Something Not Unlike Research

Paul A. Samuelson on "You Didn't Build That"

post by Paul Kelleher

Economist Paul A. Samuelson (Economics, p. 484):

Many ingenious ways have been suggested for measuring this consumer's surplus, but they are of no particular significance. The important thing is to see how lucky the citizens of modern efficient communities really are. The privilege of being able to buy a vast array of goods at low prices cannot be overestimated.

This is a humbling thought. If ever a person becomes arrogantly proud of his economic productivity and his level of real earnings, let him pause and reflect. If he were transported with all his skills and energies intact to a primitive desert island, how much would his money earnings buy? Indeed, without capital machinery, without rich resources, without other labor, and above all without the technical knowledge which each generation inherits from society's past, how much could he produce? It is only too clear that all of us are reaping the benefits of an economic world we never made.

This basic fact is well stated in the following quotation:

The organizer of industry who thinks that he has "made" himself and his business has found a whole social system ready to his hand in skilled workers, machinery, a market, peace and order---a vast apparatus and a pervasive atmosphere, the joint creation of millions of men and scores of generations. Take away the whole social factor and we have not Robinson Crusoe, with this salvage from the wreck and his acquired knowledge, but the naked savage living on roots, berries, and vermin.[1]

[1] L. T. Hobhouse, "The Elements of Social Justice," pp. 162-163, Henry Holt and Company, Incorporated, New York, 1922.

Understanding DALYs

post by Paul Kelleher

Cost-effectiveness analysis (CEA) compares, you guessed it, costs with benefits. Costs are typically conveyed in monetary terms. Benefits are usually conveyed in terms of either QALYs or DALYs. QALYs are quality-adjusted life years. DALYs are disability-adjusted life years. QALYs have been around since the 1970s (as I understand it), whereas DALYs are a more recent innovation. In 1994, Christopher J. L. Murray, then of Harvard University, introduced DALYs in his paper "Quantifying the Burden of Disease." Murray then went on to the World Health Organization (WHO), where DALYs were used in the controversial attempt by WHO to rank the equity and effectiveness of the world's national health systems. Both QALYs and DALYs are used widely today as the units of benefit-measurement in cost-effectiveness analyses.

This week I've spent a lot of time reading and thinking about CEA, and I've encountered quite a bit of confusion in the literature on how DALYs should be understood. For example, I was looking at a paper entitled "The Economics of HIV/AIDS in Low-Income Countries: The Case for Prevention" which reports CEA results in terms of the cost per "loss of DALY averted." This implies that, whatever DALYs are, you should want more of them rather than fewer (i.e. you want to avert their loss). This understanding of DALYs is made explicit in "Using Cost-Effectiveness Analysis for Setting Health Priorities," a report by the Disease Control Priorities Project (which appears affiliated with the World Bank and WHO): 

In cost-effectiveness analysis, the DALY represents the number of years of disability-free life that would be gained from a particular health intervention—yielding a cost per DALY where cost data are available or can be inferred. Gaining a DALY through a health intervention reduces the burden of disease; it is the same as averting the loss of a DALY. 

Compare this understanding of DALYs with that stated in Disease Control Priorities in Developing Countries by Dean T. Jamison, who worked on WHO's Global Burden of Disease Project and continues this work at the at the University of Washington's Institute for Health Metrics and Evaluation (which Chris Murray now directs):

Disability-adjusted life years (DALYs) are a variant of QALYs in that they measure the losses from disability or premature death; a CEA will determine which interventions maximize QALYs or minimize DALYs.

So which understanding of DALYs is correct? Do we want to maximize DALYs (i.e. avert their loss) or do we want to minimize them (i.e. praise their loss)? The answer is that Jamison is right: DALYs are to be minimized (and their loss praised). But how could those others, who work with DALYs all the time, get it so wrong? Let me try to explain.

Both QALYs and DALYs are designed to integrate considerations of longevity and quality-of-life. For example, I generate 1 QALY for every year I live in full health. The number of QALYs one generates is calculated by multiplying the length of time (measured in years) by a "utility weight" which places one's health status on a scale of 0 to 1 where 0 is as bad as death and 1 is full health. So if I live 2 years in a health state that has a utility weighting of 0.8 (perhaps I have mild lower back pain), then I am said to generate 1.6 QALYs (2 x 0.8) over that time span. Given this understanding, one obviously wants more QALYs rather than fewer, since more QALYs correlates with more years lived in good health.

