Kalderhicks Efficiency And Wtp

Welfare economists are well aware of a large literature that charges that the use of WTP as a criterion of "value" or "benefit" undermines democratic processes, misrepresents the value of life and other "priceless" goods, and ignores distributional effects.44 I quibble with this literature because I believe it concedes too much. It concedes that WTP at least sometimes measures something normative - for example, utility, benefit, value, well-offness, well-being, or satisfaction. In fact, these concepts do not explain why WTP is normative; they serve as mere stand-ins, logical equivalents, or proxies for it. I contend that WTP is useless as a normative concept because it measures or correlates with nothing but itself and with concepts it defines.

A welfare economist may concede this point, however, and reply that it is not so much utility as rationality that the science has in mind. According to this reply, "The utility analysis rests on the fundamental assumption that the individual confronted with given prices and confined to a given total expenditure selects that combination of goods which is highest on his preference scale."45 This individual, whom I shall call "WTP Man," is defined by a preference scale or ordering that meets various formal conditions, or example, if WTP Man prefers option a to option b, he cannot at the same time also prefer b to a, even under a different description. Willingness-to-Pay Man consists in a preference function which is "no more than a numerical representation of an underlying ordering of alternatives, on the basis of which the person does his choosing."46

WTP Man as a theoretical construct is assumed to have a complete preference ordering, which is to say, for any two goods a and b, he must prefer one to the other or be indifferent between them. According to two environmental economists, "All that rationality requires in respect of preferences over states of the world is that these states are ranked by a complete and transitive ordering." This means that individuals respond rationally to matters of environmental policy "only if they are able to rank all possible outcomes of an environmental dilemma con-sistently."47

Students of social psychology have for many years criticized the relevance of WTP Man as a theoretical construct because in its fundamental concept it conflicts with the way people in fact behave. Many studies have shown that "theoretically equivalent measures of preference, such as choices and prices, can lead to systematically different preference-orderings, known as preference reversals."48 The normative consequence of an enormous number of studies is to show that the preferences of individuals "may not typically be stable and well defined" when any risk or uncertainty is involved and even in a risk-free environment.49 If this is the case, economists would have to reject or dismiss the typical preferences of ordinary people because they do not come anywhere near the standard of rationality required by WTP Man.

The empirical research that has established the gulf between WTP Man and the normal socialized person is useful and important. It does not answer the question, however, of whether WTP Man is a sort of ideal - in other words, whether human beings fail somehow because they do not come up to that standard. For example, human beings adjust their choices in view of moral principles, opportunities, situations, occasions, and exhortations that may not reflect a preexisting stable preference schedule but may respond to qualities such as self-doubt, willingness-to-learn, decency, and social-mindedness - qualities that may spontaneously appear or develop with the formation of character. To reflect a preexisting complete preference-ordering may be to ignore these virtues and to abjure one's humanity. As Walt Whitman noted, a human being contains multitudes; to paraphrase R. W. Emerson, the foolish consistency of WTP Man requires a small mind. As Amartya

Sen has written, WTP Man or what he calls the purely economic man "is indeed close to being a social moron. Economic theory has been much preoccupied with this rational fool in the glory of his one all-purpose preference ordering."50

To get from individual to collective choice - that is, from WTP Man to WTP Society - welfare economists conceive society as a single individual with a preference or utility schedule that aggregates across its members. Willingness-to-Pay Man at least in theory and within an income constraint calibrates the amount he is willing to pay to satisfy one preference relative to the amount he would pay to satisfy a different preference - or the amount he will accept to surrender a good he already possesses. At least in principle, then, WTP Men will exchange goods with one another until they exhaust the "benefits" (defined in terms of net WTP) they can obtain by trade. This state of exhaustion is thought to be optimal. For example, the $ioo-million lottery winner apparently reached this optimum state. He satisfied all his preferences - and thus realized their intrinsic normative content - after he had spent half his winnings on whores, hooch, and horses. There was nothing more for him to gain from trade but he did what he could by squandering the rest.

The idea that WTP Men exchange goods with each other each to attain the highest place possible on the preference scale suggests that society might be conceived as a single rational actor who combines the preferences of all individuals on a WTP basis. The individual has no separateness or autonomy; he or she is conceived as a container of preferences or of WTP that can be aggregated with the WTP of other individuals into a single overall social account. It is a commonplace to say that from the perspective of WTP Man, "persons do not count as individuals in this any more than individual petrol tanks do in the analysis of the national consumption of petroleum."51

Economists introduce the Kaldor-Hicks compensation test to aggregate the individual tanks into the national account, that is, to get from WTP Man to society, from the individually preferred to the socially preferable. The Kaldor-Hicks test justifies government intervention to realize the net gains WTP Man would have been able to achieve but for the costs of exchange or the imperfections or failures of markets. According to this test, "If [person] A is made so much better off by the change [from one situation to another] that he could compensate B for his loss, and still have something left over, then the reorganization is an unequivocal improvement."52 The Kaldor-Hicks test justifies government interventions which create "losers" as well as "winners" on the argument that if the winners could compensate the losers and still be winners, society would be "better off" as a whole.

The Kaldor-Hicks test assumes that "better-offness," whatever it means, aggregates across society, which it treats as a sort of super-individual. Just as society may be said to be "heavier" if weight-gainers could offset weight-losers and remain gainers, or that society is "taller" if taller people could offset shorter ones and still be taller than before, this approach supposes society is "better off" if those who gain "better-offness" can compensate those who lose it and still be "better off" than before.

Gunnar Myrdal observed that welfare economics presupposes a "harmony of interests" or a "communistic fiction" about the oneness of society.53 This communistic ideal "amounts to the assertion that society can be conceived as a single subject." Society is not "a single subject" with respect to weight or height or color; these qualities attach only to the unit and do not aggregate over the whole as emergent or community properties. If you put on twenty pounds, for example, it is not any solace to you that someone else managed to lose the same amount of weight. Similarly, if a change makes one person "better off" and another "worse off" that is all that can be said about it. There is no way to sum and ascribe these qualities to society as a single subject. As Posner and Adler conclude, "In sum, the Kaldor-Hicks test is simply not an attractive normative criterion, and for that reason there is no point in trying to defend cost-benefit analysis on the ground that it implements the Kaldor-Hicks test."54

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