Rationality or Rationalism? The Positive and Normative Flaws of Cost-Benefit Analysis

I’m pleased to have gotten the reprints of my Houston Law Review piece, Rationality or Rationalism? The Positive and Normative Flaws of Cost-Benefit Analysis. It was part of their Frankel Symposium on environmental cost-benefit analysis; the main piece was Ricky Revesz and Michael Livermore‘s “Retaking Rationality: Two Years Later”, a follow-up to their (two-year-old) book, Retaking Rationality: How Cost Benefit Analysis Can Better Protect the Environment and Our Health.

I’m going to post the text of my article in installments over the next few days, though I encourage you to consult the full version on SSRN, or the version in 48 Hous. L. Rev. 79 (2011), for the footnotes. The first installment follows below the fold.

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Environmental, health, and safety advocates, say Richard Revesz and Michael Livermore, have been wrongly hostile to cost–benefit analysis because of a false belief that it is biased against regulation. But the bias against regulation, while real, has been the artifact of historical accident—the domination of cost–benefit discourse by antiregulatory advocates. In fact, cost–benefit analysis, neutrally applied, can easily be proregulatory, especially in health, safety, and environmental regulation. Proregulation types should, therefore, learn to stop worrying and confidently make their case in economic terms.

Dean Revesz’s pitch is partly political: advocates of regulation should use cost–benefit analysis to better achieve their goals, even if those goals come from a moral perspective that rejects economic reasoning. “Cost–benefit analysis,” after all, “is here to stay,” and “[d]ecisions [a]re [m]ade by [t]hose [w]ho [s]how [u]p.” But he’s also speaking on an intellectual level: cost–benefit analysis is not just “inevitable” but also “desirable,” because it correctly tells us which regulations are rational.

On the intellectual level, I believe that Dean Revesz gives short shrift to important theoretical, practical, and normative arguments against cost–benefit analysis: it may not be a coherent enterprise; if it’s coherent, it may not be possible to do it well; and if it’s possible to do it well, it’s not necessarily attractive on moral grounds.

On the political level, cost–benefit analysis can be more attractive: one can happily use theoretically indefensible means to pursue political ends that one desires for other reasons. For Dean Revesz’s intended audience—regulation advocates who have been historically suspicious of cost–benefit analysis—his thesis may well be right. But it has a corollary for free-market advocates who are hostile to regulation. Free-market advocates have mostly gone along with cost–benefit analysis because of a belief that it would serve as a brake on regulation. If Dean Revesz is right—if cost–benefit analysis, neutrally applied, can easily be proregulatory—perhaps natural-rights libertarians should reconsider their tolerance of cost–benefit analysis and focus more on making their case for deregulation in moral terms.

The Intellectual Case: Does Cost–Benefit Analysis Give Us the Right Answers?

On one level, Dean Revesz’s defense of cost–benefit analysis is unobjectionable. Surely we should consider costs as well as benefits. “We live in a world of finite resources,” and “we need a mechanism that tells us when to stop spending money” to reduce risks. Surely—if we believe in weighing costs against benefits—“[c]ost–benefit analysis is that mechanism.” Indeed, for purely economic regulations, “the use of cost–benefit analysis is a requirement of basic rationality.”

But really, this is a rhetorical sleight of hand. Of course we should always do cost–benefit analysis, even if just by tallying up pros and cons on a napkin. Even free-form democratic deliberation, insofar as it considers costs and benefits to some extent, is an exercise in intuitive cost–benefit analysis. But the term “cost–benefit analysis” in the regulatory context refers to a much more specific exercise, one that assigns numerical values to outcomes and plugs them into a utilitarian social welfare function. And clearly the type of cost–benefit analysis Dean Revesz is talking about is the formal type (even though he doesn’t view it as “a master procedure” that is “capable of trumping all other values”). Formal cost–benefit analysis—which is just one of many possible implementations of cost–benefit analysis—is much more controversial, and its theoretical basis is much less defensible than the intuitive kind we do all the time.

When I teach environmental law and economics, my students usually come in, like Dean Revesz’s audience, skeptical of cost–benefit analysis. I tell them that I want to discipline their thinking on the subject, so that even if they remain opposed to cost–benefit analysis, at least they’ll better know why. I outline a number of avenues of attack, first the internal ones:

  1. The questions cost–benefit analysis asks are incoherent.
  2. Maybe the questions are coherent, but mathematics and econometrics can’t give us the right answers in principle.
  3. Maybe we can get the right answers in principle, but the data doesn’t allow us to get the right answers in practice.
  4. Maybe we can get the right answers in practice, but practitioners of the technique have been using the method incorrectly.
  5. —and then an external one—

  6. Maybe cost–benefit analysis has been correctly applied, but its results are normatively unattractive.

Dean Revesz’s approach focuses on issue number 4 and argues that the implementation problems can be solved if the new crop of cost–benefit practitioners, both in the academy and in the Office of Information and Regulatory Affairs, is just convinced to avoid their predecessors’ mistakes. But he gives short shrift to internal critiques 1 through 3 and to external critique number 5.

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