commission-on-wellbeing-and-policy-report---march-2014-pdf

INTRODUCTION
Why use wellbeing as a measure of progress in
society What are the alternatives In particular,
what is wrong with GDP as a measure
Thirty-four years ago I was recruited as an economist by the UK Treasury and told
to revise the Green Book. This was the UK government’s bible on how to perform
cost-benefit analysis (CBA). All policy decisions were supposed to be based on an
assessment of costs and benefits using these guidelines. In reality, of course, many
policies were implemented without any formal CBA, particularly if they had been
promised during the election campaign. But as evidence-based policy making
became more established, CBA was used much more widely as a way of assessing
the merits of different policy options.
Non-economists, who constituted the majority of policy advisers at the time and
still do in most countries, tend to list advantages and disadvantages of policies
and then use ‘judgement’ to come to a recommendation, or leave the application
of ‘judgement’ to the elected decision maker. Such processes make it hard to
demonstrate that various decisions have been consistent and also to defend the
choices made against, for example, opposition politicians who may have come to
different judgements.
CBA is a way of making consistent, rigorous judgements based on explicit
assumptions. A good CBA will help a decision maker to defend their judgement
and improve the quality of the debate about whether the right policy option has
been chosen. CBA was thought to be objective and hence a scientific way to come to
decisions. However, as is explained in detail in Chapter 1, it is based on a set of value
judgements that many would question.
I had spent my postgraduate years learning from Ian Little and Jim Mirrlees 1 who
taught me at Nuffield College, Oxford. They had devised a way of doing CBA that
was intended primarily for use in developing countries, although in fact it was a
more sophisticated form of CBA than was used in most advanced countries. It
recognised the pervasive problems of market failures, externalities, and the particular
problems of CBA for government projects in health and education. In many cases
in developing countries it was impossible to use market prices to value costs and
benefits because often they were distorted by taxes, subsidies, or non-competitive
markets, or prices simply didn’t exist, since many public goods, like health, were
provided free at the point of delivery. The extent of absolute poverty in developing
countries also meant that many government policies were designed to help poorer
groups most of all. Yet traditional CBA valued a £1 of benefits going to a millionaire
at the same level as a £1 accruing to someone scraping a living in the slums of Delhi.
1. Little and Mirrlees (1974)
Little and Mirrlees had come up with clever ways of solving these problems but they
were complex and in practice were used all too rarely. Politicians were particularly
nervous about the distributional issues. I found it odd that ministers could accept a
| 9