Prest and Turvey2
define the CBA process as, "maximizing the present value of all benefits less that of all costs, subject to specified constraints
Their cost-benefit model is based on the then modern economic theory and outlines four key issues to address for successful CBA:
- Which costs and which benefits are to be included?
- How are the costs and benefits to be evaluated?
- Discounting of future benefits and costs over time to obtain a present day value.
- What are the relevant constraints?
Although as dedicated students following course on CBA, it has to be pointed out that, in practice, undertaking CBA ends up being quite different from theoretical methods, for example:
Textbooks assume that:
a. All (relevant) impacts are known and covered.
b. All impacts are equally certain.
c. All impacts are quantified in monetary terms.
d. All costs and benefits are properly discounted.
e. The most beneficial option can be identified.
In practice, the practitioner attempting to carry out CBA finds that:
a. Some impacts are in verbal-qualitative terms only.
b. Some impacts are uncertain.
c. Some impacts are quantified, but not monetised.
d. Few impacts are monetised.
e. There is a trade-off to be resolved by decision makers
As a result many of the benefits "measured" via CBA is what the assessors and decision-makers agree to make them and in the case of governments justifying some action to "benefit" the constituency, they have tendency to exaggerate CBA benefits by finding an array of secondary and tertiary benefits which essentially divert this procedure away from having anything to do with due diligence. As a result, the promise never materialises into something as significant as stated.
The current appeal to infrastructural investment, building back better and a string of proposed new deals, in a period when throwing money at problems appears to be the underlying logic, needs to be subjected to a change in the rigour applied in the evaluation of public initiatives by linking quantifiable productivity gains to potential inflation reduction and real wage augmentation
.The Cost-Benefit of Keynesian and Monetarist economists?
But don't hold your breath. The alarming reality is that the current known universe of Keynesians and Monetarists still rests on aggregate demand model (ADM) and the discredited Quantity Theory of Money (QTM). However, an economy that is in equilibrium and gaining real incomes growth needs to apply the Production, Accessibility and Consumption Model identified by Jean Baptiste Say almost 220 years ago. It is apparent that Monetarists and Keynesians lack independence because of their dependency and need to adjust their focus to the movement of political party power benefactor interests. For the sake of the country, some of them need to break out of this aimless intellectual prison. They could make a beneficial start by terminating the trivialization of Say and make more effort to understand the significance of Say's model of the economy. The Real Incomes Approach is an attempt to lay out the foundation for such an approach which, as time passes, is becoming of increasing relevance to our economy and the constituents of this country, brought to an unacceptably low pass by the fixations of Monetarists and Keynesians.
Hector McNeill is Director of SEEL-Systems Engineering Economic Lab.
Prest, A. R., and Turvey, R., "Cost-benefit Analysis: A Survey
", The Economic Journal 75(300):683-735, 1965.
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