In 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…
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.