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«Edited by ANNE MASON Research Fellow, Centre for Health Economics University of York and ADRIAN TOWSE Director, Office of Health Economics Radcliffe ...»

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It should be practical in orientation, teaching would-be analysts how to provide useful advice to clients, using simplified case studies as a method of instruction and as training exercises. But it should not be a cookbook, presenting CBA as a set of techniques to be applied mechanically; it should induct its readers into the general principles on which CBA was based. In fact, it should follow the strategy of his investment appraisal lecture course. Since he didn’t have time to write this much-needed book on his own, he suggested that we took on the project as co-authors – I doing most of the actual writing, but under his general guidance and, of course, with his reputation to sell the book. (I should say that he insisted that almost all the royalties came to me.) In many ways, The Principles of Practical Cost–benefit Analysis was, for me, the equivalent of writing a PhD thesis (something I never did); Alan’s role was similar to that of a thesis supervisor, except that the final text had to be in a form that he could sign up to. At first, I didn’t expect this to be much of a problem. However, just as PhD supervisees usually do, I gradually developed a perspective of my own, and it became more difficult for us to reach agreement on what our book should say. Increasingly, I felt the pull of currents of thought in economics which ran counter to Alan’s understanding of CBA.

In the early 1970s, economists’ views about the nature of CBA began to polarise. One school of thought was essentially that of ‘Bastard science?’. On this view, CBA is a branch of economic planning; the key ideas it imports from economics are those of optimisation theory. There are no a priori restrictions on the objective function to be maximised. This position was taken by Ian Little and James Mirrlees in their influential text, Project Appraisal and Planning for Developing Countries (1974). However, there was an opposing school of thought, represented by Ezra Mishan’s equally influential Cost–benefit Analysis (1971).

On this view, CBA is the applied branch of what in 1971 was still ‘new’ welfare economics – that is, the welfare economics of the Kaldor–Hicks compensation test. The key ideas that CBA imports from economics are those of welfare economics, consumer theory and price theory, particularly the concepts of producers’ and consumers’ surplus. The task of the cost–benefit analyst is to investigate whether the total amount that those who would gain from a policy proposal would be willing to pay for their gains is greater or less than the


total amount that losers would be willing to accept as compensation. On this account, the cost–benefit analyst is an independent specialist, committed to applying a particular set of evaluative principles. A client who employs such a specialist cannot ask for those principles to be changed: he pays to be told what they imply in a specific case. There is simply no place in CBA for postulated values. Mishan, I think, would have endorsed the quotation from Wildavsky (see pp. 6–7) which Alan thought patently false.

Another pull came from the theory of public choice, one of the intellectual growth areas of the 1970s and part of the wave of ‘New Right’ thinking which paved the way for Margaret Thatcher’s election victory in 1979. A central theme of public choice theory was the implausibility of (what was then) the conventional economist’s view of government as a benevolent despot or deus ex machina, a neutral force which could be called in to correct market failures.

The public choice literature taught economists to see political failure as just as much a problem as market failure, and to model the behaviour of government agencies in terms of the interactions of individually motivated actors. Alan’s conception of the ‘client’ for CBA began to sound suspiciously like the nonexistent benevolent despot.

Also built in to much of the theory of public choice was the hypothesis that when individuals act as voters and when they act in the market, they are acting on the same preferences: at the level of the individual, there is no distinction between the ‘citizen’ and the ‘consumer’. (Let me say in passing that I am no longer persuaded of the truth of this hypothesis.) Anyone who accepts this hypothesis will have difficulty with Alan’s idea that one might conclude that ‘the value-premises underlying both market and imputed prices are misconceived for the purpose in hand’ and that one might instead accept ‘the propriety of a paternalistic or collectivist basis for valuation’ (Williams, 1972, p. 220).

The value-premises underlying market prices, one would have to conclude, are simply the preferences of the individuals who act in the market. As voters, those same individuals have the same preferences. So when a government agency declares that these value-premises are misconceived, it is declaring that it is choosing not to act in accordance with the preferences of the people who elect it and pay for it. How can this be justified to those people?

In responding to these currents of thought, I was influenced by other York colleagues, particularly Mike Jones-Lee and Tony Culyer, and later by James Buchanan. Mike Jones-Lee was a firm adherent of Mishan’s approach to CBA.

His pioneering work on eliciting ordinary individuals’ valuations of reductions in risks of premature death was showing that it was possible to construct willingness-to-pay valuations even of ‘statistical life’ (Jones-Lee, 1976); he convinced me that this was a better way for CBA to deal with risks of death than the use of postulated values. More generally, the analysis of individual willingness to pay was in the spirit of the York department’s tradition of applied microeconomics. At the time, Tony Culyer was producing imaginative analyses of real-world problems using only the simple components of Marshallian price


theory, with a touch of populist scepticism about governments which increasingly appealed to me. I had the good fortune to be able to spend the summer of 1977 at Buchanan’s Public Choice Centre in Blacksburg, Virginia, and felt an immediate attraction to his contractarian form of normative economics, in which the role of government is not to judge what is good for society, but to implement projects which individuals recognise as being in their mutual interest. This was just after Alan and I had finished our book, but the ideas which crystallised for me in Blacksburg had been forming long before that.

So how did Alan and I manage to complete our book? Despite the famous placard on his desk, Alan’s line was never ‘Be reasonable: do it my way’.

