p. 3 of the paper you link to. That said, his *slides* said that CBA “tells you to choose” the policy that emerges as most efficient. Moreover, he drew the audience’s attention to fact that CBA tends to value health benefits to women more than men, since woman tend to live longer and can therefore derive more utility from the marginal reduction in morbidity. He didn’t bring up the analogous implications for benefits to racial/ethnic minorities vs benefits to whites. I did, but this was after his turn to talk, and so I somewhat unfairly got my shot in when he couldn’t respond.

  2. Paul says:

    Also, a nice zinger from Daniel Hausman and Michael McPherson (which is, I should add, certainly the *least* interesting thing they have to say about CBA): “One would get very misleading information concerning the relative value of a car and a spouse by investigating how much someone would be willing to pay for each!”

  3. Ben– I really thought this was interesting. I think you’re wrong to say that a straight CEA for health poses fewer ethical problems than CBA. All of the distributional questions that apply to social policy apply equally to health policies.

    A different comment:

    There’s two ways to understand what’s going on when somebody says that a CBA should account for equity: either they mean that we account for equity in the CBA by measuring not only the direct effects on people’s wellbeing, but the different spillovers and externalities (if some social policy has the indirect effect of promoting equality, and that equality indirectly makes people feel better about their society, then we should find a way of monetizing that welfare improvement), alternatively, the equity considerations could after we have already done the full CBA and ranked which set of policies are most likely to create the greatest balance of welfare. At this stage we apply a set of “equity” weights, to “correct” for the skewed distribution of benefits (since even some consequentialists accept that producing the greatest level of welfare is not the only outcome that matters). I think that inasmuch as we think that CBA should inform policy, we should welcome efforts to better measure the first type of effect, especially since they are likely to have the effect of promoting egalitarian policies. The second approach seems more problematic, principally because how do we know where the equity weights come from? As you point out, eliciting public preferences for equity is empirically fraught and unlikely to be supported by fully legitimate principles.

    A final thought: it seems to me that the politics of CBA is changing and that philosophers should take note of this. CBA has sometimes been used in ways to prevent egalitarian policies from being realized (don’t mitigate environmental costs, don’t protect consumers, don’t enact social programs). Many of the economic analyses that are now coming out are targeted at improving education, reducing crime, etc. and they very effectively attach a dollar value to the policies in order to show what the social savings are. This is a good development. Egalitarian philosophers should help to situate these analyses within a broader prioritarian framework.

  4. Paul says:

    Brendan writes: “I think you’re wrong to say that a straight CEA for health poses fewer ethical problems than CBA. All of the distributional questions that apply to social policy apply equally to health policies.”

    I don’t think this is correct. At the very least, CBA’s use of willingness to pay and contingent valuation entails that, at least in principle, the absolute value of any benefit is determined in part by the resource holdings of those who care about the benefit (typically those who want the benefit, but sometimes those who want the benefit to go to others). This distributional consideration is not present in the context of health-related cost-utility analyses, where the nature and value of benefits are determined by the aggregation of responses to survey questions (Time Trade-offs/Standard gamble/person trade-off questions) that make no reference to anyone’s resource holdings.

  5. Ben Baumberg says:

    Thanks for the comments – they’re thought-provoking, and I look forward to continuing this in future posts (I’m doing some work next summer on valuing pleasure in CBAs). Just to respond to the more immediate questions though:

    Sorry for the confusion over the additional problems of social policy CBAs over health CEAs (this is what happens when I write posts quickly…).
    – Brendan, you’re right that the issues of equity vs efficiency also exist in health CEAs – but in practice, it’s often ignored because the distributional questions for a new drug are more minor compared to broader social interventions (or indeed public health interventions, as I alluded to in my 2nd footnote).
    – Paul, you’re right that there are additional questions of equity in CBAs around valuing benefits – this wasn’t what I was writing about, but it’s a serious issue.

    Paul – thanks for your other points, they’re very interesting (and I’m going to use the Hausman/McPherson quote in my next presentation!).

    I don’t agree with your (very interesting) main point though, Brendan. I think it’s great when we think about spillovers and externalities, but how do we value them? I don’t see that producing the average $ value that people attach to equity (or any other spillover) is very useful, for the reasons I said in the post – value conflicts should be the realm of democratic debate, rather than hidden in technical assumptions.

    You’re also right that economic analyses are now increasingly being used to justify egalitarian and health-promoting policies – but often these analyses are junk (based on untenable assumptions), and even if they’re not, they are always misinterpreted. In particular, people will always take the $ value of a non-financial benefit (e.g. the increased utility from equity), and then treat it as if it were real money – I’ve heard UK ministers saying they would build hospitals from saving the QALY costs from alcohol-caused crime! The problem is not with CBAs, but rather the idea that CBAs can tell us what we should do (rather than just provide a variety of useful information for us to decide on ourselves).

  6. Pingback: Thank Your Kindergarten Teacher for Your Next Pay Raise | Inequalities

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