QALYs are therefore used to measure healthy years lived. DALYs, by contrast, are used to measure healthy years lost. That is, DALYs measure the gap between the number of healthy years one in fact lives and some normative ideal of how many healthy years equates to full health over a lifetime. The normative ideal of longevity is set using the world's longest actual life-span, which is set by the Japanese. The normative ideal of health-related quality-of-life is a trickier subject that I want to pass over here. The important thing is that it is stipulated by DALY-users that full health for each person is a certain number of healthy years of life. So when we suffer ill health and disability, that is regarded as stripping us of those healthy years. DALYs are used to measure the healthy years lost due to ill health.  

The confusion about DALYs enters when people treat DALYs as the healthy years that are lost to ill health. These folks then assume that successful health interventions work by clawing back those lost healthy years (or by "averting their loss" in the first place). Strictly speaking, however, DALYs don't get clawed back when health improves---they disappear or are obliterated. Thus, when one is in poor health, DALYs come into existence and displace one's stock of healthy life years (as set by the normative standard); but when one's health improves, one's newly regained healthy years of life displace or obliterate the DALYs that poor health created. Hence Jamison's dictate: minimize DALYs. One minimizes DALYs either by preventing the poor health that creates them in the first place, or by eliminating and substituting them with regained healthy years of life.

I hope that helps.

 

The epigenetic lottery

post by Bill Gardner

Tyler Cowen discusses the (possibly diminished) US social mobility, and asks

How much of [social] immobility is due to “inherited talent plus diminishing role for random circumstance”?  Is not this cause of immobility very different — both practically and morally — from such factors as discrimination, bad schools, occupational licensing, etc.?  What are you supposed to get when you combine genetics with meritocracy?  I do not know how much of current American (or other) immobility is due to this factor, but I find it discomforting that complaints about mobility are so infrequently accompanied by an analysis of this topic.

So, the idea is that nature roles the dice and gives each child a set of genetic endowments. Families will also invest their resources in cultivating the children's talents. Then, as we become adults, 'society' (meaning the schools, job markets, etc.) places each of us in the social hierarchies of wealth, income, and power (the figure to the right is from Catherine Mulbrandon [@visualecon], and shows the 2005 income distribution among the bottom 98% -- adding the next 2% takes you way off the page). If societies are increasingly meritocratic, those outcomes will mirror the individual distribution of genetic talent and family resources to an increasing degree. So it could be that reduced mobility and increasing social inequality of outcomes reflects increasingly accurate meritocratic selection processes. And many would argue that such processes are not inherently unjust, so maybe we should just get over being upset about the worsening inequality of outcomes. If you add the ideas that genetic endowments are exogenous, and that trying to compensate for the inequality of family resources is either wrong or futile, then you have even stronger justifications for current inequality.

I don't buy these conclusions, for lots of reasons, but this post is not the place to provide the discussion that Cowen is calling for.

I want to raise just one objection here: The story about the genetic lottery is too simple. Our biology is less exogenous than most theorists believe. Michael Rutter explains that genes do not give us talents:

...although the DNA is what a person inherits, the effects of that DNA are dependent on a chain reaction that ends up with the expression of the products of the DNA in the structure and function of individual cells that is how environments alter genes (emphasis added).

Referring to this account of the interaction of nature and nurture, James Heckman writes

The field of epigenetics surveyed in Rutter (2006) demonstrates how genetic expression is strongly influenced by environmental influences and that environmental effects on gene expression can be inherited (emphasis added).

He then argues that there is evidence

that high quality early childhood interventions foster abilities and that inequality can be attacked at its source.  

and we are therefore not absolved from responsibility for the inequitable distribution of adult talent visible in infancy and early childhood.

The problem I'm pointing to in the meritocratic argument is that there isn't really a genetic lottery  in the way we imagine: and to the degree there is, the dice are loaded in the womb. If Heckman is right, there is much more we can do about inequality than most of us are willing to acknowledge.

However, if Heckman is right, it is also the case that much if not most of what we can do is equalize the epigenetic and child developmental lotteries that will govern inequality among future generations. And we have to decide whether we are motivated to struggle for equality in that future, a promised land that we will not see.

