Summers's Memo, Cost-Benefit Analysis, and Respect for Persons
And Why Italy’s "Plan to Outsourcing Migrants Processing" Cannot Be Justified
In December 1991, the then World Bank’s Chief Economist Larry Summers sent a memorandum to some of his colleagues. A section of the memo contemplates the economic justification of (de)localizing dirty industries to less developed countries. This part of the memo can be read on a Wikipedia page and I reproduce it here:[1]
“'Dirty' Industries: Just between you and me, shouldn't the World Bank be encouraging MORE migration of the dirty industries to the LDCs [Least Developed Countries]? I can think of three reasons:
1) The measurement of the costs of health-impairing pollution depends on the foregone earnings from increased morbidity and mortality. From this point of view a given amount of health-impairing pollution should be done in the country with the lowest cost, which will be the country with the lowest wages. I think the economic logic behind dumping a load of toxic waste in the lowest-wage country is impeccable and we should face up to that.
2) The costs of pollution are likely to be non-linear as the initial increments of pollution probably have very low cost. I've always thought that under-populated countries in Africa are vastly UNDER-polluted, their air quality is probably vastly inefficiently low compared to Los Angeles or Mexico City. Only the lamentable facts that so much pollution is generated by non-tradable industries (transport, electrical generation) and that the unit transport costs of solid waste are so high prevent world welfare-enhancing trade in air pollution and waste.
3) The demand for a clean environment for aesthetic and health reasons is likely to have very high-income elasticity. The concern over an agent that causes a one in a million change in the odds of prostrate[sic] cancer is obviously going to be much higher in a country where people survive to get prostrate[sic] cancer than in a country where under 5 mortality is 200 per thousand. Also, much of the concern over industrial atmosphere discharge is about visibility-impairing particulates. These discharges may have very little direct health impact. Clearly trade in goods that embody aesthetic pollution concerns could be welfare-enhancing. While production is mobile the consumption of pretty air is a non-tradable.
The problem with the arguments against all of these proposals for more pollution in LDCs (intrinsic rights to certain goods, moral reasons, social concerns, lack of adequate markets, etc.) could be turned around and used more or less effectively against every Bank proposal for liberalization.“
After the memo leaked, Summers said that he was not the author but that he only signed it. As the Wikipedia page indicates, he argued furthermore that it was not intended as any serious policy proposal and was mainly aiming at making explicit the underlying economic logic. In their discussion of the memo, Daniel Hausman and Michael McPherson nonetheless argue that sarcastic or not, the memo is typical of mainstream normative economics.[2] They identify a small number of constitutive features. The note is explicitly evaluative, i.e., it pretends to evaluate states of affairs and recommend an action based on this evaluation. This evaluation is based on a particular framework that finds its roots in welfare economics. This framework is individualistic (outcomes are assessed from an individual perspective), welfarist (only welfare consequences are factored in, and other normative considerations are ignored), and market-based (welfare measures are made based on hypothetical market prices).
The publication of the memorandum sparked a controversy. This is partly due to the language used (obviously, the memo was not aimed to be made public), and partly to its full reliance on some “economic logic” that ignores all other considerations. Now, if we reflect on this logic, what we observe is nothing more than the kind of cost-benefit analysis that permeates the scientific and administrative design of public policies. If you contemplate building a dam at some specific location, you want to know whether the benefits that it creates overcome the costs that will be supported by some individuals who will have, for instance, to relocate. To do so, you do exactly what Summers’s memo explains. You compare how much some persons would be willing to pay to have the dam built with how much other persons would ask to allow for the dam to be built. If the former is higher than the latter, then presumably building the dam triggers more benefits than costs and is therefore justified. In Summers’s memo, a similar valuation is hinted at. Inhabitants of rich countries are presumably willing (and able) to pay a lot to relocate polluting industries far from their homes. It’s almost certain that the money that rich countries would be ready to give is more than the money that poor countries would ask to welcome polluting industries on their soil. These valuations track several objective facts, such as that the opportunity costs of health impairments due to pollution are higher in rich than poor countries, or that costs due to pollution are marginally increasing. If you accept the “economic logic” in the dam case, why should you reject it as it is used in Summer’s memo?
Let’s ask the question the other way around. Why should we consider that a typical cost-benefit analysis has any normative weight? Or, in other words, why cost-benefit analysis can provide any public reason to justify (or not) a policy? To answer, we have to acknowledge that the use of cost-benefit analysis is taking place within market economies. That gives rise to a fundamental presumption that an exchange system based on market prices is justified. Except we have reasons for the contrary (and there are in many cases), we tend to presume that it is okay that individuals trade goods at rates determined by market mechanisms. Since market prices precisely reflect information about individuals’ willingness to pay, this fundamental presumption has a fundamental corollary: in general, willingness to pay is a good reason to allocate goods. Now, cost-benefit analysis is especially relevant in cases of missing markets (i.e., market failures) because it serves as an administrative substitute for market mechanisms. If, presumably, we consider that market mechanisms provide reasons to justify any given allocation of goods in circumstances C, then the allocation that results from cost-benefit analysis is also presumably justified in C. The outcomes of cost-benefit analysis tend to mimic the outcomes that would emerge with market mechanisms, and if one is justified the other is too.
