I've written before about the insidious stupidity of relying on simple minded economic cost-benefit calculations when thinking about complex issues such as climate change, trade policy and the like. The calculation gives the illusion of hard-headed quantitative analysis, unbiased by emotion, yet such calculations almost always make sweeping assumptions about what things get counted as costs or benefits and what things do not. There is often nothing scientific in the exercise at all.
I'm not alone in finding this troubling.
Economists in practice spend a lot of time thinking about market failures and how to prevent them, and they derive much of their policy advice from this recipe. Such analyses inevitably tap into the analytical machinery for welfare analysis (which, I admit, I find hard to take at all seriously, but that's another story) and consider how some policy intervention, by removing obstacles to possible exchanges in the market, can improve welfare and economic efficiency. The trouble is, as economists Daron Acemoglu and James Robinson pointed out a while ago, is that the conceptual framework used in such analyses often simply dismisses as irrelevant other non-economic impacts of such policies, even though these may have huge societal ramifications. Here's how they described one example (I'm selecting some text here from an earlier post):
Faced with a trade union exercising monopoly power and raising the wages of its members, many economists would advocate removing or limiting the union’s ability to exercise this monopoly power, and this is certainly the right policy in some circumstances. But unions do not just influence the way the labor market functions; they also have important implications for the political system. Historically, unions have played a key role in the creation of democracy in many parts of the world, particularly in western Europe; they have founded, funded, and supported political parties, such as the Labour Party in Britain or the Social Democratic parties of Scandinavia, which have had large effects on public policy and on the extent of taxation and income red istribution, often balancing the political power of established business interests and political elites. Because the higher wages that unions generate for their members are one of the main reasons why people join unions, reducing their market power is likely to foster de-unionization. But this may, by further strengthening groups and interests that were already dominant in society, also change the political equilibrium in a direction involving greater effifi ciency losses. This case illustrates a more general conclusion, which is the heart of our argument: even when it is possible, removing a market failure need not improve the allocation of resources because of its effect on future political equilibria. To understand whether it is likely to do so, one must look at the political consequences of a policy—it is not sufficient to just focus on the economic costs and benefits.
The paper goes on to analyze this problem in much greater generality, looking at the push to privatization in Russia, and the drive to deregulate financial markets over the past three decades in Western nations, and how both led to huge shifts in the wealth and political power of different social groups. In both cases, much of the intellectual groundwork for making these changes came from analyses that were ridiculously oversimplified and carried out with considerable disregard for the larger complexity of society.
On the same topic, here's a must read article at Salon.com by Ted Hamilton, a Harvard Law student, decrying the stultifying effects of the "law and economics" movement on the teaching of law. One of the most pervasive effects is the rise of the concept of economic "efficiency" in analyzing and judging the relative merits of different legal structures. The result, as Hamilton describes it, is the systematic narrowing of thinking and stamping out of any imaginative or creative analysis in law:
Since September, I’ve been encouraged to think about the law less as a journey toward justice and more as a means for distributing resources. In Civil Procedure, we examined the wisdom of allowing average people to bring lawsuits based on the overall court costs involved. And in Property, the problem of whether to permit the building of a cement plant in a residential neighborhood turned on the national industry’s need for cement. In nearly every discussion of a given law or a proposed policy, the first question was feasibility, and the second (or third) was justice. “Feasibility” means financial soundness. Financial soundness requires measurement. So in order to measure and mete out our resources, legal questions grasp for the harsh insights of computation.
According to this oddly constrained worldview, the legal system is just another (and comparatively imperfect) means for achieving “wealth maximization.” We want a “bigger pie,” so the incessantly repeated metaphor goes, and law is merely about deciding which yeast works best. The impassioned cris de coeurs of Blackstone, Cardozo or Sotomayor notwithstanding, “the life of the law” is not, to paraphrase another luminary, “experience” — it’s accounting. If only we would spend less time with the romantic and messy concepts that have beguiled the likes of Holmes and Brandeis for millennia, so the thinking goes, we might actually be able to make things work.
In the obvious — and obviously ideological — corollary to all this, law school has tried to convince me that it’s not lawyers or judges that should decide the hard questions of law: It’s economists. The white knights of the 21st century legal academy, economists are uniquely equipped, so they claim, to furnish us wishy-washy idealists with the quantitative rigor to perform the difficult, and consummately serious, analysis that policy and politics require.
