Megaprojects, Cost-Benefit Analysis, and “Social Welfare”

Timothy Taylor writes about “The Iron Law of Megaprojects vs. the Hiding Hand Principle“. He begins by quoting a piece by Bent Flyvbjerg in Cato Policy Report (January 2017):

Megaprojects are large-scale, complex ventures that typically cost a billion dollars or more, take many years to develop and build, involve multiple public and private stakeholders, are transformational, and impact millions of people. Examples of megaprojects are high-speed rail lines, airports, seaports, motorways, hospitals, national health or pension information and communications technology (ICT) systems, national broadband, the Olympics, largescale signature architecture, dams, wind farms, offshore oil and gas extraction, aluminum smelters, the development of new aircrafts, the largest container and cruise ships, high-energy particle accelerators, and the logistics systems used to run large supply-chain-based companies like Amazon and Maersk.

For the largest of this type of project, costs of $50-100 billion are now common, as for the California and UK high-speed rail projects, and costs above $100 billion are not uncommon, as for the International Space Station and the Joint Strike Fighter. If they were nations, projects of this size would rank among the world’s top 100 countries measured by gross domestic product. When projects of this size go wrong, whole companies and national economies suffer. …

If, as the evidence indicates, approximately one out of ten megaprojects is on budget, one out of ten is on schedule, and one out of ten delivers the promised benefits, then approximately one in a thousand projects is a success, defined as on target for all three. Even if the numbers were wrong by a factor of two, the success rate would still be dismal.

So far, so good. But then Taylor says this:

A common comeback to the Iron Law of Megaprojects is that if we pay attention to it, we will be so dissuaded by costs and risks of megaprojects that nothing will ever get done. Alfred O. Hirschman offered a sophisticated expression of this concern in his 1967 essay, “The Hiding Hand.” Hirschman argued there there is rough balance in megaprojects: we tend underestimate the costs and problems of megaprojects, but we also tend to underestimate the creative with which people address the costs and and problems that arise.

I will come to the irrelevance of Hirschman’s argument, but first a few more tidbits from Taylor:

[Flyvbjerg] argues that a number of prominent megaprojects have been completed on time and on budget. When choosing which megaprojects to pursue, it is useful to avoid underestimating costs and overestimating benefits. [Wow, what an astute observation.] …

Further, Flyvbjerg offers a reminder that even when a megaproject is eventually completed, and seems to be working well, project may still have been uneconomic–and society may have been better off without it.

The second comment brings Taylor close to the heart of the matter. But he never gets there. Like most economists, he overlooks the major flaw in the application of cost-benefit analysis to government projects: Costs and benefits usually have different distributions across the population. At the extreme, benefits that accrue only to the indigent are borne almost entirely by the non-indigent. (The indigent may pay some sales taxes.)

Cost-benefit analysis (applied to government projects) effectively rests on the assumption of a social welfare function. If there were such a thing, then it would be all right for people to go around punching each other (and worse), as long as the aggressors derived more gains in “utility” than the losses suffered by the victims.

Not-So-Random Thoughts (XI)

Links to the other posts in this occasional series may be found at “Favorite Posts,” just below the list of topics.

Steve Stewart-Williams asks “Did Morality Evolve?” (The Nature-Nurture-Neitzsche Blog, May 2, 2010). His answer:

[T]here are at least two reasons to think morality bears the imprint of our evolutionary history. The first comes from observations of a class of individuals that psychologists all too often ignore: other animals. Nonhuman animals obviously don’t reason explicitly about right and wrong, but they do exhibit some aspects of human morality. Rather than being locked into an eternal war of all-against-all, many animals display tendencies that we count among our most noble: They cooperate; they help one another; they share resources; they love their offspring. For those who doubt that human morality has evolutionary underpinnings, the existence of these ‘noble’ traits in other animals poses a serious challenge….

…A second [reason] is that, not only do we know that these kinds of behaviour are part of the standard behavioural repertoire of humans in all culture and of other animals, we now have a pretty impressive arsenal of theories explaining how such behaviour evolved. Kin selection theory explains why many animals – humans included – are more altruistic toward kin than non-kin: Kin are more likely than chance to share any genes contributing to this nepotistic tendency. Reciprocal altruism theory explains how altruism can evolve even among non-relatives: Helping others can benefit the helper, as long as there’s a sufficient probability that the help will be reciprocated and as long as people avoid helping those who don’t return the favour. Another promising theory is that altruism is a costly display of fitness, which makes the altruist more attractive as a mate or ally. Overall, the evolutionary explanation of altruism represents one of the real success stories of the evolutionary approach to psychology.

