Private costs are not policy relevant

Repeat after me:

Private costs are not policy relevant

Private costs are not policy relevant

Private costs are not policy relevant

Now when the Law Commision says (on pg 169) (ht Offsetting behaviour):

These are controversial issues and the Law Commission is in no position as
yet to arbitrate in this debate
which has become highly charged.

What they really mean is that, they would like to pretend private costs are policy relevant. However, since they don’t want to be criticised for it they will pretend they aren’t making that value judgment.

How do I know they are making a value judgment – well they come up with policy recommendations like “increasing the tax on alcohol”. Making a recommendation involves making a value judgment, regular readers will remember this.

Law Commission, you have come out on a specific side by giving a policy recommendation. Pretending you are being objective when you aren’t (which reminds me of this quote the Hand picked up) is not cool.

UpdateAnti-Dismal covers as well.

  • Repeat after me:

    MOST private costs are not policy relevant IF you believe that private benefits reflect peoples’ true preferences.

    I don’t necessarily disagree with you, Matt, but I think it’s important to remember the value judgments that are tied up in that statement. We can’t accuse the LC of making value judgments and then tell them off by using a judgment laden admonition.

  • @rauparaha

    I think my line is catchier 😉

    Of course there are value judgments, I am (again) making a conclusion 🙂

    Tell you what, I agree there are deviations from the rule – but when working with policy the above statement is an AWESOME rule of thumb. Therefore, it is a good starting point.

    Now if someone writes a beautiful comment illustrating exactly why this is not the case here, and then quantifies it, I will happily accept that deviation. But the onus is on those wanting to deviate from this excellent rule of thumb.

  • Rauparaha: Even if folks are irrational and consume “too much”, then so long as they, on average, don’t consume so much that the excess costs from the excess consumption don’t more than swamp the consumer surplus from the early consumption, then we’re STILL right in ignoring private costs. NOTHING about ignoring private costs requires strict rationality assumptions, no matter how many times folks at BERL insist that it’s true without addressing the argument.

    And don’t make the mistake of only counting the folks revealed ex post to have made the wrong choice (car crash, etc). You have to take the average across the set of all folks who were in observationally equivalent positions ex ante. I totally buy that for the ex post set, costs completely dwarf benefits. But ex ante? No way.

  • @Matt Nolan
    I’m not convinced. I think it’s only a good rule of thumb if you’ve already got a particular view of what a government should do. I may share that view, but I recognise that there are alternative views. Not all normative views about the role of government imply that only private costs are relevant.

    I would definitely expect an economist to use your rule of thumb as a starting point. However, I wouldn’t necessarily expect others to think it was an appropriate default.

    It’s one thing to accuse an economist of being inconsistent with their general framework by calling private costs policy relevant. I think it’s a step further to call out the LC who may not share your views of the role of government and the objective of policy.

    It is catchy, though 😉

  • @rauparaha

    Ultimately, the LC is pretending to use an “economist’s” cost-benefit analysis framework to justify the tax. As a result, I think they should be subject to the same normative judgments – or else they are abusing our reputational capital.

    Given that this is an externality on me, they should definitely give me some money. They can do this while they organise subsidies to help me with my addiction:

    http://www.tvhe.co.nz/2009/07/24/my-recent-addiction/

  • Rauparaha: When looking at market outcomes, “irrational consumers” make not matter as there is evidence that markets basically filter out the effects of irrationality.

  • ben

    Matt, whenever I see the phrase “value judgments” I read “cultural relativism”. What am I missing?

  • @ben

    Cultural relativism hell yea 🙂

    It is a little wider than that though. We require a value judgment whenever we make an assumption that isn’t a “fact”. IMO the only facts are really tautologies, although we can have accepted facts which are things everyone is willing to accept when looking at the issue at hand.

    Even when we interpret data we need value judgments – as judging what data is saying requires an implicit model. However, value judgments that stem from data are more defendable and will often fall into the category of accepted facts.

    I do believe that on some level you can have a “framework” which does not rely on value judgments. So the important question is not – what is a value judgment, but what is not a value judgment. Defining this framework is difficult (and at an abstract level these frames could in fact be said to be the result of value judgments) but I would say:

    1) People make choices,
    2) People experience pains and pleasures,
    3) People make choices based on these pains an pleasures

    Are examples of frames.

    Now, whenever I make a post where I have a conclusion I have to use value judgments – sure.

    But if I post just describing the situation, laying out what the pains and pleasures are, what some observed trade-offs are, what revealed actions physically show then I am being objective (in an economist sense of the word) and I can’t be used of “using my value judgments”.

  • @Matt Nolan
    “they are abusing our reputational capital.”