'Health Shock': How childhood chronic illness affects children's schooling and adult employment

Pediatrics is sometimes treated as the least important branch of medicine. This kind of makes sense, because children are mostly healthy. Focusing just on health outcomes, however, is terribly short-sighted. As Jason Fletcher and Michael Richards show, chronic diseases that begin in childhood have powerful effects not only on children's adult health, but also on their non-medical development and achievements. 

Fletcher and Richards looked at the association between the 'health shock' of  getting diabetes in childhood and achievements in schooling and work for more than 15,000 children. They found

effects in several measures of educational attainment, including a high school dropout rate that was six percentage points higher than among young adults without the disease. We also found lower employment and wages: A person with diabetes can conservatively expect to lose more than $160,000 over his or her working life, compared to a peer without the disease. 

This is an observational study, so whether diabetes causes these effects is a matter of inference and interpretation. Fletcher and Richards used a data set that included detailed information on the children's family backgrounds, the health of parents, and other diseases that children had; and their estimates include statistical controls for such factors. We cannot necessarily infer that an intervention that prevented diabetes in a child would increase the years of schooling they would achieve, or how much they would earn as adults. But based on these data, it would be worth a shot.

Thinking, Fast and Slow about Informed Patient Choice

The following is an invited post from Thom Walsh PhD, MSPT, OCS, Diplomat MDT (@thomwalsh on twitter).  Thom very recently completed his doctorate in health policy at The Dartmouth Institute for Health Policy and Clinical Practice.  He is currently on faculty as a curriculum specialist in The Dartmouth Center's Health Care Delivery Science program.

Nobel-Prize winning economist Daniel Kahneman has made it his life’s work to scrutinize the many ways in which human beings fail to behave rationally.  His most recent book, “Thinking, Fast and Slow” summarizes the 40 years of research conducted by him and his colleague Amos Tversky on the topic.

Kahneman categorizes human thinking into two systems: 1) fast and 2) slow.  The fast system (System-1) represents rapid decision making based on assumptions, prior personal experience, and neurologic short cuts that have proven advantageous to survival.  System I “prepares us to perceive the world around us, recognize objects, orient attention, avoid losses, and fear spiders,” using subconscious actions and reactions that are unavoidable.  One cannot unlearn the simple mathematical formula 2+2=4 any more than they can stop themselves from flinching when surprised by the sudden bark from an angry dog.  To work at such instantaneous speed, System-I thinking relies on biases and heuristics.  Kahneman explains the “hindsight bias,” the “optimistic bias,” the “availability heuristic” and the “fast and frugal heuristic,” along with many others.  These multiple biases and heuristics detail the seemingly infinite ways in which humans divert from the utility maximization path laid out by econometrics and utility theory.  See here for a basic overview of decision theory in econometrics

By contrast, the slow system (System-2) is lazy and laborious.  Activating System-2 thinking requires us to pay attention and allows us to follow complex directions, compare choices, reflect on the past and project into the future.  Activities that rely on System-2 thinking require self-control and sustained effort.  In short, engaging System-2 is oftentimes depleting and unpleasant. 

Difficulties arise when we are presented with a situation that intuitively engages System-1 thinking, but actually requires System-2 thinking.  For example, if I told you the price of my son’s new ball and bat was $1.10, and the bat cost $1.00 more than the ball, your brain would likely switch into System-1 thinking by immediately concluding that the ball cost 10¢.  And, you would be wrong.  If the ball were 10¢, the bat would be $1.10 and our total would be $1.20.  By engaging System-2, we find the actual cost of the ball is 5¢.

Kahneman’s brilliant studies also demonstrate that humans are risk-averse when there is hope for a gain, yet risk-seeking when faced with a decision between certain losses.  He goes on to explain that we tend to rely heavily on System-I thinking when faced with uncertainty, trade-offs, or long-term horizons.

Uncertainty, novel situations, trade-offs, hopes, certain and long- term horizons are common features of many health care decisions.

The surprising truth is that medical providers seldom have solid evidence of superior treatment effectiveness.  More frequently, the clinical context is a choice between treatments with outcomes that differ depending on the option chosen without clear evidence to tell the patient or provider which is the superior choice.  Trade-offs exist with probabilities of good and bad outcomes over various time horizons.