Though I’m disinclined to use the term “altruism,” it’s useful shorthand for the kinds of behavior that seems selfless. In any event, I am sympathetic to Stewart-Williams’s view of morality as evolutionary. Morality is at least a learned and culturally-transmitted phenomenon, which manifests itself globally in the Golden Rule.

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Pierre Lemieux decries “The Vacuity of the Political ‘We’” (The Library of Economics and Liberty, October 6, 2014):

One can barely read a newspaper or listen to a politician’s speech without hearing the standard “we as a society” or its derivatives….

The truth is that this collective “we” has no scientific meaning.

In the history of economic thought, two main strands of analysis support this conclusion. One was meant to criticize economists’ use of “social indifference curves” (also called “community indifference curves”), which generally appeared in the welfare analysis of international trade between personalized trading countries. Countries were personalized in the sense that they were assumed to have preferences, just as an individual does. In a famous 1956 article, Paul Samuelson definitively demonstrated that such social indifference curves, analogous to individual indifference curves, do not exist….

A second strand of analysis leads to a similar but more general conclusion. The problem has come to be known as the “preference aggregation” issue: how can we aggregate—”add up” as it were—individual preferences? Can we fuse them into social preferences—a “social welfare function”—that would equally represent all individuals? This second tradition of analysis follows a long and broken line of theorists. The Marquis de Condorcet in the 18th century, Charles Dodgson (a.k.a. Lewis Carroll) in the 19th, and economist Duncan Black in the 20th all discovered independently that majority voting does not provide an acceptable aggregation mechanism.

I’ve discussed the vacuity of the political “we” and the “social welfare function” in many posts; most recently this one, where I make these two points:

1. It is a logical and factual error to apply the collective “we” to Americans, except when referring generally to the citizens of the United States. Other instances of “we” (e.g., “we” won World War II, “we” elected Barack Obama) are fatuous and presumptuous. In the first instance, only a small fraction of Americans still living had a hand in the winning of World War II. In the second instance, Barack Obama was elected by amassing the votes of fewer than 25 percent of the number of Americans living in 2008 and 2012. “We the People” — that stirring phrase from the Constitution’s preamble — was never more hollow than it is today.

2. Further, the logical and factual error supports the unwarranted view that the growth of government somehow reflects a “national will” or consensus of Americans. Thus, appearances to the contrary (e.g., the adoption and expansion of national “social insurance” schemes, the proliferation of cabinet departments, the growth of the administrative state) a sizable fraction of Americans (perhaps a majority) did not want government to grow to its present size and degree of intrusiveness. And a sizable fraction (perhaps a majority) would still prefer that it shrink in both dimensions. In fact, The growth of government is an artifact of formal and informal arrangements that, in effect, flout the wishes of many (most?) Americans. The growth of government was not and is not the will of “we Americans,” “Americans on the whole,” “Americans in the aggregate,” or any other mythical consensus.

*     *     *

I’m pleased to note that there are still some enlightened souls like David Mulhhausen, who writes about “How the Death Penalty Saves Lives” (September 30, 2014) , at the website of The Heritage Foundation. Muhlhausen cites several studies in support of his position. I’ve treated crime and punishment many times; for example:

Does Capital Punishment Deter Homicide?
Libertarian Twaddle about the Death Penalty
Crime and Punishment
Saving the Innocent?
Saving the Innocent?: Part II
More Punishment Means Less Crime
More About Crime and Punishment
More Punishment Means Less Crime: A Footnote
Let the Punishment Fit the Crime
Another Argument for the Death Penalty
Less Punishment Means More Crime
Crime, Explained
Clear Thinking about the Death Penalty
What Is Justice?
Saving the Innocent
Why Stop at the Death Penalty?
Lock ‘Em Up
Free Will, Crime, and Punishment
Left-Libertarians, Obama, and the Zimmerman Case
Stop, Frisk, and Save Lives
Poverty, Crime, and Big Governmen

The numbers are there to support strict punishment, up to and including capital punishment. But even if the numbers weren’t conclusive, I’d be swayed by John McAdams, a professor of political science at Marquette University, who makes a succinct case for the death penalty, regardless of its deterrent effect:

I’m a bit surprised . . . [by the] claim that “the burden of empirical proof would seem to lie with the pro-death penalty scholar.” If we execute murderers and there is in fact no deterrent effect, we have killed a bunch of murderers. If we fail to execute murderers, and doing so would in fact have deterred other murders, we have allowed the killing of a bunch of innocent victims. I would much rather risk the former. This, to me, is not a tough call.

