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Spring 2020
ISSN 0890-913X
Volume 35, Number 1

Cost-Benefit Analysis as a Failure to Learn from the Past

James Broughel, Mercatus Center at George Mason University
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TheJournalofPrivateEnterprise35(1),2020,105113EDUCATIONALNOTECost-BenefitAnalysisasaFailuretoLearnfromthePastJamesBroughelMercatusCenteratGeorgeMasonUniversity______________________________________________________AbstractThisshortnotearguesthatcost-benefitanalysis(CBA),atoolemployedbyprofessionaleconomiststoevaluatethewelfareconsequencesofpublicpolicies,embodiesavarietyoffailurestoheedthewarningsoffamousclassicalliberaleconomists.CBAattributescharacteristicsofindividualstosociety,failstoadequatelyaccountfortheunseenconsequencesofpolicy,wipesoutthefuturewithasocialdiscountrateasifinthelongrunwearealldead,”andisanexampleofhowthepursuitofmathematicallogiccanleadtofailuresofcommonsense.Asaresultoftheseproblems,CBAoffersausefulteachingdeviceforstudents,demonstratinghowevenmodern-dayeconomistsatthetopoftheirprofessioncontinuetomakebasicerrorspointedoutbyeconomistsgenerationsago.CBAinthiscontextisbestthoughtofasafailuretolearnfromthepast.______________________________________________________JELCodes:A2,B1,B2,D6,H43,I3,K2Keywords:cost-benefitanalysis,socialwelfarefunction,socialdiscountrate,shadowpriceofcapitalI.IntroductionCost-benefitanalysis(CBA)isatoolwidelyusedintheUSfederalgovernmentandaroundtheworldtoevaluatethewelfarepropertiesofpublicpolicies.EconomistsacrossthepoliticalspectrumendorseCBAasausefultooltoguidedecision-making.However,CBAsuffersfromanumberofshortcomingsthatinothercontextswouldbethoughtofaselementaryfailurestoapplybasiceconomicprinciples.Thisbriefnotewilloutlinetheseshortcomings.Forwhateverreason,CBAhasnotabsorbedmanylessonslearnedthroughoutthehistoryofeconomicthought,lessonsthatinthiscasearemostcloselyassociatedwithclassicalliberaleconomistssuchasF.A.HayekandFrédéricBastiat.Asaresult,CBApresentsausefulfoilwhenteachingaboutcommonpitfallsineconomics,andit
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