Philosophy of Economics Essay

This is an essay submitted for Philosophy of Economics, for my MSc in Philosophy of the Social Sciences.

In Haybron and Alexandrova’s “eminent domain” case, is it paternalistic to build the shopping centre? If yes, does this count against using cost-benefit analysis to guide public decision-making?

1 Introduction

In this essay, we are asked to consider a case study, proposed by Haybron and Alexandrova (H&A), in which a government makes use of “eminent domain” powers, that is, in which property owners are forced to sell their properties.  This is done in order to build a shopping centre that it believes (based on cost-benefit analysis) will benefit citizens enough to compensate the owners. H&A argue that the government’s decision, made on behalf of the people and then forced upon them, is potentially paternalistic and inappropriate.  I will consider this argument, and its wider implications on using cost-benefit analysis within public decision-making.

In section 2 I will consider paternalism in general, defining it and describing the harms that make it a concern.  I will argue that this definition is broader than sometimes thought, and includes cases with benefits that outweigh the harms, which I will argue are justified.  Sections 3 and 4 examine H&A’s case study, which I will argue displays paternalism in two ways: the decision to use eminent domain (section 3), and the way in which costs and benefits of the project are estimated (section 4). I will argue that both these aspects involve paternalism, and therefore inflict harms, but are nevertheless justified. In section 5 I will generalise these conclusions to provide guidance as to when cost-benefit analysis is appropriate and how it should be done.

 

  1. Paternalism

Throughout this essay, I will adopt Dworkin’s definition of paternalism[FN: H&A consider a definition of paternalism by Shiffrin (2000, p218), and propose their own (H&A, 2013, p163). However, the arguments in this essay do not depend on which of these accounts is adopted.], which suggests that a government acts paternalistically towards citizens when

  • It interferes with their liberty or autonomy
  • Without their consent
  • It believes this will improve their welfare or promote their interests (Dworkin, 2017)

Paternalism imposes harms. First, it undermines the liberty of the citizens – their freedom to make their own choices.  Second, it can damage their ongoing ability to make decisions and exercise their will. Third, the decision maker can, despite good intentions, be incorrect in their assessment of what will enhance the individual’s welfare.  Examples of paternalism are requiring cyclists to wear helmets, or requiring companies to reduce the sugar content of drinks[FN: I note that some of these laws do not represent pure paternalism, but also seek to reduce the cost incurred by the rest of society.].

While the harms of paternalism are real and should not be ignored, I argue that paternalistic action can have benefits which may outweigh those harms and make it justified.  It is certainly conceivable that a government has knowledge or capabilities that will genuinely and significantly improve its citizens’ welfare (however defined), compared with what they could do themselves.  

It might be challenged that this definition is broader than paternalism is usually envisaged, and in particular includes government decision-making done on behalf of citizens, that could not be decided individually.  For example, national defence policy could not left to each individual to decide. However, I believe the definition’s breadth is appropriate, for two reasons. First, it is difficult to draw a clear distinction as to what individuals could or couldn’t decide; some might argue that citizens indeed could defend themselves.  Second, government decision-making on behalf of citizens still inflicts the harms of paternalism, which should be recognised. However, the paternalism of much of legitimate government action does support the argument that paternalism is justifiable where the benefits outweigh the costs.

I argue that collective action problems are a case where paternalism is particularly likely to be justified.  Collective action problems are ones where individuals, acting rationally, are likely to reach a suboptimal outcome; that is, one where an alternative exists, which is preferred by each individual.  For example, each citizen may highly value a national defence, but would not individually choose to contribute; government is a way to ensure, albeit paternalistically, that the optimal outcome is achieved.

 

  1. The decision to use eminent domain

In the previous section, I defined paternalism, and argued that while harmful, it could nonetheless be justified, where the benefits outweigh the costs.  I suggested collective action problems are an example where paternalism provides benefits that may outweigh its harms. In this section I wish to argue that government decision to use eminent domain, such as in the H&A case study (described in the introduction), addresses a collective action problem: individual property owners have an incentive to not sell unless they are paid above their fair value.  I will argue that in this case paternalism is likely to be justified. I will also suggest ways in which the harms of paternalism can be reduced.

The use of eminent domain is paternalistic, according to Dworkin’s definition; it interferes on property owner’s freedom, they have not consented, and it is being done because the government believes it will maximise the welfare of all citizens.  I also argue that it inflicts the harms of paternalism described in the previous section. For example, the government may incorrectly assess how people feel about property owners being forced to sell. In the case study, H&A suggest that citizens “would be appalled” to see other people forcibly removed from their homes (p8), however, no evidence is given for this.  It is possible that only a vocal minority of citizens are concerned, or that they are merely expressing outrage despite actually preferring the shopping centre to be built.

However, the use of eminent domain also has benefits, which may well justify its paternalism.  It addresses a collective action problem, in which property owners have a good reason to resist selling, hoping to get compensation beyond how they value it.  Disallowing eminent domain can stop much-valued (or even essential) projects, and allow some to profit by strategically buying property that the government needs.  Cost benefit analysis, which will be considered in the next section, can be used to estimate the benefits.