The same goes for fraudsters, thieves, rapists, and other transgressors against morality.

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Walter E. Williams asks “Will the West Defend Itself?” (creators.com, October 1, 2014):

A debate about whether Islam is a religion of peace or not is entirely irrelevant to the threat to the West posed by ISIL, al-Qaida and other Middle Eastern terrorist groups. I would like to gather a news conference with our Army’s chief of staff, Gen. Raymond T. Odierno; Marines’ commandant, Gen. Joseph Dunford; chief of naval operations, Adm. Jonathan W. Greenert; and Gen. Mark A. Welsh, the U.S. Air Force’s chief of staff. This would be my question to them: The best intelligence puts ISIL’s size at 35,000 to 40,000 people. Do you officers think that the combined efforts of our military forces could defeat and lay waste to ISIL? Before they had a chance to answer, I’d add: Do you think the combined military forces of NATO and the U.S. could defeat and eliminate ISIL. Depending on the answers given, I’d then ask whether these forces could also eliminate Iran’s capability of making nuclear weapons.

My question to my fellow Americans is: What do you think their answers would be? No beating around the bush: Does the U.S. have the power to defeat the ISIL/al-Qaida threat and stop Iran’s nuclear ambitions — yes or no?

If our military tells us that we do have the capacity to defeat the terror threat, then the reason that we don’t reflects a lack of willingness. It’s that same lack of willingness that led to the deaths of 60 million people during World War II. In 1936, France alone could have stopped Adolf Hitler, but France and its allies knowingly allowed Hitler to rearm, in violation of treaties. When Europeans finally woke up to Hitler’s agenda, it was too late. Their nations were conquered. One of the most horrible acts of Nazi Germany was the Holocaust, which cost an estimated 11 million lives. Those innocents lost their lives because of the unwillingness of Europeans to protect themselves against tyranny.

Westerners getting the backbone to defend ourselves from terrorists may have to await a deadly attack on our homeland. You say, “What do you mean, Williams?” America’s liberals have given terrorists an open invitation to penetrate our country through our unprotected southern border. Terrorists can easily come in with dirty bombs to make one of our major cities uninhabitable through radiation. They could just as easily plant chemical or biological weapons in our cities. If they did any of these acts — leading to the deaths of millions of Americans — I wonder whether our liberal Democratic politicians would be able to respond or they would continue to mouth that “Islam teaches peace” and “Islam is a religion of peace.”

Unfortunately for our nation’s future and that of the world, we see giving handouts as the most important function of government rather than its most basic function: defending us from barbarians.

Exactly. The title of my post, “A Grand Strategy for the United States,” is a play on Strategy for the  West (1954), by Marshall of the Royal Air Force Sir John Cotesworth Slessor. Slessor was, by some accounts, a principal author of nuclear deterrence. Aside from his role in the development of a strategy for keeping the USSR at bay, Slessor is perhaps best known for this observation:

It is customary in democratic countries to deplore expenditure on armaments as conflicting with the requirements of the social services. There is a tendency to forget that the most important social service that a government can do for its people is to keep them alive and free. (Strategy for the West, p. 75)

Doctrinaire libertarians seem unable to grasp this. Like “liberals,” they tend to reject the notion of a strong defense because they are repelled by the “tribalism” represented by state sovereignty. One such doctrinaire libertarian is Don Boudreaux, who — like Walter E. Williams — teaches economics at George Mason University.

A post by Boudreaux at his blog Cafe Hayek caused me to write “Liberalism and Sovereignty,” where I say this:

Boudreaux … states a (truly) liberal value, namely, that respect for others should not depend on where they happen to live. Boudreaux embellishes that theme in the the next several paragraphs of his post; for example:

[L]iberalism rejects the notion that there is anything much special or compelling about political relationships.  It is tribalistic, atavistic, to regard those who look more like you to be more worthy of your regard than are those who look less like you.  It is tribalistic, atavistic, to regard those who speak your native tongue to be more worthy of your affection and concern than are those whose native tongues differ from yours.

For the true liberal, the human race is the human race.  The struggle is to cast off as much as possible primitive sentiments about “us” being different from “them.”

