Cost Benefit Analysis Essay, Research Paper

Is cost-benefit analysis a morally defensible technique for making decisions in business?

Questions around the use of cost-benefit analysis as a tool in the decision making process in business have become even more relevant in the past decade with the increase in cost cutting and productivity enhancing pressures brought on by increased global competition. If cost-benefit analysis is to be used in this way, then it is advisable to thoroughly understand its limitations and recognize the implications of its use. These questions become even more complex as ethical and moral implications are recognized and addressed.

I intend to promote the position that the use of cost-benefit analysis is morally defensible, and perhaps even necessary given the societal context in which we operate. However, its use should be limited to that of a tool to be used in the decision making process, rather than as a final (or only) determining factor. I will begin by taking a look at Steven Kelman s cost-benefit analysis : an ethical critique , and the replies of James V. DeLong and Robert A. Nisbet, using these papers as a basis for understanding the arguments against cost-benefit analysis, as well as their counter-arguments. Following this I will present a brief outline of my own thesis and supporting arguments

Kelman, in his critique of cost-benefit analysis, has the purpose of reducing its importance in the regulatory process. While this is a different goal and context from the business decision-making process I am examining, his arguments are relevant in that they closely examine cost-benefit analysis from a moral/ethical point of view, and the conclusions should be applicable to the business case. He presents the prescription of cost-benefit analysis advocates as follows: If benefits do not outweigh costs, the activity in question should not be performed, and to weigh these fairly, all benefits and costs need to be expressed in a common scale (usually dollars), even if some of those costs or benefits are not usually expressed that way.

Kelman opposes both of these points with the following positions. First, it is likely that there are many decisions that are morally or ethically right where the costs outweigh the benefits. Second, Kelman argues that there are many good reason not to try to put dollar values on many costs or benefits. (Kelman, p. 90)

Kelman identifies the position ascribed to his opponents as a utilitarian one, in which he claims that all kinds of consequences of each possible action would be though out, quantified and compared to each other in coming up with the action that benefited society the most. A consequence of utilitarian thinking, is illustrated by an example of an old man in Nazi Germany debating whether to speak out against the regime. The utilitarian position, as Kelman presents it, would have it be morally wrong for the man to speak out, as it would benefit no one and injure him considerably. Kelman believes that this is wrong, and that this is because there are questions for which cost-benefit analysis is just not applicable. (Kelman, pp. 91, 92)

The question of Rights and Duties within a moral or ethical system are the basis for determining whether cost-benefit analysis is applicable. By this standard, the morally right act is the act that reflects a duty or respects a right . (Kelman, p. 92) If duties or rights conflict, as they will when a moral principle comes up against the outcome of a cost-benefit analysis, it is possible that the results of the cost-benefit analysis will be subsumed or become irrelevant to the wider analysis. (Kelman, p. 92) Additionally, Kelman argues that certain things, in order to demonstrate their special value should stand outside the cost-benefit analysis. Included in this are fresh water, clean air, and other environmental concerns. (Kelman, pp. 92-93)

Turning now to questions around valuation of costs and benefits, especially for things not normally bought and sold, Kelman identifies three relevant areas of concern within the context of techniques used to value these things, such as unbundling the thing to be valued from a commonly marketable item. (Unbundling involves looking at the value of the marketable item with and without the unmarketable factor present. The difference should give the value of the intangible item.) (Kelman, p. 93)

The first concern that Kelman identifies involves the difficulty in controlling for all of the variables that my be present in the valuation of a bundled item, as well as not taking into account factors that may influence the value but are not recognized. For instance, Kelman argues that valuing quiet by the discount a property in an airport flight zone might have on the open market may not take into account factors such as economic pressures, or convenience to the airport for travellers or airport employees. (Kelman p. 93)

Another concern raised is that of the psychological effect of the difference between the price a person would require for giving up something to which he has a pre-existing right and the price he would pay to gain something to which he enjoys no right. (Kelman, p.93, italics Kelman s) He believes that the first is valued much higher than the second.

Kelman s final concern is that of the automatic reduction in value he believes occurs when something previously not valued is given a value. The example of slavery, in which human value is lessened by the very act of buying and selling humans, is cited. He gives two reasons to explain this: The first involves the associated values that may come with a non-market exchange being lost in the market valuation. Prostitution provides an example of this, whereby sex becomes cheapened through the buying and selling, and the emotional values of a sexual relationship are not present. The second is the loss of the value given to something that can be said to be not for sale . This is another case of some things having special value , which is lost when market valuation is used.