For example, a patient suffering from 6 weeks of uncomplicated low back and leg pain from a herniated disc could chose surgical or non-surgical treatment.  Surgical care holds the promise of relieving the leg pain more quickly than non-surgical care but at the added risk of the surgical procedure itself.  Non-surgical care holds the promise of relief over a longer period of time and without the surgical risks.  Existing evidence suggests the long-term outcomes are equivalent.  (See here, here, & here for supporting evidence.) For this reason the patient’s preferences should determine the treatment pathway.  More commonly, however, it is the provider’s opinion that determines the patient’s treatment destiny.

Following this thought process further leads to the uncomfortable realization of a seldom discussed medical error, operating on the wrong patient.  I do not mean operating on patient A instead of patient B.  By “wrong patient,” I mean one who would have, had she been fully informed of the risks and benefits of all treatment options, chosen non-surgical care.  Evidence of the over-use of surgical interventions in this manner is detailed in Dartmouth Professor Jack Wennberg’s latest book, “Tracking Medicine.”

Patient preference-sensitive clinical situations are best addressed by aligning the fully informed patient’s preferences with the care she receives.  Doing so requires System-2 thinking by both the clinician and the patient.  This is not easy and there are legitimate reasons for both the clinician and the patient to be unhappy.

The situation is difficult for clinicians because System-2 thinking is laborious, but not reimbursed.  There are no evaluations or procedures to order.  Further, medical school does not provide the skills required to elicit a patient’s preferences, fears, and risk-tolerance, let alone their numeracy.  This final aspect is especially important because medical decisions frequently involve very small numbers that are difficult to place in context.

Patient preference-sensitive clinical situations are difficult for patients because they may not want to be so involved.  Patients engage the health care system at their most vulnerable times.  They reveal secrets to us their spouses may not know.  They disrobe in front of us and we peer inside of them with our technology or surgical technique.  Despite all this, patients reveal their anxieties and hopes to us, after the briefest of interactions, in the hopes of receiving information, wisdom, and care that can prevent or ease pain and dysfunction.

In return, they should receive our best information and judgment.  Past attempts to involve the patient in sharing the medical decision have, in my opinion, come up short.  They have relied on econometric utility-maximizing theory, weighting each of the probabilities in a decision tree and then mathematically folding branches back to reveal the most rational choices with the highest probability of producing the most utility for the patient.  This process has always struck me as an unusual because, in over 15 years of clinical work, I have never met a truly rational patient.  Nor for that matter, have I encountered a fully rational and unbiased clinician.

The work done by Kahneman and Tversky debunks utility theory and replaces it with “prospect theory.”  Kahneman describe this well in his book.  It is incumbent on us to find ways to design the delivery of care in ways that incorporate the insights gained from prospect theory and employs methods that lead to fully informed patient choice.  I think you’ll agree and look forward to your comments.

 

So you want to think more about rationing...

post by Paul Kelleher

In light of the conversation we've been having about the American College of Physicians' Ethics Manual's statements on resource allocation, I thought I'd point to some short, web-accessible sources that can help advance our thinking about these issues. It should go without saying that this is a non-exhaustive list, and that I intend for these to provide useful food for thought, not knockdown arguments or silver bullets.

1. Peter Ubel's contribution here (begins on page 11).

2. Peter Singer's NYT Magazine article, "Why We Must Ration Health Care," here. 

3. Frances Kamm's Letter in response to Singer's article, here.

(if you hit NYT's paywall when trying to access Singer and Kamm, let me know in the comments and I can help you out)

4. Norman Daniels's contribution here, especially from page 50 onward.

5. Marthe Gold's podcast here (the first is longer [14min] and worth your time). It is based on this 2005 paper in Health Affairs.

6. Jonathan Wolff's remarks here, especially from about 16:45 onward.

These last two focus on the ways in which the UK's National Institute for Health and Clinical Excellence (NICE) sets health care limits and priorities. 

Locating Values in Health Care Policy Decision Making

post by Paul Kelleher

A few days before Christmas, the New York Times's Economix blog published a characteristically excellent post by Uwe Reinhardt on the recently released Wyden-Ryan proposal (pdf). As many of you know, Reinhardt is a master when it comes to explaining complex health policy concepts and principles in clear, accessible prose for non-experts. In this particular post, Reinhardt pellucidly lays out "the major economic functions any health system must perform" (see his first numbered list for these functions). He then remarks:

Most of the debate over health policy in this country has been over two questions.

First, to what extent should healthier or wealthier members of society be asked to subsidize the health care received by their poorer or sicker fellow Americans? Second, influenced by the answer to the first question, who should perform the functions listed above: government, private nonprofit entities or for-profit entities?