In other words, society is a problem. And legal economics is here to solve it.
The law and economics movement, born at the University of Chicago in the 1970s, gave birth to this type of thinking and now enjoys unquestioned academic supremacy over the more prevaricating methods of legal realism, critical legal studies and legal formalism. Law and economics’ doyen Richard Posner, a professor at Chicago, Seventh Circuit judge and famous advocate of all things market-oriented, is the most cited legal academic of the 20th century. Ronald Coase’s “The Problem of Social Cost,” which reduces debate over legal rules to the calculation of transaction costs, is the most cited legal article. Passions have cooled somewhat since the raucous debate in the ’80s and ’90s over law and economics’ takeover of the legal academy — which was aided in no small part by generous donations from private, free market-promoting foundations — but that’s just because the movement’s methods have become part of the background. No other approach to adjudication dominates class discussion to such an extent, or shapes the way in which cases are selected and read.
The economic analysis of law, then, has become the standard against which other approaches are measured. And even if many professors still believe that cost-benefit analysis, with its incessant focus on data and calculation, brandishes empiricism the way Descartes brandished self-reflection (read: with excessive faith in a promising but limited approach), only a cantankerous cynic would argue that it’s all hogwash.
But that’s not to say there isn’t much to pause over.
Here’s a typical example: Legal economists generally assess the value of a resource — land, loans, even lives — by how much someone is willing to pay for it. This makes sense at a very basic level: The sandwich is worth $8 because you won’t pay $9 but you’ll pay more than $7. But how effectively can dollars capture worth when people have different abilities to pay? It seems a bit obtuse to claim that the owner “willing” to pay $200,000 for her home values it less than the developer “willing” — read: able — to spend $1 million. And that’s just marketable assets. What about more elusive “resources”? How do we price, say, the happiness of children? (Don’t worry: economists have tried.)
Here’s another example: Economic analysis evaluates environmental regulations according to the net social value of restricting industrial activity versus the activity’s economic value absent regulation. Even beyond the difficulties of measuring such things, how do we decide where to draw the line between what “counts” as value in such a calculation and what doesn’t? When dealing with something as resistant to quantification as a wild stream, this puzzle has no end. Is the stream only valuable to those who live by it? To those who live in it? What about those who hear stories about it, or who would drink from it in 90 years, or the painters who might never see it? Does their value “count”?
... we need to consider economic thinking’s ideological and imaginative effects. ... Simply put, our social life is much more than a pie-eating contest. Our shared resources are meant to serve our shared ideals, not vice versa. Yes: a rising tide might sometimes lift all ships, and we need to enjoy our bread before we can enjoy our rights. But the two biggest specters on our communal horizon, climate change and inequality, demonstrate where a singleminded obsession with economic growth can lead us. Taking care of ourselves and our planet means much more than taking care of our wallets.
In an era crying out for radical thinking and radical solutions, we can ill afford the strictures of the cost-benefit mindset. The complete immersion of our legal class into this language of economics has a corrosive effect on its imaginations, leaving our lawyers unequipped to think outside the box. A singleminded pursuit of efficiency loses sight of the inherent messiness of society and the legal rules that grapple with it. By reducing everything to entries in a formula and by seeing human behavior as limited to “rational pursuit of maximum value,” law and economics conjures up a version of the self-interested and self-destructive world that we now inhabit.
After all, when we concede that our society’s legal life is essentially about growing the economy, it becomes very hard to argue against leaving the tough decisions of rule design and market legislation to the growth experts and wealth maximizers. Not surprisingly, those folks have lately turned out to be expert mostly at maximizing their own wealth and that of their friends, while minimizing the wealth, and the happiness, of everybody else — those less willing, because less able, to pay for their share of our resources.
Three years of law school spent evaluating society according to the metric of transaction costs will inevitably produce lawyers less attuned to the more ephemeral, and more essential, considerations — the kind that could actually inspire the reforms and revolutions we need. A law school acculturation process whereby the hard facts of economic analysis are constantly if implicitly vaunted over the less determinate methods of ethical reasoning necessarily generates attorneys more sympathetic to those who traffic in the material of such analysis — namely, bankers, hedge fund managers, and their similarly-educated regulators — and it’s just such economic essentialists who are overrepresented in the ranks of the enemies of social change.
Read the whole thing here (h/t Mitch Julis)