Strategies in relation to complexities: From neoclassical Cost-Benefit Analysis to Positional Analysis
Peter Söderbaum
Please cite the paper as:
Peter Söderbaum, (2017), Strategies in relation to complexities: From neoclassical Cost-Benefit Analysis to Positional Analysis, World Economics Association (WEA) Conferences, No. 2 2017, Economic Philosophy, Complexities in Economics
Abstract
In this essay neoclassical Cost-Benefit Analysis (CBA) is criticized as beinng too simplistic and also too specific in ideological terms. Positional Analysis (PA) is advocated as an alternative based on a definition of economics in terms of multidimensional analysis and democracy. Non-monetary impacts are regarded as being as ’economic’ as monetary ones and decision-making is seen as a multiple stage proces where issues of inertia, path dependence and irreversibility can be considered. While PA is still based on some simplifications, it is argued that the approach is closer to the complexities of the real world.
Sustainable Development is presented as a multidimensional issue where mainstream neoclassical theory has failed. A degree of pluralism in economics is needed to overcome some of the present unsustainable trends. As an example CBA-analysts cannot dictate correct values for assessments in a democratic society. In relation to decision-making, different and competing ideological orientations have to be considered.
Prof. Soderbaum seems unaware that a logical-methodological fallacy was discovered several years ago in the Kaldor-Hicks Principle (that vitiates its usual application) which is usually taken as the economic basis for cost-benefit analysis.
Ellerman, David. 2009. “Numeraire Illusion: The Final Demise of the Kaldor-Hicks Principle.” In Theoretical Foundations of Law and Economics, edited by Mark D. White, 96–118. New York: Cambridge University Press.
Ellerman, David. 2014. “On a Fallacy in the Kaldor-Hicks Efficiency-Equity Analysis.” Constitutional Political Economy 25 (2 June): 125–36.
Or my webset: http://www.ellerman.org
Very interesting. Apparently chimes with LAEP — see pp. 41 et seq here: https://www.researchgate.net/publication/280977715_New_Legal_Approaches_to_Policy_Reform_in_Brazil
Muy buen artículo. Aunque el autor no cita a John R. Commons, su posición me parece estar muy emparentada con el enfoque de análisis institucional de Commons.
Very good paper. Although the author does not cite John R. Commons, his position seems to me to be very closely related to Commons’s institutional analysis approach..
Reply to Mamerto Reyes Hermandez: The reference to John R. Commons is certainly relevant. I tend to see myself as an “institutional ecological economist” in the tradition of Veblen and Commons and later institutional economists such as K. Wiliam Kapp and Gunnar Myrdal who focused on broad development and environmental issues. Your comment made me reread a chapter by Neil W. Chamberlain in a book “Institutional Economics: Veblen, Commons and Mitchell Reconsidered” (C.E. Ayres et al. 1963, University of California Press). I certainly support Commons in his emphasis on comparative studies (understanding CBA by comparing it with positional analysis as in my paper) and his interest in the case study approach. Of special interest in relation to our present focus on complexity is John Commons search for concepts and conceptual frameworks useful in studying the economy. In relation to the complexities of a changing world he saw conceptual framework and language as more important than speculative abstract explanations about how the whole economy works. In this focus on concepts (that represent alternatives to the mainstream conceptual framework), I certainly agree with him.
What is meant by “neoclassical CBA” requires clarification. The purest single-criterion version of CBA (an attempt to choose public investments so as to increase the future stream of national income, as set out for example by Arnold Harberger in his essay “Three Basic Postulates …” in the 1971 JEL, famous for the assertion that “a dollar is a dollar is a dollar”) is a straw man. Even Harberger has abandoned this version (see A. Harberger, “Economic Project Evaluation, Part 1: Some Lessons for the 1990s,” The Canadian Journal of Program Evaluation, 1997). As currently practiced, CBA generally tries to incorporate income distribution and environmental issues. It can certainly be argued that CBA doesn’t do this very well. At the applied level, see, for example, Martin Ravallion, “Geographic Inequity in a Decentralized Anti-Poverty Program: A Case Study of China,” World Bank Working Paper 4303, 2007, and IEG, “Cost-Benefit Analysis in World Bank Projects,” The World Bank, 2010. At the abstract analytical level, there is the extensive literature on MCDM (multi-criteria decision methods), of which CBA practicioners seem barely aware. CBA as currently practiced certainly deserves to be criticized. But characterizing CBA as “technocrats dictating to politicians/decisionmakers” is not accurate. I am strongly in favour of democracy, but I would nevertheless argue that the failings of democracy need to be balanced against the failings of CBA. The mechanisms by which the public can participate in government investment decisions (referenda, surveys, elections) have significant weaknesses of their own.
Reply to David P. Ellerman: It is of some interest to look for “logical-methodological fallacies” within the scope of Cost-Benefit Analysis and the neoclassical paradigm. But as I see it our main effort should be to look for alternative perspectives in terms of paradigm (theoretical perspective) and ethics/ideology. In relation to sustainnable development we need concepts and terminology that differ from neoclassical theory and method. We need a new language that makes us think differently as economists and in other actor roles. And we should accept complexity and not aim at a new paradigm that represents a complete logical mathematical system. There has to be openings for other kinds of terminology and language.