The first of these questions is quite obviously a central values question for health policy, and I've written a few posts addressing it here on the blog. As Reinhardt notes, the answer to the second question must be influenced by the answer to the first, but the second question is also clearly more empirical and technocratic in nature than the first.

Reinhardt says that the Wyden-Ryan plan, which is a form of "managed competition," answers the first values question thus:

Let there be a limit to the extent to which healthier or wealthier Americans are forced to subsidize the health care received by sicker or poorer Americans – that is, to the practice of social solidarity.

According to Reinhardt, Wyden-Ryan incorporates this "truncated" conception of social solidarity by limiting the size of the voucher that individuals would receive to purchase health insurance plans within a regulated health insurance marketplace:

The major point of contention in the political debate over managed competition...is over the nature of the “defined contribution,” which defines the extent to which the concept achieves social solidarity in health care. The crucial distinction here is between “vouchers” and “premium support” (as explained in Section B of this Brookings Institution document). [emphasis added]

I think Reinhardt makes a slight mistake here, for I do not think it's true that the answer to this question--i.e. how generous the vouchers should be--"defines the extent to which [a form of managed competition] achieves social solidarity in health care."

To illustrate, imagine that you and I have both been given a very very generous subsidy by the government to purchase insurance on the open market. Let's assume it's $30,000. In most cases, this will be enough to purchase gold-plated health care for a single person. And this may well be true in your case, since you're relatively healthy. But now suppose I have a super expensive pre-existing condition. Depending on how expensive my condition is to treat, there may be no insurance company that would offer me coverage, even if I had $30,000 per year to spend on premiums. If we nevertheless think there is something wrong with that situation, we may choose to place regulations on the marketplace that forbid insurance companies from denying me coverage and that ensure I have affordable access to needed medical care.

Now, these regulation cannot exist in a vaccuum: if insurance companies are required to cover me, then other regulations will have to be put into place to ensure that the market doesn't become disfunctional. Such additional regulations are precisely the regulations the Affordable Care Act imposes for precisely these reasons, as Reinhardt masterfully explains elsewhere.* Yet since these regulations have potentially burdensome implications for others--e.g. they may involve an individual mandate (or its equivalent) and/or make insurance premiums more expensive for others--there is every reason to think that they too help define the extent to which health policy embodies social solidarity. Put differently, if you think it violates some freedom or prerogative of yours to be mandated to have health coverage or to pay a premium higher than is justified by your own actuarial health risks, then you may object to the marketplace regulations embraced by the ACA and Wyden-Ryan. And this may influence--or be influenced by--your understanding of the demands of reasonable social solidarity. 

This isn't a big disagreement with Reinhardt, obviously. And I hope he'd agree with my minor correction to his useful post. Still, I do think it's super important to be able to locate the areas of health policy that must be responsive relevant social values. Reinhardt himself proves why: since health care policy has so many moving parts, it may be possible to adjust several dials to achieve the same degree of social solidarity while lessening the burden placed on others. But we won't get it right if we think that the size of the voucher is the only choice that must be responsive to our understanding of social solidarity. 

*Really, if you are going to give someone you love just one thing to read on the ACA, give them the Reinhardt piece linked to here.

A worse than useless survey

post by Paul Kelleher

Robin Hanson points us to a forthcoming paper in Economics Letters by Olof Johansson-Stenman that purports to "provide survey-based support for the consequentialist assumption associated with welfare economics." Consequentialism is the normative view that an act or policy is right if and only if it maximizes the good (i.e. the net balance of good over bad). As such, it treats an act's rightness or wrongness as solely a function of outcomes. Modern welfare economics is consequentialist in that it aims to be a science of efficiency focused on welfare-maximization. But then again, plenty of welfare economists insist that what they study is but one sphere of moral investigation, and they would not agree that an interest in efficiency entails a single-minded interest in it.

Johansson-Stenman sent his survey to 2,450 Swedes over the age of 18 in the Spring of 2004. Forty-five percent responded (n=985). Here is the main question asked, together with the respondents' answers (click the image to enlarge it):

According to Johansson-Stenman, "the result is quite consistent with the consequentialist ethics underlying conventional economic welfare theory, since almost two-thirds chose this alternative." But this is an illegitimate interpretation of his results. As noted, consquentialism is the view that rightness and wrongness depends only and exclusively on the outcome. The survey, however, only asks people what they think the badness of an outcome "depends primarily on." So for all we know, the 67% who gave what the author characterizes as "the" consequentialist answer may actually agree with those welfare economists who are not consequentialists at all because they believe that other moral considerations (e.g. individual rights and liberties) matter too.   