The problem with such sentiments — correct as they may be — is the implication that we have nothing more to fear from people of foreign lands than we have to fear from our own friends and neighbors. Yet, as Boudreaux himself acknowledges,

[t]he liberal is fully aware that such sentiments [about “us” being different from “them”] are rooted in humans’ evolved psychology, and so are not easily cast off.  But the liberal does his or her best to rise above those atavistic sentiments,

Yes, the liberal does strive to rise above such sentiments, but not everyone else makes the same effort, as Boudreaux admits. Therein lies the problem.

Americans — as a mostly undifferentiated mass — are disdained and hated by many foreigners (and by many an American “liberal”). The disdain and hatred arise from a variety of imperatives, ranging from pseudo-intellectual snobbery to nationalistic rivalry to anti-Western fanaticism. When those imperative lead to aggression (threatened or actual), that aggression is aimed at all of us: liberal, “liberal,” conservative, libertarian, bellicose, pacifistic, rational, and irrational.

Having grasped that reality, the Framers “did ordain and establish” the Constitution “in Order to . . . provide for the common defence” (among other things). That is to say, the Framers recognized the importance of establishing the United States as a sovereign state for limited and specified purposes, while preserving the sovereignty of its constituent States and their inhabitants for all other purposes.

If Americans do not mutually defend themselves through the sovereign state which was established for that purpose, who will? That is the question which liberals (both true and false) often fail to ask. Instead, they tend to propound internationalism for its own sake. It is a mindless internationalism, one that often disdains America’s sovereignty, and the defense thereof.

Mindless internationalism equates sovereignty with  jingoism, protectionism, militarism, and other deplorable “isms.” It ignores or denies the hard reality that Americans and their legitimate overseas interests are threatened by nationalistic rivalries and anti-Western fanaticism.

In the real world of powerful rivals and determined, resourceful fanatics, the benefits afforded Americans by our (somewhat eroded) constitutional contract — most notably the enjoyment of civil liberties, the blessings of  free markets and free trade, and the protections of a common defense — are inseparable from and dependent upon the sovereign power of the United States.  To cede that sovereignty for the sake of mindless internationalism is to risk the complete loss of the benefits promised by the Constitution.

Signature

The Arrogance of (Some) Economists

Paul Krugman, former economist, writes:

Think of the government budget as involving tradeoffs similar to those an individual household makes. On one side, there are all kinds of things the government could be doing, from dropping freedom bombs to providing children with dental care; think of each of these things as involving a certain marginal benefit per additional dollar spent, with the marginal benefit declining in the total amount spent on each concern. On the other side, raising revenue has a cost, both the direct cost of the money taken from taxpayers and the possible reduction in incentives from higher tax rates.

What the government should do, in this case, is set all the marginals equal: the marginal benefit of an additional dollar spent on bombs, dental work, national parks, soup kitchens, etc, should all be equal, and this common marginal benefit should equal the marginal cost of raising an additional dollar of revenue.

Krugman must know that the benefits of government programs are unlikely to flow to the persons who bear the costs of those programs. Even if the benefits were to be allocated in such a manner, it would be pure arrogance to assume that income-allocation decisions should be taken from individuals and placed in the hands of government official and bureaucrats. That, of course, is precisely the assumption that underlies government spending. And those who share that assumption, are guilty of the same arrogance. Krugman is so guilty that he should be serving time in a special hell of his own — being forced to listen to the recorded lectures of Milton Friedman, for example.

What is the problem with the kind of cost-benefit analysis prescribed by Krugman? It is this: If you take a dollar from me to make X happier, you have made me less happy, and X’s greater happiness doesn’t compensate for my greater unhappiness. I don’t even have to be a selfish curmudgeon to object to the transfer of my dollar to X. It could be that I wanted to give the dollar to one of my grandchildren, which would have made both me and my grandchild happy. As for X, I couldn’t care less. And it is presumptuous of Krugman (or anyone else) to suggest (even by implication) that it is okay to take a dollar from me just to make X (or a government bureaucrat) happier.

Government, in short, is a tool used by arrogant, self-serving individuals to impose their preferences on others. That is why government should be restricted to a night-watchman role — protecting citizens from predators, foreign and domestic. Anything more than that is social engineering.

