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How to Make Better Economic Policy Choices

Dec 21, 2020 Mariana Mazzucato , Simon Sharpe

While public policy organizations are increasingly diversifying their decision-making approaches, many remain overly reliant on static tools such as cost-benefit analysis. Such tools have severe limitations, leading to policy errors with serious long-term consequences.

LONDON– The United Kingdom is entering its deepest recession in 300 years. Millions of jobs are at risk. And national debt has exceeded 100% of GDP. Now is hardly the time to explore the conceptual underpinnings of economic theory, right?

In fact, as governments everywhere are borrowing, spending, and regulating on an unprecedented scale, a deeper understanding of economic decision-making is essential both to accelerate the recovery and to avoid longer-term risks. That is why the UK Treasury’s new guidance on decision-making for transformational change is so welcome, and why finance ministries everywhere should follow suit.

In a recent study for the UK’s Better Regulation Executive, we found that, while public policy organizations are increasingly diversifying their approaches to decision-making, many remain overly reliant on static tools such as cost-benefit analysis. Such tools are ill-suited to understanding, predicting, and driving innovation and structural change in the economy.

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Mariana Mazzucato

Writing for PS since 2015
33 Commentaries

Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at University College London, is Founding Director of the UCL Institute for Innovation and Public Purpose. She is the author of The Value of Everything: Making and Taking in the Global Economy, The Entrepreneurial State: Debunking Public vs. Private Sector Myths, and, most recently, Mission Economy: A Moonshot Guide to Changing Capitalism.

Simon Sharpe

Writing for PS since 2020
1 Commentary

Simon Sharpe is a visiting policy fellow at the UCL Institute for Innovation and Public Purpose.

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Merton Finkler Dec 30, 2020

Cost-benefit analysis is not static; however, some unscrupulous users might choose to cite such an analysis in announcing a public policy decision. The late British economist Alan Williams argued compellingly in an illuminating 1972 article entitled "Cost-Benefit Analysis: Bastard Science? And/Or Insidious Poison in the Body Politick?", that CBA seeks to assist policy makers, but not replace them, in making effective judgments by explicitly presenting key assumptions, identifying all relevant evidence, and communicating the resulting judgments in a way that can be replicated. American economist Victor Fuchs made a similar argument in his 1980 article entitled "What Is CBA/CEA And Why Are They Doing This To Us?" Both Williams and Fuchs sought to make decision-makers both transparent in the tradeoffs they make in their analyses and accountable for the results.
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Per Kurowski Dec 26, 2020

While all the excessive exposures that could bring down bank systems are built-up with assets perceived as safe, few things more static than the risk weighted bank capital requirements based on how credit risks are perceived risky, at this moment.
http://subprimeregulations.blogspot.com/2019/03/my-letter-to-financial-stability-board.html
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kurt smithpeters Dec 24, 2020

Perhaps the problem is not simply adding a mission selection process to cost benefit, but rather both the cost benefit frame and the risk opportunity / value-mission selection / potential structural transformation frame are lacking some detail. What frames seem likely to trade these intuitive benefits: Developing region hydro foundation to support grid / light industry, a breadth to depth shift from successive retrofitting steam plants from coal to natural gas to nuclear, the proportion of intermittent energy on a grid based on its storage cost and habitat impact? It seems like one set of reasoning is the quantitative comparison of cost (how fast deploy) and hazard (how much degradation while deploying) attributes over time. The other set is the structural transformation opportunity characterization, which varies according to many aspects of the situation of each region. Mission/value selection relate to both of these. Also i suggest mission/value selection needs market mechanism help. If we dont have a carbon or hazard tax for example many nodes of decisions will be sub optimized toward higher GHG choices.
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