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NBN + cost benefit analyses « Previous | |Next »
May 9, 2011

William K. Black in a post on formal cost benefit analyses to decide regulatory policy at New Economics. This has often been used as part of a frontal attack on Australia's national broadband network (NBN). Black says:

Benefit-cost tests are used as a device to give theoclassical economists extraordinary power to block regulations disfavored by the ruling administration. A regulation on pollution, for example, is typically shaped by scientists and engineers because they have the relevant expertise and they use that expertise and experience to reach a judgment that the policy they are recommending will benefit the nation. Economists, however, are the purported experts on formal benefit-cost analyses and they can and do use that expertise to kill rules the scientists believe to be vital. The neoclassical economists are implacably hostile to regulation, so benefit-costs reviews could serve as a “choke point” to protect their dogmas – no matter how irrational and anti-empirical those dogmas prove.

He adds that the core, defining dogma of theoclassical economists is that government is the problem, not part of the solution. They believe government is rarely necessary, that it proves a grave danger to personal liberty, and that virtually all governmental programs are economically illiterate and harm the intended beneficiaries as well as the economy.

The implicit intellectual proposition underlying this choke point is that the neo-classical economists assumption that have a universal, superior methodology for judging the desirability of public policies even in fields in which they are hopelessly ignorant. That universal, superior methodology is that economists are engaged in a value-free, objective, and scientific exercise. Hence the cost-benefit process is objective.

This is hard to accept since behind this assumption sits another one, which continually surfaces around the NBN. It is that private enterprise or the free market is the best and only way to build the NBN--in spite of the marked failure of private enterprise to do so in the past. That failure is an example of a negative externality that a competitive free market economy has produced and could not address successfully. Hence the need for government intervention with the NBN designed to create a level playing field.

What usually happens is the free market economists deny the harms caused by a broadband network that has been built by the private enterprise. They deny the negative externality; or say that if laissez-faire—that is, no government intervention—provides too little high speed broadband to regional Australia, the the straightforward solution is some form of subsidy to private enterprise, not the government production of a broadband network.

Other responses are that within a system of a system of voluntary exchange the individuals involved in these situations can always negotiate a solution that internalizes any externality. Or the traditional distinction between public goods, which must be produced collectively because of the positive externalities they create, and private goods, the production of which may be left to the market can be challenged.

| Posted by Gary Sauer-Thompson at 10:08 AM | | Comments (2)


The debate needs to switch away from cost benefit analysis to more fundamental questions, like:

Where does Australia wish to be in a global digital economy?

Or does Australia want to create jobs, improve domestic productivity, increase exports and advance its competitive position in a global digital economy?”

Yes it's a classic case of circular reasoning: the private sector won't build the NBN/government should try to be like the private sector/therefore the government ought not to build the NBN either. The unstated assumption of course is that running a country is just like running a business and rank amateur politicians should defer to professional managers in policy-making. Once this assumption is examined it falls apart of course, because a country is nothing like a business, but neoclassical economists have never been good at examining the assumptions that underpin their work. On the contrary, they have allowed the assumptions to become a normative ideology.

The reason the private sector will not build the NBN - or at least a reason - is that it is impossible to do a sensible cost benefit analysis. While the economic benefits will be enormous, it is not feasible to analyse the extent to which those benefits will be able to be captured by the owners of the NBN. In fact many will certainly not be - the NBN will be an enabler for many other organisations to create value in ways that will escape the revenue stream of the NBN owners.

A private company would naturally decline to build something that will mainly profit other enterprises, even though the nett impact would be hugely beneficial for the nation as a whole. A classic case for government intervention, in other words, unless you are only capable of thinking in slogans and doctrinaire talking points. The latter, unfortunately, describes most politicians and journalists.