Sunday, November 23, 2014

For the Euthanasia of Kaldor-Hicks/Cost-Benefit Pseudo-Science

J. R. Hicks "The Foundations of Welfare Economics" 1939:
"Positive economics can be, and ought to be, the same for all men; one's welfare economics will inevitably be different according as one is a liberal or a socialist, a nationalist or an internationalist, a christian or a pagan. 
"It cannot be denied that this latter view is in fact widely accepted. If it is intellectually valid, then of course it ought to be accepted; and I must admit that I should have subscribed to it myself not so long ago. But it is rather a dreadful thing to have to accept. No one will question the activity of some of our 'positivists' in the criticism of current institutions; but it can hardly be denied that their authority to advance such criticism qua economists is diminished by their abnegation, so that in other hands economic positivism might easily become an excuse for the shirking of live issues, very conducive to the euthanasia of our science
"Fortunately there is no need for us to accept it. The way is open for a theory of economic policy which is immune from the objections brought against previously existing theories..."
Just a small sample of the objections Kaldor-Hicks has been immune to over the years:
"...judged in relation to its basic objective of enabling economists to make welfare prescriptions without having to make value judgments and, in particular, interpersonal comparisons of utility, the New Welfare Economics must be considered a failure." 
"Pareto is sometimes credited with an early formulation of the ill-fated Hicks or Kaldor principles of hypothetical compensation." 
"The ethical appeal of this [compensation criterion] argument, however, is weak."  
"It turns out then that Mr. Kaldor's criterion in its most general sense has not eliminated the problem of interpersonal comparison of utility. It has only subjected utility to the measuring rod of money, a measuring rod which bends, stretches, and ultimately falls to pieces in our hands."
"...implicit assumptions about the numéraire good in the Kaldor–Hicks efficiency–equity analysis involve a 'same-yardstick' fallacy..."
"For sustainability science, the Kaldor–Hicks rule runs counter to both intra- and inter-generational concerns."
"Only later would it be realized that one did not know -- indeed, one could not know -- the value of production independent of the distribution of income and the associated price vector that provided the weights to the various physical quantities being produced."
"...in all of this prodigious elegance, rarely is there recognition that the Pareto test remains what it has always been -- an analytical construct (inconsistent and incoherent at that) with no special claim to legitimacy beyond the tautological domain out of which it arose." 
"When the unweighted sum of net benefits from a project are used as a criterion of project evaluation, cost-benefit analysis may be sensitive to the choice of  numéraire . This is one reason, among others, why this criterion should not be used."
And yet:
"The Kaldor-Hicks criterion — a test of whether total social benefits exceed total social costs — is the theoretical foundation for the use of the analytical device known as benefit-cost (or net present value) analysis."
Not bad for an inconsistent, incoherent, ethically-weak, ill-fated tautological failure of a fallacy that should not be used!

Hicks was right. The Kaldor-Hicks theory is indeed "immune from objections."

2 comments:

Thomas L. Hutcheson said...

I learned that a lot of practical tools and concepts that economists use GDP, price, and quantity indexes have theoretical objections. No doubt "cost benefit analysis" similarly fails. But if government is going to impose a regulation or incur a cost of an investment, what alternative method is there for comparing the costs and benefits of the action?

Sandwichman said...

I wouldn't pretend to have the answer to that all by myself. But what I'm trying to highlight by posting excerpts from the report of the panel of consultants on indirect and secondary benefits is that there WAS an alternative. It was acknowledged by its advocates to be imperfect, which apparently wasn't good enough for the Bureau of the Budget. Why settle for merely imperfect when "unacceptable nonsense" is the alternative?