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The Skeptical Economist

In today’s Wall Street Journal, Bjorn Lomborg nicely explains a fundamental truth of economics: every choice has a cost. At each decision-making moment, doing more of A means doing less of B.

Lomborg and his organization, the Environmental Assessment Institute, has teamed up with The Economist magazine on the Copenhagen Consensus. Lomborg explains:

In an ideal world, we would have the money and the political capital to do everything. We would be able to end malnutrition, illiteracy and refugee problems, halt climate change, stop global conflicts, and wipe out corruption. But we live in the real world, where we must focus our efforts to achieve even some of these things. We have a stark choice. We can continue to prioritize without acknowledging that we are doing it. Or, we can work out a rational framework for our spending that makes some more sense.

This is exactly the aim of Copenhagen Consensus, a project that will bring nine of the world’s top eonomists to Denmark later this month. The expert panel — including four Nobel Laureates — will create a prioritized list of opportunities to solve the 10 greatest challenges facing humanity, as we see them. The economists will examine the costs and benefits of solutions to each challenge. An example of a solution (to the challenge of communicable diseases) could be to provide free mosquito nets to areas affected by malaria. The result will be perhaps the grandest “To Do” list the world has seen, showing us how to spend our money the most efficiently. The list will be concrete, outlining tangible opportunities that can be done today.

I admire Lomborg greatly. And I believe that the Copenhagen Consensus has merit. But – with apologies to Lomborg and, especially, to my GMU colleague Vernon Smith who is one of the four Nobel Laureates working on this project – we shouldn’t expect too much from these economists beyond the (vitally important) task of doing what Lomborg does in his WSJ article, namely, reminding people that trade-offs are unavoidable.

No economist, as such, has any special expertise at comprehending the full set of costs and benefits that attend, say, malaria prevention as compared to that of investing in irrigation projects or rural schoolhouses. The same is true for physicians, statisticians, electricians, musicians, you name the ‘expert.’

True, economists’ skills at empirical analyses enable them to put dollar values on different proposed projects. But the soundness of these dollar-value estimates is directly proportional to the extent to which the resources used in these projects, and the outcomes of these projects, are embedded in markets. No economist – no third-party – can know just how much Ms. Kihiu in Kenya values an extra dollop of malaria prevention versus a few added square-footage in the village schoolhouse. No economist can know just how much Mr. Robinson in Liberia will benefit from an 10% reduction in global warming versus a 10% decrease in the risk of contracting the HIV virus.

The ultimate goal is to decentralize decision-making power as much as possible down to individuals. It’s at the individual level that cost-benefit calculations are most accurately made; it is at the individual level that the most important “to do” lists are formulated, pursued, adjusted, and achieved.