Rather, he looked for ways in which we could acknowledge our fundamental differences within the structure of a practically oriented textbook. The original plan of the book, as designed by Alan, served us well. As in ‘Bastard science?’, we conceptualised the appraisal process as a dialogue between ‘the analyst’ and ‘the decision maker’ (Alan’s ‘client’). In order for analysis to be possible, we said, the decision maker’s objective needed to be specified. The kind of analysis that was required depended on the nature of that objective. In many contexts, even in the public sector, agencies are expected to act on ‘commercial criteria’ – that is, to use financial appraisal. So we began by explaining the principles of financial appraisal. This relatively uncontroversial material took up the first third of the book.

We then suggested that public decision makers might be expected to take account of a wider range of policy effects than can be encompassed by financial appraisal. As one way of doing this, we introduced the compensation test. At this point, we distinguished between two ways of thinking about CBA – the decision-making approach (Alan’s preferred approach, in which the objective is whatever the decision maker chooses it to be) and the Paretian approach (Mishan’s approach, in which CBA is seen as an application of Paretian welfare economics, and the objective is given by the compensation test). However, we began by playing down this distinction, presenting the compensation criterion as a simple and tractable way of taking account of a wide range of effects in a consistent way; as such, it provides a credible ‘first approximation to a full statement of government objectives’, even within the decision-making approach (Sugden and Williams, 1978, p. 93). This kept us going for another third of the book, in which we dealt with shadow pricing, consumers’ and producers’ surplus, imputed prices and uncertainty. It was only in the final third of the book that we introduced the idea of postulated values – for particular goods such as health care, for weighting gains and losses to different income groups, and in the form of a postulated social discount rate. Here, things became more awkward as we repeatedly reminded the reader that the legitimacy of postulated values was a controversial issue, and tried to treat the two approaches to CBA even-handedly.

In the final chapter, entitled ‘Epilogue: the analyst, the decision-maker and the community’, we reworked some of the themes of ‘Bastard science?’, with


the significant difference that the analyst and decision maker were placed in a triangular relationship with ‘the community as a whole’. We declared that ‘the public decision-maker is entrusted to act on behalf of this community’ (Sugden and Williams, 1978, pp. 220–30). Clearly, the intention was to qualify Alan’s earlier account of CBA as management consultancy, by making both analyst and client responsible to a wider community. My recollection is that the idea that we should do this was originally mine, but that Alan worked over my drafts quite closely, suggesting revisions and making sure that he could endorse the sentiments expressed.

The idea that the analyst has responsibilities beyond those of a consultant to a client was developed in two ways. The first (which, as far as I can recall, Alan supported wholeheartedly), appeals to a professional ethic of intellectual honesty. In the perspective of the decision-making approach, one of the principal virtues of CBA is consistency. It is by making different decisions of the same agency consistent with one another, and consistent with a common objective, that CBA promotes efficiency in the allocation of resources. However, if the benefits of efficiency are to be achieved, the CBA must be done in good faith and not as mere window-dressing. The more freedom decision makers have to specify their own objectives and to postulate their own values, the more scope there is for self-serving window-dressing. I think I felt at the time – and I certainly believe now – that this is a serious weakness of the decision-making approach. The less discretion there is for CBA methodology to be tailored to specific appraisals, or even to the interests of specific commissioning agencies or governments, the more confidence one can have that the results are genuinely informative. On these grounds, I now favour the convention that CBA should be based on individual willingness to pay (see Sugden, 2005). But back in the mid-1970s, I was still making up my mind. Alan and I were able to sign up to the claim that, if consistency is a virtue of CBA, the analyst’s professional role must include the advocacy of consistency, even in cases in which the client would prefer to be inconsistent. Thus, in reporting the results of a cost–benefit study, the analyst has a professional responsibility to point out the wider implications of using whatever values have been postulated for that study (Sugden and Williams, 1978, pp. 231–6).

The second form of responsibility is to the community as a whole. My recollection is that we had more difficulty agreeing on the passages which deal with this issue. We discussed it in relation to another virtue of CBA, explicitness.

We pointed out that the explicitness of CBA is not always desired by clients:

their interests may sometimes be better served by obfuscation. However (and here the influence of public choice theory can be detected), explicitness might have a corresponding value to the community as a whole, as a mechanism of


–  –  –

actions to the scrutiny of those to whom he is accountable... [It] carries a stage further the function of traditional financial accounting. The obligation on the part of privately owned firms and public agencies to keep financial accounts is a very effective deterrent against embezzlement and fraud by managers, public officials and politicians. The obligation to justify public decisions within the framework of cost–benefit analysis discourages a much subtler form of abuse of responsibility – that of taking decisions on behalf of others by using criteria that these others would not approve.

(Sugden and Williams, 1978, p. 240) Significantly, our concept of accountability allowed political decision makers to choose objectives and postulate values. We offered the following understanding

of the political process (cautiously prefaced by ‘one can argue that’):

the role of the analyst is to assist, not simply a decision-maker, but a decisionmaking process that has the assent of the community as a whole... The decision-maker is responsible for making a decision, according to his own lights, but he is responsible to the community. His right to decide stems from the consent of the community, expressed through the political system. The community, then, ought to have the right to call upon the decision-maker to account for his decisions.

(Sugden and Williams, 1978, p. 241) This formulation leaves room for CBA to be based on the kind of ‘collectivist’ value premises that featured in ‘Bastard science?’. The claim that these premises are social values is still only a value judgement made by the decision maker on behalf of the community: there is no requirement that this judgement is endorsed by the members of the community themselves. But there is a recognition that the decision maker has to account for his judgements to the people on whose behalf he claims to make them.


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