Saturday, May 26, 2012

When specificity is a roadblock

For today, I will just quote a passage that I came across in the remarkable book, Steady -State Economics: The Economics of Biophysical Equilibrium and Moral Growth (1974), by the ecological economist Herman E. Daly. Please let me know what you think.
Why do we insist on ignoring the ethical character of so many major economic decisions? Why this compulsion to substitute mechanical calculation for responsible value judgment? Perhaps it's because our mechanistic paradigm has reduced values and ethics to mere matters of personal taste, about which it is useless to argue. Quality involves difficult judgments and imposes self-definition and responsibility. Quantity involves merely counting and arithmetical operations that give everyone the same answer and impose no responsibility. Thus university deans make promotion decisions by counting words published and number of citations rather than by attempting a qualitative judgment about the true worth of a scholar's work, which is bound to cause some disagreement. Counting is an easy way out--a retreat from the responsibility of thinking and evaluating quality.

An especially important role in the quantitative short-circuiting of responsibility is played by randomness. Randomness is, in fact, an excellent moral scapegoat. Consider that some 50,000 Americans are killed annually by the automobile. Suppose that the specific identities of these people were known in advance. To save 50,000 specific individuals, we might lower speed limits drastically and return to bicycles for local transportation. To save 50,000 unknown, randomly determined individuals, we do nothing. If a soldier kills specific women and children at close range with a rifle we are horrified; if a bomber pilot kills many more women and children, whose numbers are predictable but whose identities are unknown before the fact, we are only vaguely upset...'Thou shalt not kill thy specific identified brother, but mayest murder random persons at will, in order to achieve thy 'progress,' however shallowly defined.' How much economic growth is based on this expanded version of the shorter, less sophisticated commandment?...We cannot throw responsibility for such collective existential decisions on to the moral scapegoat of randomness with its phony numerical calculations.

The way in which these phony calculations work is via "economies of ignorance and scale," as John U. G. Adams ("...And How Much For Your Grandmother?" Environment and Planning, Vol. 6, 1974) has scathingly illustrated. Consider what happens when we apply the concept of Pareto efficiency to the cost-benefit analysis of a project involving the predictable loss of life. Let Vj be te compensatory money payment to individual j to make him indifferent to the proposed project. That is, if j is to be hurt by the project, then Vj is what he must be paid to accept it, and it carries a minus sign.; if j is to be benefited, Vj is what he must be paid to forgo the project, and it carries a plus sign. If the algebraic sum for all individuals is positive, then there is a potential Pareto improvement; that is, the winners could compensate the loser and still be better off.

Suppose now that individual j would be killed as a result of the project. Consistency with the Pareto criterion requires that he be compensated for the loss of life according to his own valuation. Since most people would put a very high or even infinite cash value on the remaining years of lives, the result is that any project involving predictable loss of specific lives would fail the test of Pareto improvement and could not be justified by cost-benefit analysis. This is so even if more lives are saved than lost by the project, since there is no way for those saved to compensate those killed, and any cancelling out by the analyst of lives saved against lives lost violates the Pareto rule of no interpersonal comparisons.

It is obvious that many projects justified by cost-benefit analysis do result in the predictable loss of life. This is true for any projects that increase air or ground traffic, radiation exposure, or air pollution, for example. What allows cost-benefit analysts to "justify" such projects? It is essentially the fact that we never know in advance the identities of the specific people who will be killed. Th result is that we never have to compensate anyone for his certain loss of life but instead we must compensate everyone for the additional risk to which he is exposed as a result of the project (E. J. Mishan, "Evaluation of Life and Limb: A Theoretical Approach," Journal of Political Economy, July/August 1971). If the population is large, the individual risk becomes very small, perhaps below the minimum sensible, so that everyone is indifferent to such a negligible risk and no compensation at all is required, and the project passes with honors.

Note that in theory we have passes from a case requiring infinite compensation to a case requiring zero compensation, simply by throwing away information, that is, by remaining ignorant of the specific identities of the victims. This is odd, to say the least. In practice, of course, we never have the specific identities of victims beforehand, but that fact does not resolve the theoretical anomaly. The population subset most at risk could often be specified but usually is not, so that the risk often appears more diluted than it really is.

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