In order to ensure the use of eminent domain is justified and to reduce the harm, I would suggest a process of public deliberation to gain a clearer consensus on what arrangements citizens felt were preferred.  This would consider an acceptable method of determining compensation; for example, people may wish non-market considerations to be taken into account, or a premium to be paid. Similarly, people may have views as to how essential and/or valuable the project should be to society before it is able to justify use of eminent domain.  These steps would increase individual liberty and improve the government’s understanding of what people value.

In this section, I have argued that although paternalistic, use of eminent domain may be justified, where it offers sufficient benefit to outweigh its harms.  I have noted that cost benefit analysis can be used to estimate the benefits of its use. However, cost benefit analysis introduces a further source of paternalism, which I will discuss in the next section.

 

  1. Estimation of costs and benefits

In the previous section, I argued that eminent domain is paternalistic, though justified if it allows a project with sufficient benefit to outweigh its harms.  I noted that these benefits will often be estimated using cost-benefit analysis. In this section, I will consider how we should conduct this cost-benefit analysis.  I will argue that using much of the data we have available is paternalistic. However, I will argue that using this data has significant benefits that make it justified.  I will argue that rather than attempting to minimise paternalism, we should seek to maximise accuracy, taking into account any data that helps us do this.

When a government performs cost-benefit analysis in order to justify a project in which eminent domain has been used, it can use a variety of methods to estimate the loss of value by those who lose their existing property (similar considerations apply to estimating the value to those benefiting from the project).  Firstly, it can use revealed or stated preference, seeing how much the owner has recently sold property for (though they are unlikely to have sold a similar property under similar circumstances), or asking the property owners what they are willing to sell for. Secondly, it can use other market information, seeing how much others are or were willing to buy or sell for.  Thirdly, a number of economists are now recommending the use psychological research into how people’s wellbeing is affected by experiences (this is often referred to as happiness-driven economics – see H&A, 2013 ). For example, research might indicate that people tend to overestimate how upsetting they would find moving.

There is an argument that it is paternalistic to rely on anything other than revealed or stated preferences of the individuals affected.  I find this argument convincing; without ensuring that individuals have consented to having their own views ‘downplayed’, this is likely to result in the harms of paternalism described in section 2.  For example, economists adjusting for psychological evidence are liable to introduce their own biases.

However, I argue that we shouldn’t only pay attention to revealed or stated preferences, ignoring all other evidence.  First, applying stated preferences does not prevent paternalism; for example, a restaurant is not justified in forcing patrons to eat the food, just because they ordered it.  Second, I don’t believe that these people can reliably predict how losing the property will affect their welfare. Nor can we imply this from their past actions. Third, especially when the figures used for cost-benefit analysis are also being used to guide compensation, individuals have a strong incentive to overvalue the property in order to increase the compensation they receive, thus revealing an untrue preference (that they would prefer not to sell at a price above their true valuation).  

I believe that planners should take into account all data they have available, and attempt to generate an accurate cost-benefit analysis.  This should include elements that are subjective, such as psychological evidence. Planners should recognise the uncertainty in their own theories and models, and the fact that these may not reflect how the individuals affected will experience the project.  The existence of this uncertainty is part of the reason only projects that are sufficiently valuable should be justified by cost-benefit analysis, as noted in the previous section. However, planners should not be afraid to downplay revealed preference data, particularly when there is evidence it is unreliable.  

 

  1. Conclusion

In this essay, I have argued that the use of eminent domain and cost-benefit analysis will generally be paternalistic, as citizens will seldom unanimously consented to their use.  However, I do not believe we have a duty to minimise paternalism at all costs. I have highlighted collective action problems as being a particular case where paternalism can potentially make individuals significantly better off, for whatever definition of welfare we choose to apply.  In these cases, individuals have an incentive to reveal untrue preferences, and planners are justified in downplaying these preferences, and enriching their decisions with other information, including psychological and happiness research that people may not take into account sufficiently when forming their own preferences.

This is not to argue that paternalism is harmless.  I have argued for greater public deliberation; scepticism does not mean ignoring the views of people.  We should seek to understand the conditions under which people believe coercion, such as eminent domain, is justified.  We should seek to genuinely understand how people experience the loss of their property. Finally, we should seek to transparently report how we reached the decision to apply cost-benefit analysis, and how we estimated the costs and benefits of the project.  Steps like these would reduce the risk of incorrect decisions and somewhat restore people’s sense of autonomy, while still allowing projects that significantly improve total welfare.

  

References

Adler, M. and Posner, E, 2006. “New Foundations of Cost–Benefit Analysis”, Harvard University Press

Dworkin, G., 2017. “Paternalism”, The Stanford Encyclopedia of Philosophy (Winter 2017 Edition), Edward N. Zalta (ed.), URL = <https://plato.stanford.edu/archives/win2017/entries/paternalism/>.

H&A (Haybron, D & Alexandrova, A),  2013, “Paternalism in Economics”, In Paternalism: Theory and Practice. Cambridge University Press. pp. 157-177

Schmidtz, D,  2001, “A Place for Cost–Benefit Analysis,” Noûs, October 2001, Vol.35, pp.148-171

Shiffrin, S., 2000. “Paternalism, Unconscionability Doctrine, and Accommodation”, in Philosophy & Public Affairs, Vol. 29, No. 3 (Summer, 2000), pp. 205-250

Sunstein, C., 1999,  “Cognition and Cost-Benefit Analysis” ( John M. Olin Program in Law and Economics Working Paper No. 85, 1999).

 

Leave a Reply

Your email address will not be published.