Limits of economic analysis
Contents
Limits of economic analysis
Economic tools facilitate in the preparation of a robust urban plan and can help with making a city more resilient against crime & terrorism, but there are also fundamental and methodological limits of economic analysis/tools that have to be considered.
Consequential focus
Economic tools such as the cost-benefit analysis assume a basic rationale that things are worth investing in if the positive effects outweigh the negative ones. This imposes an evaluation of costs and benefits with a focus on the consequences of the respective decisions[1]. However, this guid-ance by consequences can violate fundamental rights (such as civil rights) and is irrespective of actions based on their “rightness” or “duty/obligation”.
Assumed complete knowledge
Economic analysis tend to assume “completeness of knowledge” of all the effects and corresponding weigths[2]. Apart from the fact that the used techniques are an estimate rather than a precise measurement, there is the risk in daily practice that in search of completeness the economic analysis results in judgements that are without justification, which, according to Sen (2000, p.941) results in ignoring “the less exactly measured consequences or less clearly agreed values, even though they may be extremely important..”[3]. Examples of these often ignored consequences are the environmental effects, the effects on quality of life, etc.
Dominating market thinking
Economic effects are principally valuated according to the market mechanism. However, for a lot of goods (public goods, the environment, etc.) and specific type of effects (e.g. external effects) there are no existing markets. As a result, market valuation only admits a narrow class of values, neglecting, for example, distributional issues (the poor versus the rich) and changes in values as a result of changes in the urban environment.
Normative claim
In theory, economic science does not presuppose a policy preference and the outcomes of a cost-benefit analysis or economic impact study is not the decisive step in the decision-making process. In practice, however, both economists and the public decision makers have to be very careful not to regard the economic analysis as the final/normative step in the decision-making process, and to reduce the multidimensional realm of reality to a financial and market value based model of reality.
Related subjects
Categories of economic impact:
The four subdimensions:
- Economic impact of urban planning
- Economic impact of security threats
- Economic impact of security measures
- Economics of criminal and terrorist behaviour
Footnotes and references
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