Prices and Values
Why Economics Fails As a Sole Foundation of Public Policy
August 9, 2005
By Ernest Partridge, The
upon assuming office in 1981, President Ronald Reagan issued an
Executive Order requiring all federal administrative agencies and
departments to justify proposed regulations with a cost-benefit
Similarly, on his first day in office, January 20, 2001, George
Bush ordered all cabinet officers to withhold implementation of
more than fifty federal regulations that had been approved late
in the Clinton administration. They were to be kept on hold until
Bush's Office of Management and Budget determined that their benefits
exceeded their costs.
As Amanda Griscom (of grist.com) reported
in September, 2003:
The frozen rules included more than a dozen significant environmental
ones. They called for less arsenic in drinking water, a ban
on snowmobiles in national parks, controls for raw sewage overflow,
stronger energy-efficiency standards, and protections against
commercial logging, mining, and drilling on national lands.
Of the environmental regulations that came under scrutiny, only
half have since made it past the cost-benefit analysis and into
the Federal Register.
Cost-benefit analysis (CBA), an exclusively economic assessment
of public policy proposals, is based upon the assumption that the
public values that enter into policy decisions can all be quantified
in monetary terms. This is a remarkably impoverished concept of
values, especially coming from an administration that proclaims
its commitment to moral vaules.
But does anyone really believe that values can be reduced to (monetary)
costs and benefits? Apparently more than a few economists believe
this. Consider the following comments from standard economic texts
All goods that matter to individuals ... must be capable of
being bought and sold in markets. (A. Myrick Freeman)
The benefit of any good or service is simply its value to a
consumer. (J. Seneca and M. Taussig)
In principle, the ultimate measure of environmental quality
is the value people place on these services ... or their willingness
to pay. (Freeman, Haveman, and Kneese)
... anything that is valued instrumentally ... can in principle
be handled by economics, be it acts of friendship or love. (Steven
While historically utilized by both Democratic and Republican
administrations, cost-benefit analysis is especially favored by
corporate and business interests, and not surprisingly, the Bush
administration – described by two CBA critics as "populated
by the most ardent defenders of cost-benefit analysis in executive
branch history." These critics, Frank
Ackerman and Lisa Heinzerling, continue:
The administration of George W. Bush is the most hostile to
environmental protection of any in recent memory. It is also
the most enthusiastic about the use of cost-benefit analysis
to screen proposed regulations. Perhaps this is only a coincidence.
Perhaps [this] process of carefully summarizing people's preferences
has found that the American public wants to weaken the Clean
Air Act, drill for oil in the Arctic National Wildlife Refuge,
ignore the dangers of global warming, allow more polluting snowmobiles
into national parks, use cheaper and less effective safeguards
against SUV tire blowouts, accept high levels of mercury in
our food and water, and so forth.
However, Ackerman and Heinzerling tell us, "we don't believe
it." Cost-benefit analysis and the monetization of values are
somehow failing to measure the authentic values of the American
public. They continue:
Gamblers know that dice that always roll snake-eyes are loaded.
The same holds true for a decision-making method that repeatedly
tells us to do less about environmental protection, even when
public opinion polls tell us that the American people want to
do more. The problem ... is that cost-benefit analysis is incapable
of making meaningful choices about things that matter to most
Why, therefore, are the Republican administrations of Ronald Reagan
and George W. Bush, not to mention many economists and policy analysts
(worthy exceptions noted below), so eager to apply monetary prices
to values? And why is CBA "incapable of making meaningful choices
about things that matter to most people?"
To these two questions we now turn.
First of all, why is "the economic approach" to public policy
– cost-benefit analysis and the monetization of values - so attractive
to legislators and policy makers?
In the case the Bush administration, the White House's Office
of Management and Budget has managed, through subtle and arbitrary
"pricing" of costs and benefits, to come up with cost-benefit
analyses that support pre-determined administration policies – i.e.,
policies favorable to business and corporate interests, and critical
of the federal regulation of these interests. Chief among these
devices is the inflation of costs and the exclusion of benefits
that can not be measured economically. To put it bluntly, Bush's
OMB "rigs" the cost-benefit analyses to favor corporate
interests. As Public Citizen reports
in a February, 2004 news release:
Cost-benefit analysis attempts to assign a monetary value to
the costs and benefits of regulations, with an eye toward eliminating
rules with a higher cost than benefit. The method ignores benefits
that cannot be expressed in terms of money and disregards the
principle that industry should bear the cost of alleviating
the harm it causes.
