Sunday, November 16, 2014

Climate Catastrophe, the Numéraire, and a Smokescreen of Technical Jargon

I invite the reader to connect the dots and be horrified. If I tried to explain my interpretation of the passages below and the documents they come from you might not believe me, you may not want to grasp what I am trying to tell you.

Mistakes have been made. A mistake. A monumental error. The error has been detected but the magnitude of its consequences is incomprehensible... inconceivable. Nothing will be done to correct the error because there is too much at stake in admitting that public goods are different than private goods -- that the sign (plus or minus) of the sum of net benefits from a mixture of private and public goods is not independent of the choice of numéraire. This was the intuition behind John Kenneth Galbraith's observation, more than half a century ago, that "in an atmosphere of private opulence and public squalor, the private goods have full sway."
"In all cases, therefore, where a certain policy leads to an increase in physical productivity, and thus of aggregate real income, the economist's case for the policy is quite unaffected by the question of the comparability of individual satisfactions; since in all such cases it is possible to make everybody better off than before, or at any rate to make some people better off without making anybody worse off." – Nicholas Kaldor, 1939.
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"When all is said and done, the New Welfare Economics has succeeded in replacing the utilitarian smoke-screen [of technical jargon] by a still thicker and more terrifying smoke-screen of its own." – John Chipman and James Moore, 1978.
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"The ethical appeal of this [compensation criterion] argument, however, is weak. If compensation is only hypothetical, it is irrelevant. If it is actual, it should be counted as part of the project… In the light of these flaws, it may be asked why the ABC [aggregate benefit] criterion is so widely used in practice. Several possible reasons come to mind. First, the practitioners may not appreciate these flaws. Second, they may be aware of them, but use the ABC criterion for convenience. Third, they may be reluctant to contemplate the value judgements involved in choosing distributional weights. Fourth, they may hold the normative view that marginal social utilities are equal in terms of their chosen numéraire. Fifth, they may simply be siding with the rich." -- Jean Drèze, 1998.
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"Some people, on the one hand, want to make recommendations, and others  want to be told, without the responsibility of deciding for themselves, what is the best thing to do. If they are told without its becoming too obvious that they are being told, so much the better. It is, in fact, attractive to  some people to have a theory which tells them what is the best thing to do." – I.M.D. Little, 1949.
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"...it has become the norm for BCA [benefit-cost analysis] 'to focus on efficiency' and to compare a dollar of costs with a dollar of gains at a one-to-one exchange rate—no matter who is gaining or losing—which in practice amounts to setting η equal to zero. 
Although distributional weights are seldom used in practice, there is one big exception, where distributional weights turn up under another name: discounting! By setting η higher than zero, distributional weights are in fact applied to future generations." – Thomas Sterner and U. Martin Persson, 2008.
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"The numéraire matters in cost-benefit analysis." Kjell Arne Brekke, Journal of Public Economics (1997) 64: pp.117–123.

Abstract: The choice of numéraire is shown to be important in cost-benefit analysis. When a public good is involved, individual consumers" marginal rates of substitution will generally differ. Thus, the less valuable the numéraire is to a person, the higher the number required to express his net benefit, and the more will his interest weigh in the total sum. The choice of money as numéraire is systematically favourable to those who value money the least, relative to alternative numéraires.

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"On a fallacy in the Kaldor–Hicks efficiency–equity analysis." David Ellerman, Constitutional Political Economy (2014) 25: pp. 125–136.

Abstract: This paper shows that implicit assumptions about the numéraire good in the Kaldor–Hicks efficiency–equity analysis involve a 'same-yardstick' fallacy (a fallacy pointed out by Paul Samuelson in another context). These results have negative implications for cost-benefit analysis, the wealth-maximization approach to law and economics, and other parts of applied welfare economics—as well as for the whole vision of economics based on the 'production and distribution of social wealth,'
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In 1952 the Bureau of the Budget, in a Budget Circular [A-47] that neither required nor invited formal review and approval by the Congress, nailed this emphasis into national policy, adopting it as the standard by which the Bureau would review agency projects to determine their standing in the President's program. And soon thereafter agency planning manuals were revised, where necessary, to reflect this Budget Circular. In this way benefits to all became virtually restricted to benefits that increase national product. The federal bureaucrats, it should be noted, were not acting in a vacuum; they were reflecting the doctrines of the new welfare economics which has focused entirely on economic efficiency." – Arthur Maass, 1966.

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