The survey also makes the fatal mistake of asking its main question in terms of "badness" rather than "rightness" or "wrongness." To see why, consider this passage from a paper (pdf) by Frances Kamm, philosophy's leading non-consequentialist:

I shall distinguish between goodness, fairness and justice. To make one distinction clearer, consider the following case: A doctor must decide whether to stop a big pain in person A or a small pain in person B. She thinks, correctly, that she will do more good if she helps A. But she also remembers that yesterday B suffered a much bigger pain than A will suffer and no one helped B (A suffered nothing in the past). So she thinks it would be unfair to let B suffer again, even though she will do less good if she helps him. If it is overall right to do this, this means she does the morally better thing in helping him and the state of affairs in which B is helped rather than A is morally better than one in which A is helped. But this is not because it produces more good.

Here Kamm claims that sometimes considerations of fairness can conflict with considerations of goodness and badness. But note that someone using Kamm's conceptual scheme might well have given the survey answer that Johansson-Stenman associates with consequentialism. For the survey asks respondents to indicate which considerations they associate with "badness," and the simple (but not simplistic) Kammian answer is that welfare-related considerations are associated with badness, while fairness or equity considerations must be called in alongside welfare considerations to determine which action is "overall right" or "morally better." So it is quite possible that many survey respondents took themselves to be answering a question about only one part of morality, viz. badness, while also holding beliefs about other parts not asked about.

I conclude, therefore, that this survey is useless in helping to answer the question of whether most people are consequentialists. Indeed, since its publication has already led one influential writer (Hanson) to claim that "Most are consequentialist," I fear that it's actually worse than useless.  

Is Rawls Relevant in a Warming World?

post by Paul Kelleher

The short version: Tim Mulgan thinks John Rawls's A Theory of Justice has limited value for thinking about moral issues associated with climate change. I disagree. I describe the role that discounting plays in cost-benefit analyses of climate change, and argue that Rawls's discussion of discounting is useful and of lasting importance. 

Philosopher Tim Mulgan thinks that John Rawls may go the way of "paisley shirts and psychedelic music":

[O]ptimistic assumptions allow political philosophers to ignore the future. Consider Rawls himself.  His magnum opus (A Theory of Justice) devotes just ten pages to justice between generations; and even then his focus is tellingly limited.  As we accumulate wealth, we must decide how much to consume for ourselves and how much to invest for the future.  For Rawls, the only ethical question is: How much better-off should we leave our descendants?

Rawls wrote in 1971. Like paisley shirts and psychedelic music, his complacent approach has not aged well.  We no longer take it for granted that we will leave our descendants better-off, or even that we can.  And future people are no longer an afterthought.  They have moved centre stage, both in popular debate and in moral philosophy.

Mulgan may well be correct that the majority of A Theory of Justice does not speak to the issue of inter-generational justice. Nevertheless, I believe that what Rawls does have to say is of lasting importance. Consider the seemingly academic issue of discounting. In cost-benefit analyses of climate-related plans and projects--and in cost-benefit analysis generally--it is common for economists to discount the value (or disvalue) of goods (or bads) that occur in the future. Depending on the discount rate used, we--here and now--can have stronger or weaker duties to prevent health shocks that will occur in the far future. If we discount the goodness of future health and the badness of future ill-health, then it seems to follow that we have commensurately less pressing reason to prevent those shocks from occurring. After all, no one thinks that it's morally required for current generations to take on great burdens to prevent one hangnail in 200 years. Since the nature of our obligation clearly turns on the size of the future benefit or burden we're talking about, discounting has the potential to turn a future moral tragedy into something not that important.

The economist and philosopher John Broome illustrates the importance of getting the discount rate right:

Stern's conclusion differs from Nordhaus's principally because, on ethical grounds, Stern uses a lower "discount rate." Economists generally value future goods less than present ones: they discount future goods. Furthermore, the more distant the future in which goods become available, the more the goods are discounted. The discount rate measures how fast the value of goods diminishes with time. Nordhaus discounts at roughly 6 percent a year; Stern discounts at 1.4 percent. The effect is that Stern gives a present value of $247 billion for having, say, a trillion dollars' worth of goods a century from now. Nordhaus values having those same goods in 2108 at just $2.5 billion today. Thus, Stern attaches nearly 100 times as much value as Nordhaus does to having any given level of costs and benefits 100 years from now.