"Regulatory accounting [i.e., CBA] suffers from fatal flaws
that make it useless for any purpose other than lending a false
appearance of technical objectivity to a political decision
that regulated industries' interests trump the public's interest,"
[Public Citizen President, Joan] Claybrook said.
OMB's report to Congress is misleading also in that it ignores
the costs to the public of scores of public health, safety and
environmental protections that have been weakened and blocked
during the past three years.
Bush administration aside, economists and policy analysts cite
these general advantages of cost-benefit analysis and the monetization
- They appear to be sensitive to particular and identifiable
facts - namely consumer choices, market prices, etc.
- They employ precise, formal modes of quantification and calculation
that are public and replicable, and thus appear to be "scientific."
- They are "democratic," reflecting the actual (rather than
the "desirable") values of the public.
- They are tolerant and libertarian, assuming that "each individual
is the best judge of his own welfare" (William Baxter).
- They commensurate values in terms of a common and quantifiable
denominator: cash. (Thus enabling the aforementioned advantages
of quantification and formalization.)
- They are determinate: they arrive at unequivocal conclusions
- the so-called "bottom line."
That final advantage ("the bottom line") may suggest why, at congressional
hearings, economists are many and philosophers are few. The former
are willing to supply answers, while the latter are disposed to
raise further questions.
With advantages such as these, why not base policy on economic
values? As many critics have pointed out (among them such economists
as Kenneth Arrow, Kenneth Boulding, Herman Daly and Amartya Sen),
many of the values most cherished by cultivated human beings are
either independent of, or even inversely related to, economic values.
Four such categories of values immediately come to mind: those of
the scholar and scientist, the citizen, the moral philosopher, and
the friend and lover.
1. The primary value of the scholar and scientist, of course,
is truth - as supported by evidence and sound argument
An authentic scholar will say, "show me your evidence, and if it
is well-founded and your argument is sound, then you will convince
me." Never will he, qua scholar, say, "how much are you willing
to pay to have me believe you?"
Similarly, judges and juries ideally decide their verdicts on the
weight of evidence. A purchased verdict is not only invalid; it
is quite properly regarded as a crime. And even classical economists,
when they publish their theories, offer arguments, not bids.
2. What an individual values (as a citizen) for his community
may be quite contrary to what he might value for himself as a consumer
Mark Sagoff vividly illustrates this contrast:
Last year I bribed a judge to fix a couple of traffic tickets,
and was glad to do so because I saved my license. Yet, at election
time, I helped to vote the corrupt judge out of office. I speed
on the highway, yet I want the police to enforce laws against
speeding. I used to buy mixers in returnable bottles - but who
can bother to return them? I buy only disposables now, but to
soothe my conscience, I urge my state senator to outlaw one-way
containers. ... I send my dues to the Sierra Club to protect
areas in Alaska I shall never visit... And of course, I applaud
the endangered Species Act, although I have no earthly use for
the Colorado Squawfish or the Indiana bat... I have an 'ecology
now' sticker on a car that drips oil everywhere it's parked.
In fact, as these examples point out, a complete human being is
both an individual with consumer preferences, and a citizen with
loyalties and moral aspirations, which frequently over-ride the
self-serving, "utility-maximizing" motives of homo
economicus. The consumer views the world through "the mind's
I." The citizen takes "the moral point of view," perceiving oneself
as an equal member among many in a community. The governing impulse
of the consumer is "I want." The governing impulse of the citizen
is "we need." (See my "Consumer
3. Distributive justice
As economists and utilitarian philosophers have long acknowledged,
economic efficiency and utility maximization do not, by themselves,
touch upon the essential moral issue of justice. Economic theory
is silent on the question of whether the wealth of the cooperative
enterprise which is society, goes to those who most deserve it.
"Just deserts" is a moral, not an economic, concept.
Pareto optimality is the economist's term for that condition
in society of "perfect efficiency" whereby there are no further
transactions that can benefit anyone without making another individual
worse off. It is noteworthy that Pareto optimality can describe
a slave economy. For while justice demands the emancipation of the
slaves, this can not be accomplished without making the slave owners
4. Love, friendship and loyalty that is bought is less valuable
than that which is given freely
Economists enjoy telling the tale of the new member of the Economics
Department encountering a colleague in the Quad. "How do you like
it here?" asks the veteran. "OK, I guess," replies the newcomer,
"intelligent students, good research facilities - trouble is, I
don't seem to have many friends." His colleague suggests, "well,
if you value friendship that much, why not buy a friend?" Elaboration
is clearly superfluous.