Related posts:
Greed, Cosmic Justice, and Social Welfare
Positive Rights and Cosmic Justice
Utilitarianism, “Liberalism,” and Omniscience
Utilitarianism vs. Liberty
The Indivisibility of Economic and Social Liberty
Beware of Libertarian Paternalists
Negative Rights
Negative Rights, Social Norms, and the Constitution
Rights, Liberty, the Golden Rule, and the Legitimate State
The Near-Victory of Communism
Tocqueville’s Prescience
Accountants of the Soul
The Case of the Purblind Economist
Rawls Meets Bentham
The Left
The Divine Right of the Majority
Our Enemy, the State
Government vs. Community
Social Justice
The Left’s Agenda
Positive Liberty vs. Liberty
Taxing the Rich
More about Taxing the Rich
More Social Justice
Luck-Egalitarianism and Moral Luck
The Left and Its Delusions

Creative Destruction, Reification, and Social Welfare

I was prompted to write this post by Mark Perry’s reprise of Walter Williams’s post about creative destruction.

Joseph Schumpeter used the term creative destruction

to describe the process of transformation that accompanies radical innovation. In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms.

The Wikipedia article about creative destruction (just quoted) offers an elaboration:

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, FedMart, Woolworths) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction in its technological manifestation.

Other examples are the way in which online free newspaper sites such as The Huffington Post and the National Review Online are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009 that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. The Seattle Post-Intelligencer became online-only in March 2009.  Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics or kinetics of industrial change: the transition from a competitive to a monopolistic market, and back again….

So far, so good. But then the article implicitly adopts the reification (or hypstatization) fallacy and explicitly endorses the idea of a social-welfare function:

Creative destruction can cause temporary economic distress. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

However, some believe that in the long-term society as a whole (including the descendants of those that experienced short-term hardship) enjoys a rise in overall quality of life due to the accumulation of innovation – for example, 90% of Americans were farmers in 1790, while 2.6% of Americans were farmers in 1990. Over those 200 years farm jobs were destroyed by exponential productivity gains in agricultural technology and replaced by jobs in new industries. Present day farmers and non-farmers alike enjoy much more prosperous lifestyles than their counterparts in 1790.

The reification (or hypostatization) fallacy, which is implicit in the first paragraph of the preceding quotation, is that creative destruction is an actual force which is responsible for good and bad things: better jobs for some workers, worse jobs or none for other workers. But creative destruction is merely a term that refers to the consequences of innovation and entrepreneurship. And these are merely labels for types of activity that are as old as mankind — normal, non-pathological behavior. The results may seem “good” or “bad” to particular individuals, but creative destruction is neither “good” nor “bad.” To evaluate creative destruction in such terms makes no more sense than calling the results of evolution “good” or “bad.” The results of creative destruction, like the results of evolution, are what they are — nothing more, nothing less.

Which points to the second fallacy, which is  explicit in the second paragraph of the preceding quotation. The writer attempts to reconcile the “good” and “bad” results of creative destruction by appealing to the net effect of those results on social welfare (“quality of life”). On that subject, I borrow from myself:

How can a supposedly rational [commentator] imagine that the benefits accruing to some persons … somehow cancel the losses of other persons … ? There is no valid mathematics in which A’s greater happiness cancels B’s greater unhappiness.

By the same token, there is no valid mathematics by which the happiness of a group, or nation, can be summed over time, to justify past hardships in terms of present comforts. Individuals can, and do, make such calculations for themselves when they decide whether or not to postpone current consumption for the sake of obtaining a future goal (a house, retirement, etc.). But those individual calculations cannot be summed, because each individual is making decisions for the sake of his or her unique vision of happiness.

The farm laborers of the past, whose jobs went a-glimmering with the rise of mechanization and other agricultural advances, cannot be compensated by the consumers of today. Those jobs went a-glimmering, in the way that species go extinct, and that is that.

If you (or I) choose to think privately of such outcomes in terms of “bad” and “good,” and react accordingly (e.g., with charitable contributions to help the jobless), the thought and action are legitimate, but personal. “Bad” and “good” have no place in characterizations of unintentional phenomena, such as (the badly named) creative destruction.

Related posts:
Greed, Cosmic Justice, and Social Welfare
Positive Rights and Cosmic Justice
The Interest-Group Paradox
Inventing “Liberalism”
Freedom of Will and Political Action
Law and Liberty
Rights, Liberty, the Golden Rule, and the Legitimate State
Line-Drawing and Liberty
The Divine Right of the Majority
Our Enemy, the State
The Golden Rule and the State
A Not-So-Fine Whine
Social Justice
The Meaning of Liberty
Taxing the Rich
More about Taxing the Rich
Peter Presumes to Preach
More Social Justice
Positive Liberty vs. Liberty
On Self-Ownership and Desert
Luck-Egalitarianism and Moral Luck