Saturday, March 28, 2020

An Economist's First Tryst with Benefit-Cost Analysis

Célestin Monga has had an eminent career as a research economist at the World Bank, as Managing Director of the UN Industrial Development Organization, as Chief Economist and vice-president at the the African Development Bank, and now as a Senior Economic Adviser at the World Bank. Here, he tells of that intimate special moment in the life of any economist--that first encounter with cost-benefit analysis. 

(I'm quoting here from Monga's "Comment" (pp. 77-94) in response to an essay by Amartya Sen from The State of Economics, The State of the World, published in 2019 by MIT Press.)  
I still remember vividly the strange mix of excitement and bewilderment that overwhelmed me in my high school years when our professor of accounting taught us the fundamentals of benefit-cost analysis. I immediately went to my dormitory and spent most of the evening trying to apply this powerful technique, not to assess whether the advantages of a hypothetical investment project were likely to outweigh its drawbacks, but to evaluate my own life prospects. Benefit-cost analysis seemed like a rigorous and revealing tool to examine whether my minuscule and uncertain existence was a "profitable" venture, or at least a worthwhile escapade that deserved to be continued. Of course, the few friends to whom I confided this found it a ludicrous idea. ... They were right: ... But so what? I kept running the numbers. ... 
I also had to decide how to imagine and estimate the prospective benefits and costs of my entire life to come. Using my own personal value scale, I calculated the costs as the amount of compensation required to exactly offset negative consequences of being alive for 50 or so years of life expectancy ahead. The compensation was the monetary amount required that would leave me just as well off as before engaging in this exercise. Benefits were measured by my willingness  to stay alive and enjoy all the things and emotions that I could reasonably expect for the decades ahead. Knowing that, in the end, life always results in death, typically following either an abrupt and tragic event like a car or airplane crash, or a long and painful illness, I could not find many benefits show present and expected value could match and compensate for the pains and disappointments of the costs. The results of my benefit-cost analysis were not very promising: Taking into consideration all current and expected streams of good and bad news, life did not appear to be a "profitable" investment. 
Shocked by the outcomes, I quick did some sensitivity analysis to check the robustness of my findings: No  matter what discount rates I chose, the calculations still yielded disappointing numbers to the question of whether life was a worthwhile venture. This was all the more puzzling because I actually loved many aspects of my life. Not knowing what to do with the analyses, I concluded one should either doubt the validity of certain measurement instruments or our ability to use them "objectively," or radically give more weight to whatever we define as "positive" outcomes for our actions or inactions, or accept the very probable hypothesis that happiness may be an illusion but those who choose to live should learn to ignore its downsides. I could only forget the outcomes of my own study by learning to radically change whatever assumptions I used in carrying it out. "Live is impossible without the ability to forget," philosopher Emil Cioran once said. But some memories are just to long-lasting to ever be erased. 
Monga's reminisce serves as a reminder of teenage feelings about the world. It also illustrates that although benefit-cost analysis has a useful place in comparing certain limited sets of choices, the method does not contain solutions to the mysteries of life. However, if you are a young person who finds yourself tempted to carry out a benefit-cost analysis of your own life, you may wish to consider seriously a career as an economist.