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72 Finance and economics The Economist May 5th 2018
ACYNIC, says one of Oscar Wilde’s characters, is a man who
knows the price of everything and the value of nothing. But,
as philosophers have long known, assigning values to things or
situations is fraught. Like the cynic, economists often assume that
prices are all anyone needs to know. This biases many of their
conclusions, and limits their relevance to some of the most seri-
ous issues facing humanity.
The problemof value has lurked in the background ever since
the dismal science’s origins. Around the time Adam Smith pub-
lishedhis “WealthofNations”, JeremyBenthamlaidout the basis
of a utilitarian approach, in which “it is the greatest happiness of
the greatest number that is the measure of right and wrong”. In
the late 19th centuryAlfredMarshall declared the correct focus of
economics to be the “attainment and…use ofmaterial requisites
ofwell-being”. Or, as his student, Arthur Pigou, put it, “that part of
social welfare that can be brought directly or indirectly into rela-
tionwith themeasuring rod ofmoney”.
Equating money with value is in many cases a necessary ex-
pedient. People make transactions with money, of one form or
another, rather than “utility” or happiness. But even if econo-
mists oftenhave no choice but to judge outcomes in terms ofwho
ends up with howmany dollars, they can pay more attention to
the way focusing on “material well-being”, as determined by the
“measuring rod ofmoney”, influences and constrains their work.
The measuring rod itself often causes trouble. Not every dol-
lar is ofequal value, for instance. Youmight thinkthat iftwo econ-
omists were forced to bid on an apple, the winner would desire
the apple more and the auction would thereby have found the
best, welfare-maximising use for the apple. But the evidence sug-
gests that money has diminishing marginal value: the more you
have, the less you value an extra dollar. The winner might there-
fore end upwith the apple not because itwill bring himmore joy,
but because his greaterwealthmeans that his bid is less ofa sacri-
fice. Economists are aware of this problem. It features, for exam-
ple, in debates about the link between income and happiness
across countries. But the profession is surprisingly casual about
its potential implications: for example, that as inequality rises,
the pricemechanismmay do aworse job of allocating resources.
Equating dollar costs with value misleads in other ways. That
economic statistics such as GDP are flawed is not news. In a
speech in1968 Robert Kennedy complained thatmeasures ofout-
put include spending on cigarette advertisements, napalm and
the like, while omitting the quality of children’s health and edu-
cation. Despite efforts to improve such statistics, these problems
remain. A dollar spent on financial services or a pricey medical
test counts towards GDP whether or not it contributes to human
welfare. Social costs such as pollution are omitted. Economists
try to take account of such costs in other contexts, for example
when assessing the harms caused by climate change. Yet even
then they often focus on how environmental change will affect
measurable production and neglect outcomes that cannot easily
be set against themeasuring rod.
Economists also generally ignore the value of non-market ac-
tivity, like unpaid work. By one estimate, including unpaid work
inAmerican GDP in 2010would have raised its value by 26% (and
drawn a verydifferent picture ofthe contributions ofdifferent de-
mographic groups). As Diane Coyle ofCambridge University has
argued, the decision to exclude unpaid workmay reflect the val-
ue judgments of the (mostly male) officials who first ran statisti-
cal agencies. But it seems likely that economists today still treat
thingswhich cannot easily bemeasured as if theymatter less.
Economists are at their least useful when a measuring stick
should not be used at all. They have been known to calculate, for
example, the financial gains from achieving gender equality. But
gender equality has an intrinsic value, regardless of its impact on
GDP. Similarly, species loss and forced mass migration impose
psychic costs that resist dollar valuation but are nonetheless im-
portant aspects of the threat fromclimate change.
Such quandaries might suggest that ethical issues should be
left to other social scientists. But that division of labour would be
untenable. Indeed, economists oftenworkon the basis that tangi-
ble costs and benefits outweigh subjective values. Alvin Roth, for
example, suggests that moral qualms about “repugnant transac-
tions” (such as trading inhumanorgans) shouldbe swept aside in
order to realise the welfare gains that a market in organs would
generate. Perhaps so, but to draw that conclusion while dismiss-
ing such concerns, rather than treating them as principles which
might also contribute to humanwell-being, is inappropriate. Fur-
ther, the very act ofpullingout themeasuring rod alters our sense
of value. Though the size of the effect is disputed, psychological
research suggests that nudging people to think in terms ofmoney
when they make a choice encourages a “businesslike mindset”
that is less trusting and generous. Expanding the reach ofmarkets
is not just a way to satisfy preferences more efficiently. Rather, it
favoursmarket-oriented values over others.
The PharrellWilliams school
Some economists advocate the creation and use of broader mea-
sures of well-being. Several organisations, including the Euro-
pean Commission and the World Bank, now publish data series
presentingamore comprehensive picture ofsocial health. But the
costs of the standard approach are growing. Price is a poor mea-
sure of the value of digital goods and services, which are often
paid for by giving access to data. Technological progress promises
to create ever more situations in which ethical considerations
conflict with narrowly material ones. The question of how to in-
creasewell-being in such aworld deserves greater attention. 7
The worth of nations
Economists sometimes fail tomeasurewhatmattersmost. The fourth in our series on the profession’s shortcomings
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