As for love, Mark Sagoff makes the point with characteristic wit
and eloquence: "A civilized person might climb the highest mountain,
swim the deepest river, or cross the hottest desert for love, sweet
love. He might do anything, indeed, except be willing to pay for
Finally, the marketplace can obscure Adam Smith's essential distinction
between "values in use" and "values in exchange."
"The things that have the greatest value in use," Smith writes,
"have frequently little or no value in exchange; and on the contrary,
those which have the greatest value in exchange have frequently
little or no value is use." As examples, Smith cites diamonds, which
have little value in use but great value in exchange, and water
which has effectively infinite value in use (we can not survive
without it), but very little cost (exchange value). Significantly,
"environmental values" such as clean air and water tend to be "values
in use," and thus greatly undervalued in markets.
Neo-classical economists are quite correct when they state that
theirs is a "positive discipline" that attempts to report values,
rather than prescribe values - and, as we have noted above, only
a limited realm of values at that. For while they might tell us
what is valued by "the consuming public," they can not tell us what
But the latter question, "what is valuable," is of most basic and
urgent concern to the policy-maker, the legislator and the citizen.
Ask an uncritical economist, "what is the value of X?" and he will
likely ask in reply, "what are you (or 'the market') willing to
pay for X?" The astute citizen, asked such a question, will reply:
"Before I can answer that, I must first assess the value of X."
And that "value" will, of necessity, be normative, not economic.
And if this value is environmental - for example, the value of
clean air, access to wilderness, biodiversity, and the availability
of these amenities into the remote future - or political – the rights
of life, liberty, property, free speech, free association, free
exercise of religion, etc. - then the most appropriate means of
assessing that value just might be not an assessment of the marginal
price in a "free market" to self-interested, utility-maximizing
individuals ("how much are you willing to pay") but rather
a consensus through evaluation in a forum of informed and deliberating
citizens or their elected representatives. (See my "The
Fairness requires that I anticipate a rebuttal by the economist:
"We never meant to suggest," he might reply, "that homo economicus
describes all dimensions of human existence, and thus we do not
contend that prices are the only values. While agreeing with the
gist of your argument above, we would only insist that economic
motives and values happen to be the subject-matter of our discipline.
In some conditions of ordinary life, and even of public life, human
beings, both individually and collectively, act upon economic motives.
When they do, the concepts and methods of economics might prove
to be illuminating."
Fair enough! I have little quarrel with economists who thus qualify
and confine the application of their methodology and concepts. Unfortunately,
such commendable modesty is not universal. Moreover, these wise
qualifications are more likely to be found among scholars, especially
as they write papers for, and discuss public issues with, their
colleagues. My quarrel is with opportunistic politicians, such as
those who labor in the Bush administration and in Congress, who
have no use for such qualifications, and who instead employ cost-benefit
analysis as a device to justify the elimination of laws and regulations
put in place to protect the general public, and to justify policies
design to benefit their corporate "sponsors."
At the opening of his ill-fated campaign of 1968, Robert F. Kennedy
eloquently expressed the limitation of the Gross Domestic Product
(then called "the Gross National Product) as a measure of the
value of a society:
Too much and for too long we seem to have surrendered personal
excellence and community values for the mere accumulation of
material things. The Gross National Product ... if we judge
the United States by that, counts air pollution and cigarette
advertising, and ambulances to clear our highways of carnage.
It counts special locks for our doors and the jails for the
people who break them. It counts the destruction of the redwoods
and the loss of our natural wonders in chaotic sprawl. It counts
napalm and nuclear warheads and armored cars for the police
to fight the riots in our cities. It counts [the killer's] rifle
and [the rapist's] knife and the television programs which glorify
violence in order to sell toys to our children.
Yet the Gross National Product does not [include] the health
of our children, the quality of their education, or the joy
of their play. It does not include the beauty of our poetry,
or the strength of our marriages, the intelligence of our public
debate or the integrity of our public officials. It measures
neither our wit nor our courage, our wisdom nor our learning,
neither our compassion nor our devotion to our country. It measures
everything, in short, except that which makes life worthwhile,
and it can tell us everything about America, except why we are
proud that we are Americans.
This essay is adapted from the second section of my published
paper, "In Search of Sustainable Values." Endnotes and
references may be found with that paper, which is located at my
personal website, The
Online Gadfly. The third section is an extended analysis of
the Price/Value distinction. Follow this
Dr. Ernest Partridge is a consultant, writer and lecturer in
the field of Environmental Ethics and Public Policy. He publishes
the website, The
Online Gadfly and co-edits the progressive website, The
Crisis Papers. Send comments to: email@example.com.
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