In a forthcoming short paper on discounting, I describe two different kinds of discounting and the main reasons why one might support them. Here they are in brief:

Kind 1/Reason 1: When individuals save money in bank accounts, they are trading present consumption for future consumption. But many individuals would not do this unless they were given an incentive in the form of an interest rate. Therefore, since individuals need to be in effect bribed to put off present consumption, individuals have a preference for consuming now rather than later. Some economists see this as revealing individuals' ethical opinion that future well-being is morally less important than present well-being.

Kind 1/Reason 2: There is a second reason that some people offer for discounting the moral importance of future benefits. The argument goes like this: unless we discount the value of future benefits (and the disvalue of future bads), current generations will be forced to make unreasonable sacrifices. After all, since what we do here and now will have effects that radiate out in the far future, a large sacrifice now will certainly create benefits in the future that outweigh the sacrifice we have to make. The only way to release ourselves from these surely tyrannical obligations to future generations is to count their well-being for less. Thus, we need to discount to protect ourselves from overdemanding duties.

Kind 2/Reason 1: Any use of current resources has opportunity costs---that is, we could have used them for other purposes, and these other uses may have yielded even greater benefits. Economists in general would like us to put scarce resources to their most efficient possible use. One possible use is a financial investment: we could invest the resources now and let them grow, at prevailing interest rates, to a certain size in the future. If it is impossible to achieve that same sized gain by investing current resources in environmental projects, then funding the environmental project "leaves resources on the table," so to speak. That is, we could give future people a larger benefit if we just invested the money and gave them the pin number to the bank account than if we funded the environmental project. To choose between projects, economists tell us to discount the future environmental benefits at prevailing interest rates. This discounted value is the amount we'd have to invest now to deliver future benefits of the same value as the environmental benefits. If it would cost more to deliver those benefits via an environmental project, then (the economists argue) we should go with the bank account instead.---The perceptive reader will notice that this second reason for "discounting" doesn't support discounting the moral importance of future well-being. Rather, it holds the moral importance of future benefits fixed and simply tells us how to deliver those benefits most efficiently. That is why I (following Dominic Rosser [pdf]) call it "discounting" and why I consider it a different kind of discounting from the first kind discussed above. 

As regards the first reason for Kind 1 discounting, Rawls would surely argue that when individuals are making their own private investment decisions, they should not be taken--nor do they take themselves--to be expressing a moral stance on whether the well-being of future people matters less from a moral point of view. It is Rawls's view that moral deliberation must be explicit and sensitive to specifically moral reasons. At least that's what I take the his argument from the Original Position to entail.

The short discussion of inter-generational justice in A Theory of Justice actually provides an explicit and decisive refutation of the 2nd reason for Kind 1 discounting. Rawls notes that duties to promote future well-being would be tyrannical only if we had a basic duty to maximize well-being. But that duty is questionable, and is only supported by the consequentialist moral framework he is rejecting in the book. The consequentialist framework is, however, the framework that many welfare economists use when constructing cost-benefit analyses, and this is why many of them are led to embrace discounting. If Rawls is correct that we do not have a simple duty to maximize well-being, then Kind 1 discounting is not needed to release ourselves from that duty.

Finally as regards the reason for Kind2 "discounting," Rawls seems willing to grant that it may have something to be said for it. He writes, "[T]he rejection of pure time preference [i.e. Kind 1 discounting]...does not rule out using an interest rate (in either a socialist or a private-property economy) to ration limited funds for investment" (TJ, p. 294 [Original 1971 edition]). In my forthcoming paper I offer some moral reasons for being troubled by Kind2 discounting, but like Rawls I am willing to admit that it may be useful in some cases. 

If Broome is right that the issue of discounting is crucial for properly understanding our duties to future generations, then A Theory of Justice--and especially the ten pages on inter-generational justice--may contain more that is of lasting importance than Mulgan's discussion would suggest.