Reply to Söderbaum: Prof. Söderbaum does not seem inclined to bother to understand the same-yardstick fallacy at the root of the Kaldor-Hicks Principle and Cost-Benefit Analysis. Like so much heterodox ‘criticism’ of neoclassical theory, he enters a plea to take into account a myriad of other criteria because of the complexities of economic life, etc. and it is all wrapped up in an appeal to democracy. The purest form of democratic voting would be unanimity, and that is the basis for core neoclassical notion of a Pareto improvement. But the Kaldor-Hicks principle and CBA based on it, are a neoclassical attempt to technocratically short-circuit the appeal to unanimity in the Pareto concept by saying that economists can, in their professional role, recommend a proposed change that would increase ‘social wealth’ even if compensating payments are not made to the losers to make the whole change + payments into a Pareto improvement. Söderbaum seems disinterested in the fallacy involved in that CBA argument, and is satisfied with general heterodox rhetoric about technocracy, democracy, market ideology, multidimensional criteria, complexities, etc.
Reply to Ralph W. Huenemann: Reading the 2010 World Bank report that you mention it becomes clear that Cost-Benefit Analysis aiming at “Economic Rates of Return” and the neoclassical paradigm with “externalities” etc. still playes a role as the ideal approach. It is recognized that there are difficulties in applying CBA but no reference to alternative theoretical perspectives in economics or alternative ideological orientations is made. At best “cost-efficiency analysis” – a small step toward multidimensional thinking – is considered.
When you write that “characterizing CBA as technocrats dictating to politicians/decisionmakers is not accurate” the reply is that my argument may be simplified but there is too much truth in it. Again the ideal is to come up with specific numbers of “Economic Rates of Return” which are not so easy for politicians/decisionmakers to dispute. The ideal is still technocracy as opposed to methods where democracy plays a more significant role. The CBA-analyst is supposed to be an expert in “correct vaues” in market terms for each kind of impact as part of the aggregation procedure. In this sense ideology is dictated, a specific market ideology.
Yes, there are different Multiple-Criteria decision methods but they may suffer from the same technocratic tendencies as CBA. Positional Analysis as indicated in my paper (and at other places) is an attempt to take democracy seriously.
I am happy to find Professor David Ellerman in this forum. Complexity economics is closely related to evolutionary economics, as João Vitor Oliveira da Silva has beautifully shown in this conference paper Complexity in the theory of economic evolution of Thorstein Veblen: an introduction. Oliveira da Silva is a young hopeful researcher on this topic.
David Ellerman has written a seminal paper on evolutionary theory in social sciences. It is the “must” for all complexity and evolutionary economists to read. The title of the paper is Parallel Experimentation: A Basic Scheme for Dynamic Efficiency. You can download it at
https://www.researchgate.net/publication/260124152_Parallel_Experimentation_A_Basic_Scheme_for_Dynamic_Efficiency
Positional Analysis, as an alternative based on a definition of economics in terms of multidimensional analysis and democracy suffers from the same shortcomings as neoclassical Cost-Benefit Analysis does: It is too simplistic and also too specific in ideological terms. The best advice human experience with science can give: focus on facts and empirical evidence and use theory only as a motivator for research.
See: What is Science: An evolutionary and interdisciplinary view: https://www.amazon.com/dp/1523271590/
I am happy to find complexity economics is closely concerned with evolutionary economics, as Silva has nicely contributed in the paper. No doubt Silva is a dynamic researcher and presented in such a nice way.
Positional analysis takes into consideration time and space in the context of culture and even history. Neo-classical economics incorporates these in Urban and Regional Economics where space and time are contextually incorporated. In the absence of good data which shows a longitudinal analysis of space across time, spatial economics focuses, as a first step, at current time. The dimensions of space in terms of characteristics of a community, culture and history are done with the inputs of ethnography. Thus, the approach of neo-classical economics is richer than what many think.
Söderbaum‘s work represents a parallel approach for competing with neoclassical economics. PA adds non-monetary dimensions to economic decision, such as the case of infrastructure investment. However, PA approach could integrate other dimensions into Cost-Benefit analysis as a more GENERAL framework, just like Einstein’s relativity theory could integrate Newton mechanics as its SPECIAL case. The problem of neoclassical economics is its over-simplification based on linear, static modeling of scale economy. For example, the current cost-benefit analysis did not consider long-term cost and benefit when infrastructure investment may change existing growth path. Clearly, PA could develop a range of simulation models for evaluating competing projects under multi-dimensional perspective. Adding political and social dimension is easy in theory but difficult in policy debate. If complexity economics could enlarge the scope of empirical and quantitative analysis in economic decision-making, we may have a better chance to make our approach as a future mainstream.
Take one example, our work in metabolic growth theory proposed the wavelet model as a better model than AR or cycle model in describing changing technology [see. Ping Chen, “Metabolic Growth Theory”, J. Evolutionary Economics, 24(2), 239-262, 2014]. The problem of neoclassical economics is the assumption of fixed (constant or decreasing) return to scale. Increasing return to scale is critical for infrastructure investment but excluded by CB model because of its non-convexity. In reality, infrastructure investment typically has changing return to scale. Wavelet model could consider four stages of scale economy. The first infant stage has negative returns caused by negative cash flow and uncertainty at initial construction that often deter developing countries; the second growth stage has increasing returns that was visible in China’s investment in high speed train but constrained by long-term debt burden; the third mature stage has constant returns that could achieve sustained development if we have proper financial arrangement; the fourth decline stage has decreasing returns that may need government help during transition process. You can see the evolutionary process can be simplified into multi-staged growth. Therefore, CB approach can be integrated into an evolutionary framework with nonlinear dynamic return to scale. This scenario is a BRIDGE from NEGATIVE constraints of PATH DEPENDENCE theory to CONSTRUCTIVE development in COMPLEX ECONOMICS, which could serve not only as analytical framework but also policy tools.
Ping Chen, Peking University in Beijing and Fudan University in Shanghai