Tuesday, April 18, 2023

Beyond Market Mantras, and the Benefit-Cost Conundrum in Policy.

Takashi Negishi, 2014

In a brief post today, Brad DeLong, an economist and historian at Berkeley, shared his thoughts on the importance of benefit-cost analysis in policy-making, largely agreeing with Henry Farrell's views. Farrell's argument in question is that the long-held belief that the market knows best has left government policymakers ill-equipped to intervene in the economy effectively. The focus on neoclassical economics in elite US policy schools has resulted in a lack of understanding about how markets actually work. Farrell believes that the price signal cannot convey as much information as previously thought, and some goods are not efficiently provided by market arrangements. He suggests that the assumption that government actors lack the knowledge to intervene has become a self-fulfilling prophecy. To address this issue, Farrell proposes rethinking public policy education to include not only traditional economic reasoning but also new approaches.

DeLong emphasizes that benefit-cost analysis, or "economistic reasoning," is more than just beneficial; it is essential. This approach requires policymakers to count and compare the benefits and costs of a proposed policy, helping them decide what should be done. DeLong also highlights the value of comprehensive benefit-cost analysis, which takes into account all externalities in a system. By driving shadow and real prices towards social-welfare maximizing values, this framework helps conceptualize policy goals. DeLong believes that checking whether these goals have been achieved is the only way to determine a policy's success. However, he acknowledges that benefit-cost analysis has its limitations, particularly in addressing wealth and inequality.

Despite its shortcomings, DeLong argues that considering wealth distribution and its correlation with political power is essential for effective policy-making. Ignoring this aspect could result in policies that threaten the existing distribution of power, which would make it impossible to implement any meaningful changes. In other words, technocracy can only succeed with the support of raw political power. In explaining this, DeLong turns to the work of Takashi Negishi, whose social welfare weights have been controversialy applied in a series of contexts, including the Kyoto Protocol. I had intuitivelly understood Negishi weights for a long time, but this was the first instance where the articulation of it in terms of his scholarship registered with me. I make this note todady as a marker for the future, and a recognition of a nascent idea in an earlier post