On Economic Valuation and Sick Mothers

I have spent most time this week at the Fourth International Conference on Degrowth for Ecological Sustainability and Social Equity, which takes place in Leipzig. In one of the sessions today, my doctoral father had the pleasure(?) to defend the economic (valuation) approach to environmental problems in a panel discussion. Most arguments used in this discussion against the economic approach were, I say it frankly, nonsense. Either they resulted from misunderstanding or from confusion or they just didn’t have anything to do with the issue. The only two valid arguments I was able to filter out were: a) that economists often treat ecosystems atomistically in that they value single ecosystem services and then just “add them up”, which is a practice I am very concerned about, too, and b) that the economic approach hasn’t achieved anything so far (which is debatable, but still a valid critique, as there is no systematic assessment of this issue to be checked against). Today, however, I would like to respond to one of the misconception-based arguments, for I think that it shows in an impressive way what economics is (not) and why we need economic analysis.

The “argument” that I mean came from one of the two other panelists, who represented the majority view at this degrowth Conference: namely, that economics is bad. She said, towards the end of the discussion, that the economic logic would lead in consequence to her considering what she gains, in monetary terms, when she is to care for her sick mother. This statement was applauded during the discussion, but it is actually based on a misconception about what economics is.

Contrary to popular believe, economics is not all about money! Yes, we economists deal a lot with money, but we also deal with a lot of other things without referring to euros or dollars. We use the terms “costs” and “benefits”, which many associate with money–however, we understand them in a much broader fashion. Not being able to do something because of being obliged to do something else is a cost. It is not necessarily monetary, but it is a cost. So, what is economics then about, if it is not about money? There is a very popular definition of economics, formulated by Lionel Robbins in his 1932 Essay on the Nature & Significance of Economic Science, as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses‘. Put more simply: economics is about trade-offs. It studies trade-offs that have to be made by both individuals and collectivities. And trade-offs is something that we constantly make. In an abstract sense, every single decision we make, both conscious and unconscious, is based on an implicit cost-benefit analysis. Even the decision how much time and other resources to spend on caring for the sick mother is a decision that involves trade-offs. We don’t have unlimited time–at least most of us–, we have multiple obligations, both social and contractual, that are in conflict with our wish to help our needy relatives. This makes the decision about time allocation between our sick mother and other obligations a natural object of economic analysis.

The same is true of the trade-offs involved in environmental policy. Do we want a road to be built or do we want to preserve an ecosystem that would be destroyed or damaged by its construction? Do we want lots of bioenergy or do we want food security? Do we want to build a new wind park or do we want to save the lives of bats and birds that might be harmed by the wind mills? Etc.

Now there is the justified question: why do we need economic valuation? Basically, the idea of economic valuation is that it helps make those normally implicit cost-benefit analyses explicit–objective, if you prefer that word. By translating values into one metric, money, we are able to directly compare and weigh off very different things. Of course, this works well only in theory. Economic valuation is extremely tricky and it is very naive to expect that it can provide exact values. Rather, it provides an idea about orders of magnitude. Which is, at least in some cases, quite a valuable contribution to political decision-making, because otherwise many things, especially ecosystems, are implicitly perceived as worthless. Therefore, I would argue that economic valuation should be understood mainly as a communication tool–it shows that something is valuable and allows for comparison with other valuable things, even if an exact cost-benefit analysis remains elusive. It makes trade-offs more explicit.

The problem of economics is that it is often viewed too narrowly–both by the critics and by many economics. If it is framed, however, as a way of studying trade-offs, it can be very useful in many areas, including environmental policy. This is not to say that we can depend on it and that other approaches to influencing policy are not needed. But to attack economics because it makes explicit trade-offs that are made implicitly either way is just not helpful.

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2 thoughts on “On Economic Valuation and Sick Mothers

  1. If economics is about assessing trade-offs among conflicting alternatives, the social “optima” will still be about what people prefer. A problem rather lies in a potential incommensurability stemming from the nature of trade-off and how people value their choices. An ideal valuation essentially takes into account what people want and do not want. This does not necessarily require any monetary measurement. Options that minimize trade-offs can be identified. Why should we not make use of such rationale?

  2. I don’t quite get your point, I must admit. Do you mean incommensurability within a person’s choices (such as reflected in lexicographic preferences) or between the preferences of different persons? The latter problem of aggregation is indeed something I left out from my argument presented above, but I would call this a serious difficulty for the economic approach. The personal-level incommensurability, on the other hand, doesn’t make the trade-offs go away–but it does make economic valuation senseless.

    I agree completely with your last two points about the need for monetary measurement and minimising trade-offs.

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