Kelman closes by setting out one objection to his thesis that people making judgements are actually doing cost-benefit analysis all the time without realizing it. He dismisses this as an after the fact, ad hoc attribution of cost-benefit analysis to a decision made on other grounds. (Kelman, p. 96)

James DeLong makes four points in attacking Kelman. The first is that he believes Kelman is misrepresenting cost-benefit analysis proponents and attributing a theoretical framework to their actions that does not fit. Instead of utilitarianism, DeLong argues that those in favour of cost-benefit analysis are merely looking for a pragmatic solution to the problem of valuing things that are not easy to compare. He also strongly asserts that this is not a mechanistic and inhuman process, and that no analyst lets himself become the prisoner of the numbers . (DeLong p. 97)

A second criticism of Kelman is his use of moral claims as a basis for argument. DeLong argues that this contributes to two problems. First, it fails to recognize that the problems being addressed are practical problems that seldom have simple either/or answers, and second, the use of passive voice hides the lack of clear thought about moral rights and their duty counterparts, especially who will perform the duty and at what cost. (DeLong, pp. 97-98) In other words, DeLong is arguing that moralizing is fine in theory, but does not address the question of how to practically act.

Kelman s specially valued things are also taken to task. DeLong feels that it is ludicrous to base decisions on this as everyone s special value items would need to be considered (or a good reason for drawing a line provided), and this would be impossible. (DeLong, p. 98) This counter seems to reduce Kelman s special value items to something that everyone would use to promote their own interests, but I don t think that this is what he had in mind. The things that Kelman promoted in this category are highly valued by everyone clean air, fresh water, etc., and besides that are necessary to human life. I do not believe that it would be an overwhelming task to ensure that the items critical to human health be on a special value list.

Finally, DeLong argues that it would be irresponsible to try to make difficult decisions without having as much knowledge as possible, and cost-benefit analysis provides knowledge that would otherwise not be available. (DeLong, p98)

Turning now to Robert Nisbet, I find a couple of more objections. Nisbet also begins by attacking the framework that cost-benefit analysis proponents have been placed in. His first point is to provide an account (derived from J.S. Mill) of utilitarianism that puts all of the principles of morals and ethics above the arguments from utility. (Nisbet, p. 99)

In response to the idea that there are values that stand outside cost-benefit analysis, Nisbet uses a relativist argument to say that in other cultures these values are different and cost-benefit analysis would be appropriate. (Nisbet, p. 99) He also mixes in references to two more very important points that have not been adequately addressed by the previous two writers.

Firstly, Nisbet promotes the idea that not doing cost benefit analysis is harmful because it might help to find a more efficient way to address a problem that, morally everyone agrees on. In other words, questions of whether to help a disadvantaged group of people should not be excluded from cost-benefit analysis, because the process might find an even better way to help them than if it were not performed. (Nisbet, pp. 99,100)

Secondly is another practical question that has not been mentioned to this point, and goes right to the heart of the matter of the use of cost-benefit analysis in business decisions. Nesbit argues that there are often consideration of economy and jobs that depend on decisions taken using cost-benefit analysis. To simply say no, you cannot drill a well here , could mean the difference between well being and joblessness for thousands of people. (Nisbet, p. 100) The growth driven economic system which provides the context under which these decisions are being made, and the consumption ideology that fuels that system are a fact of life that must be accounted for. This is not to say that we should simply accept this as inevitable, only that we should not ignore it or pretend otherwise.

My analysis leads me to the conclusion that cost-benefit analysis, while not perfect as a tool, does have a legitimate place in decision-making, in that it provides information that would not otherwise be available. That this information is relevant and necessary to the decision to be made is supported by the very practical questions raised by Nisbet and DeLong. I accept from Kelman s work the criticisms of cost-benefit analysis, but rather than discarding the tool as useless, I would prefer to see it refined, as well as applied in a reasonable fashion. Above all, this means that it must be recognized for what it is a tool with powerful applications and significant limitations. As such it should never be relied on as providing the greatest or only arguments for a decision.