Curiously, you find some economists and philosophers who, while endorsing market mechanisms as a justified way to allocate resources, are also very critical of the ethical standing of the welfare economics apparatus that underlies cost-benefit analysis. To mention only one example, Mark White argues in his book Kantian Ethics and Economics that the use of the Pareto criterion and Kaldor-Hicks compensation test to evaluate and justify public policies entails wrongful coercion.[3] In support of this claim, White makes an explicit appeal to Kant’s humanity formula:
“From a Kantian point of view, the most immediate problem with welfare economics and efficiency analysis, as with any consequentialist procedure, is that whenever actions are taken that transfer resources from one party to another with no justification based on wrong-doing or desert, the party losing resources is treated simply as a means to the end of the party who gains them.”[4]
The problem with this argument is that it ignores the context in which public policies enacting welfare-economics-type of analysis are evaluated and implemented. Since we are living in market-based liberal democracies, the presumption is that market mechanisms are justified in allocating resources and the machinery of the state, partially dependent on democratic procedures, is legitimate to make administrative and legislative decisions. As far as Kant’s humanity formula is a version of the liberal respect for persons principle, public policies relying on cost-benefit analysis are presumptively respectful of persons, because they enact mechanisms that provide public reasons justifying the procedural rules and the outcomes of those policies.
Of course, a presumption can be defeated. In the case of Summers’s memo, there may be reasons to doubt that the “economic logic” provides a decisive reason justifying the dumping of waste in poor countries. To start with, while the transfer of polluting industries from rich to poor countries could be used as a substitute for market mechanisms that are hard to implement in this context, it’s not clear that the economic argument is correct. For instance, the consequences of pollution aren’t fully local and it’s perfectly possible that the transfer would lead to an overall increase in pollution, with adverse consequences also for rich countries. Moreover, we are precisely in the kind of situations where other normative aspects than efficiency such as fairness or dignity seem to be relevant. It’s not that market mechanisms are completely oblivious to fairness or dignity considerations,[5] but it is clear in this case that the differences in terms of willingness to pay (or other economic measurements reflecting implicit market prices) are due to structural inequalities that are themselves presumably not justified. Finally, we are concerned with an international issue involving members of different polities, which gives rise to problems of political legitimacy that are trickier than in the dam case.
Still, I would not go as far as to say that the hypothetical policy proposal of Summers’s memo necessarily entails a disrespect for persons, in a Kantian sense of treating some persons as means rather than ends. The case is controversial because there may be reasons to object to the policy proposal that defeat the economic logic brought in support of it, but we are still in a situation where individuals (including those from poor countries) may have reasons to accept the outcomes of market mechanisms or their substitutes. In contrast, there are other cases where seemingly the same economic logic applies and that clearly leads to a wrongful treatment of persons. Italy’s so-called “plan” to “outsource migrant processing” to countries such as Albania is an illustration. The justification of the plan appeals to a very similar logic to Summers’s memo, treating migrants in exactly the same way as the waste to be exported. I’ll not repeat the reasoning but I think the parallel is obvious. Here, the fundamental presumption that market mechanisms are justified doesn’t apply. It doesn’t because we are not talking of “goods” to be traded, but of persons. Kant’s humanity formula is obviously violated. Treating migrants as if they were mere merchandise is a clear case of disrespect. This treatment could of course never be justified to the persons who are treated this way. This doesn’t mean that there is not a liberal case for (limited) exclusion of would-be immigrants,[6] but there is no public justification for “allocating” migrants according to how much rich countries are willing to pay to “export” them.
[1] This section of the memo is also reproduced and discussed in Daniel M. Hausman and Michael S. McPherson, Economic Analysis, Moral Philosophy and Public Policy, 2nd ed. (Cambridge University Press, 2006). The authors use it as an introductory illustration of the ethical dimension of economic reasoning.
[2] Ibid., p. 14.
[3] Mark White, Kantian Ethics and Economics: Autonomy, Dignity, and Character (Stanford, Calif: Stanford University Press, 2011).
[4] Ibid., p. 125.
[5] For a good case for this claim, see Luigino Bruni and Robert Sugden, “Fraternity: Why the Market Need Not Be a Morally Free Zone,” Economics and Philosophy 24, no. 01 (2008): 35–64.
[6] See for instance Michael Blake, “Immigration, Jurisdiction, and Exclusion,” Philosophy & Public Affairs 41, no. 2 (2013): 103–30.
If I read your quote from White correctly, he is starting from a presumption that existing property rights have a moral standing of their own, which cannot be over-ridden by the state that created them. This is the typical Lockean position, but entirely baseless. As Hume said, you never have to go far back in the history of any piece of durable property to find force or fraud. I don't know what If anything Kant had to say about this.
The real objection to the Kaldor-Hicks criterion is the compensation is typically hypothetical.
“The outcomes of cost-benefit analysis tend to mimic the outcomes that would emerge with market mechanisms, and if one is justified the other is too. “
This is an empirical claim that is very difficult to test. It is good rhetoric, though. To what degree are the tasks of a central planner analogous to the task of a cost-benefit analyzer? And to what extent to criticisms of one apply to the other? Cost-benefit analyzers at least have a context of market prices to use in their estimations. But they still lack the feedback from profits and losses that guide entrepreneurs.
“differences in terms of willingness to pay (or other economic measurements reflecting implicit market prices) are due to structural inequalities that are themselves presumably not justified.”
If this is disqualifying, most, perhaps all international trade and much domestic trade is rendered illegitimate. Structural inequalities are ubiquitous and hard to fix.
“Treating migrants as if they were mere merchandise is a clear case of disrespect.”
Isn’t this a flaw of any modern mass society that must deal with large numbers of persons by means of a bureaucracy? Bureaucracies themselves can be good or bad, but they of necessity treat persons as molecules in a chemical reaction. Do we have recourse when we feel violated? Often we do not.