Mankiw vs. Nozick on Just Deserts

post by Paul Kelleher

The short version: Greg Mankiw believes people should get what they deserve, and that what people deserve is based on the economic value of what they contribute to social production. Mankiw attributes this view to libertarian philosopher Robert Nozick. But Nozick explicitly rejects the view, noting a problem with it that Mankiw never addresses.

Students of economics learn that, under a certain set of assumptions, a competitive market economy leads to an efficient allocation of resources. However, since economic efficiency may not the only thing we care about, many economists are careful to note that there may be equity-based reasons to condemn otherwise efficient arrangements. Harvard economist Greg Mankiw thinks this is a mistake. In "Spreading the Wealth Around: Reflections Inspired by Joe the Plumber", Mankiw argues that when competitive markets promote efficiency, they do so by rewarding factors of production (including labor) in proportion to their productive contribution. Mankiw thus extols "the inherent equity of the competitive market": the market ensures that factors of production are paid what they deserve.

Mankiw claims that this "Just Deserts Theory" can be found in the work of the libertarian philosopher Robert Nozick (among others). But in fact, Nozick believed the area of economics that Mankiw draws on--Marginal Productivity Theory (MPT)--cannot reliably be used to assess individuals' productive contributions. Nozick did think that MPT could explain why individuals get what they get in market distribution, but this was not because Nozick thought the market does or should reward people in accordance with their contribution. Rather, Nozick's view is that people are entitled only to what others are willing to give them (either as gifts or in economic exchange). MPT helps us understand who will be willing to give what to whom, but that is it. So Nozick would say Mankiw is wrong on two counts: (1) people are not in fact entitled to their "Just Deserts"; (2) even if people were entitled to their just deserts, MPT cannot be used to identify what it is people deserve in Mankiw's sense.

Let me explain Nozick's argument for this second point. Nozick agrees with Mankiw that (at least under a set of "idealized circumstances") MPT can be used to predict the wage that rational firms will be willing to pay to a worker for performing a specific job. To illustrate, consider the following graphic*:

For economic reasons that Mankiw and Nozick agree upon, a rational firm will pay all laborers a wage equal to the value of the output generated by adding the last laborer, depicted here as laborer #10. To use some economic jargon, firms will pay a wage equal to the marginal value product of labor. Where Nozick and Mankiw disagree is on how this economic jargon should be interpreted. According to Mankiw, when wages are set in this way, it ensures that "each person's income reflects the value of what he contributed to society's production of goods and services...[E]ach person receives his just deserts" (emphasis added). Nozick claims that this is not an accurate characterization. Here is why: all we know from the graphic is that after adding the 10th laborer, the total product went up by 6 bushels of corn; but we don't know exactly how that outcome arose. For example, it might have been achieved by the 10th laborer simply producing 6 extra bushels all by himself. Or, those 6 extra bushels might have resulted from the 10th laborer producing 16 bushels while some other laborers simultaneously reduced their collective output by 10 (perhaps because they reduced their effort when the 10th man was added). In this case, the marginal value product of labor will still be defined by MTP as 6 bushels, and all the workers will still be paid a wage equal to the value of 6 bushels. But it will nonetheless be false to say (as Mankiw does) that "each person's income reflects the value of what he contributed." While it is true that adding the 10th laborer resulted in a net increase of 6 bushels, we cannot deduce any worker's actual contribution from this fact. 

Nozick summarizes this point in a footnote to p. 187 of Anarchy, State, and Utopia:

Thus marginal productivity theory is not best thought of as a theory of actual produced product...but rather as a theory of the difference (subjunctively defined) made by the presence of a factor.

Paul Samuelson makes the same point here:

In our example, output increases from ten bushels to eighteen bushels when one adds the second man not because the second man only adds eight, but rather because his presence on the field makes the situation such that the total output of both men is eighteen...[W]hat we wish to note is that by adding the second man, output was increased by eight. Thus, the marginal product of the second man is eight. But his actual contribution may be very different than this.

If Mankiw is right that each person's income should reflect the value of what s/he contributed, it does not seem that marginal productivity theory can tells us what we need to know. Importantly, this worry arises even if we grant the many unrealistic assumptions MPT seems to require for its validity. Of course there may be even more problems with using MPT as part of a theory of just income distribution. Amartya Sen discusses several of these in a very nice 1985 paper called "The Moral Standing of the Market" (which Mankiw doesn't cite).

 

*This figure comes from p. 28 of David Schweickart's After Capitalism.