Obscuring Moral Responsibility Through Cost-benefit Analysis

Is society nothing more than the sum of its members; or is it greater than the sum of its members? Should we care? That this question is not mere academic quibble is given compelling, literally life-and-death significance by cost-benefit analysis.

Cost-benefit analysis (CBA) is the procedure prescribed by mainstream, neoclassical economists as a corrective for the public effects of private market activity. CBA works by applying the Pareto criterion for economic efficiency to the evaluation of private or even government projects. The criterion works like this (Daly 1977: 173): Monetary compensation is given to all individuals to be affected by a project. The monetary compensation is assigned a negative value if it is what is to be paid an individual who will be affected negatively by the project to make the individual indifferent to the project. The compensation is assigned a positive value if it is the sum to be paid to an individual who will be positively affected by the project to make it acceptable for the individual to forego the project. The monetary compensations given are then simply summed, algebraically, to see if they yield a positive value. If they do, then the project is said to confer a Pareto improvement. This means the winners are able to compensate the losers and still be better off. This signals that the project passes cost-benefit analysis and it proceeds.

That this procedure is not as straightforward as it seems is given instance by projects that lead to predictable deaths of individuals. In such instances, the Pareto criterion demands that the individual be paid an amount that would make him indifferent or at least reconciled to the loss of his life-even if that sum were infinite! Given the high likelihood that many individuals would insist on such a price, it is clear that many projects that cause predictable deaths could not possibly pass the cost-benefit analysis test if the specific identities of those to be killed were known. This would be true even if there were more lives saved than lost by the project. Furthermore, the possible expedient of canceling out lives saved against lives lost is precluded the analyst because the Pareto rule prohibits interpersonal comparisons (Daly 1977: 173-174).

Yet, it is the case that projects causing predictable deaths regularly hurdle cost-benefit analysis. How is this possible? A faulty chain of reasoning appears to be at fault. It begins with the fact that we never know the specific identities of those to be killed. Accordingly, it is supposed that what we must do is to compensate “everyone for the additional risk to which he is exposed as a result of the project (Mishan, 1971).” Should the population be large, however, the individual risk could become so minimized as to become insensible. The result is general indifference and no compensation at all is paid. The project passes cost-benefit analysis with flying colors. Thus, a procedure intended to protect the public welfare from the advance of individual interest may, simply from ignorance of the specific identities of those to be killed by a specific project, fail utterly in its avowed intent. How is this unpalatable failure to be corrected?