Cost benefit analysis: Simplistic R Us

We have a plethora of wisdom available to us in this era.  We have developed tools to allow us to access unprecedented volumes of information and ideas, and you would think that this volume would allow us to find new solutions to our most complex public policy problems.

But obviously we haven’t.  Why?

My theory: we keep using simplistic methods for drawing meaning from that information, and that’s stunting our ability to make strides forward. The next level of challenge that all of us in public policy face is to learn to use the information we have in a way that reflects the real complexity and interrelated character of the world around us.

Last week, one of my Twitter contacts tweeted this:

While RI spent the last 5 years debating the extension of 1 airport runway 33 new airports have been built in China.

The simplicity of the statement bugged me – you don’t have to be an international relations whiz to recognize that the comparison’s not that simple.  In usual Della fashion [that is, more to say than I can wedge into 140 characters, let along wedge in and be legible about it], I responded:

respectfl challge re China runways: @ wht cost? # Lost homes? Habitat, archeology etc destroyed? That’s the impt diffce RI/China.

(Translation: Respectful challenge regarding China runways: at what cost?  Number of lost homes?  Habitat, archeology, etc. destroyed?  That’s the important difference between Rhode Island and China.)

My correspondent, very understandably, noted that “cost/benefit analysis should inform not block all new initiatives.” 

The more I have turned this over in the head, the less I am sure how that informing process should work.   There’s two possible ways to do this informing:

The first would be the conventional approach implied by cost/benefit analysis – economic issues, such as demand for air travel, have to be somehow “weighed” against intrinsically non-economic issues, such as environmental degradation.  Both fine, and important, but different.  The image we often use is one of “balancing.”  To see what I mean, picture the usual picture: two items on a mechanical scale:

balance scale


When we use cost-benefit analysis, what we are trying to do in essence is find a balance point between competing interests.  The two items we are comparing are fundamentally different and fundamentally separate, things on opposite sides of that fulcrum. We put an apple on one side and a rock on the other, and we wait to see if what the balance does actually tells us something useful.  But what does that comparison tell us?

(a rock is heavier than an apple)


What doesn’t it tell us?

(which one can I eat?)


Which answer gives us something we can use?

No matter how fancy the graphs and tables, no matter how elaborate the calculations, the root method is the same: try to weigh the economic thing against an important but somehow non-economic thing, and hope that the numbers we get tell us something more useful than whether an apple is heavier than a rock.

This is part of why cost-benefit analyses of policy issues often fail to persuade people – they understand intrinsically that a simple comparison probably misses important parts of the story.

Our fundamental approach to public policy analysis needs to be re-evaluated – not because you can’t make comparisons, but because the assumption that non-economic things, such as environments or social opportunity, are in themselves not the same as economic things is a fundamentally false assumption.  What we so easily forget, and what we increasingly must not forget, is that these things are not discrete lumps sitting on separate trays: the issues that we are inclined to call non-economic are intrinsic to the function of a vibrant economy.

In other posts, I have talked about externalities, and the fact that the classical economic definition of externalities doesn’t work in real life anymore, if it ever did.  We live in a world where the impacts of my choices don’t just vanish into some magic ether…they have a very real and powerful capability to directly or indirectly affect everyone around me, and by extension directly or indirectly bite me in the butt.  The choices that we make on the basis of our personal calculus (like the story I told about my father’s paint company using the hill above the creek as a landfill) doesn’t just abstractly impact someone else: they have a real and direct impact that one way or another will probably circle back to us.  If it’s not a matter of directly damaging me (by impairing my health or making my children sick), the externalities of my choices cut into the limited capacity of my community to do the things I want or need it to do.  Our myth of infinite resources, whatever kind of resources, has been pretty well disproven, and the fact that we don’t all live on 300-acre spreads in Montana means that we are all directly impacted by each other’s externalities.  That’s not a political or metaphysical stance – it’s an observable fact of life.  And it’s more pervasive than I have indicated – even the rancher in Montana finds his ability to make an economic living directly impacted by factors like water quality that are beyond his control.

The English poet John Donne wrote hundreds of years ago that “no man is an island.” Not a new concept. But we persist in simplistic thinking that blinds us to the interconnections, the real story, the most important impacts.

Here’s the kicker: if we see beyond the crayon drawing of discrete things on a balance, and we start thinking instead in terms of the externalities, the impacts and the unintended consequences of the choices we make, then we _can_ make real sense about whether one choice or another is the most wise.  If we focus on the connections and the impacts, we end up with more and better information than whether an apple is lighter or heavier than something else.   If we think about supposedly non-economic impacts in terms of their pervasive, direct and indirect potential economic impacts, the value of those non-economic things changes substantially. There are direct and an indirect impacts of the different methods that Rhode Island and China have taken to address their air travel needs, and the impacts of those choices on the long-term health of their economic system.  That’s the important question – -what’s the entire impact on the vitality of the economy, not just who builds more runways.

Suddenly we are evaluating two elements of the same system – two species of apples, not an apple and a rock.  And with that manner of observation, we can finally use the information we have to make wise decisions.


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