    Now that I can agree with wholeheartedly 🙂

    @Paul Walker
    I’m not really talking only about ideas such as bounded rationality. I think this debate is a lot wider than whether we think the BERL report is good economics. I think the heart of the dispute is whether it’s hypocritical to accuse a non-economist of making incorrect value judgments using normative economic arguments.

  • ben

    By the way I don’t think there is any controversy in this issue. BERL hasn’t tried to defend most of its report, and neither has anybody else. They’ve mainly said their critics have the wrong values. Not a recognised argument in economics to my knowledge.

  • @rauparaha

    “I think the heart of the dispute is whether it’s hypocritical to accuse a non-economist of making incorrect value judgments using normative economic arguments.”

    I think it is, as I think that all moral frameworks should reduce to our one or they are wrong. This is, of course, completely my opinion not a fact.

  • @ben

    It is an essential issue in economics.

    But you are very correct when you say that the argument needs to be divided between issues of the values applied to a framework and issues of the presumed structure of society in the first place.

    The presumption that private cost are not internal is not a usual economic assumption, it is not part of the economics “hard core” and as a result it needs to be defended. I have no idea if it has been defended adequately as I don’t have a spare three weeks to trawl though everything – however, that is how I would “paint the debate” in broad terms.

  • ben

    I think the heart of the dispute is whether it’s hypocritical to accuse a non-economist of making incorrect value judgments using normative economic arguments.

    It depends. If they’re trying to pass off their analysis as economics while quietly rewriting the foundational assumptions of economics and producing credible-looking but ultimately nonsense analysis as a result, then I think if it correct and proper to point out where that analysis departs from the economic framework. Again, I don’t see where the value judgment is in this. Pointing out that x does not accord with y on some way can be observed objectively. This is in the same league as trying to get agreement on whether the traffic light is red. Apparently, people with all sorts of values can agree on the colour of traffic lights. Noting inconsistencies of BERL’s analysis with a general understanding of economics, supported by literature, is not value laden. Asking for an explanation is not value laden. Noting that no answer is forthcoming is not value laden.

  • @ben

    “Noting inconsistencies of BERL’s analysis with a general understanding of economics, supported by literature, is not value laden”

    Well, this depends.

    If someones says BERL’s conclusions are wrong given this evidence etc IS value ladden – value ladden is not an insulting term, it merely implies that there are assumption that CAN be debated.

    To make a conclusion you need a value judgment, so by definition any conclusion can be debated.

    Regarding this alcohol business it is good to see the issue being debated, and hopefully this will lead to better informed policy outcomes.

    “Asking for an explanation is not value laden. Noting that no answer is forthcoming is not value laden.”

    Indeed they aren’t, as they have nothing to do with actual analysis 🙂

  • @rauparaha

    “I think the heart of the dispute is whether it’s hypocritical to accuse a non-economist of making incorrect value judgments using normative economic arguments.”

    Actually one more point.

    My criticism was of the fact they made a value judgment while pretending they didn’t. This is a broader philosophical error, not an error in terms of normative economics.

    In the post I showed a quote where they said they WOULDN’T fall down on the side of any of these arguments, but then they implicitly did by making policy recommendations.

    This was dishonest, not just from an economists stand point, but from a human standpoint.

  • @Matt Nolan
    I agree, that quote doesn’t make it sound like they’ve been very honest. I was taking issue more with your catchcry above that as an admonition to policy-makers. But I realise that it’s just a catchy heading below which you make your real point, which I do agree with.

  • @rauparaha

    “I was taking issue more with your catchcry above that as an admonition to policy-makers”

    Ahhh fair call – I had forgotten about during the self-induced hype of discussing value judgments 😀

    That is fair enough.

  • ben

    To be honest I think this whole value judgment discussion is a waste of time. It has no special significance in the debate about alcohol. If you want to insist that value judgments matter to assessing a report’s quality presumably that applies to every economic journal article you ever read. So why are we talking about this? Its an argument with no power. Economics, thankfully, is obviously not decided by who has the most popular or “best” personal values.

    Matt I think you are flat out wrong to say value judgments are necessary to draw conclusions. You do not need values to observe that cars stop at red lights, to note that 1 + 2 = 3, or to observe the behaviour of consumers and develop models which explain that behavour. Data is the data. Model fit is model fit. In judging the model and the data, it is appeals to reason logic and evidence, not my personal values, that is persuasive. Whether I believe in x or y does not change the fact that on day a person b did c.

    What you need values for is normative claims. You are confusing normative and positive.

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  • Hi
    I strongly recommend that you read “The Economics Of Waste” written by Richard Porter.
    It throws some light about the whole dilema.
    While reading this post I recalled this book. So I am going to study it again.

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