Benchmarks and Economic Analysis

1、benchmark and economic analysis* i thank the helpful comments by patrick gunning, kenneth chan, nuro garoupa, and frank lorne.bingyuan hsiung* professor, department of economics, national taiwan university, taipei, taiwan. e-mail address: .tw*benchmark and economic analysisabstractthis

2、paper focuses on a concept that has attracted relatively little attention in the literature, even though the concept is important to both theoretical analysis and human behavior in general. in particular, the concept of benchmark and its implications are explored. in advancing an argument, economist

3、s are taking the existing literature as the departing point and trying to have value-added. controversies and/or debates between economists are often related to the fact that their arguments are based on different benchmarks. in addition, benchmarks are also prevalent in the other social sciences, w

4、ith webers ideal types in sociology and various doctrines in legal studies as clear examples. alternatively, human behavior goes through the sequence of cognition, reasoning, and response; each and every link of the sequence is related to past experience which serves as a benchmark. however, the fac

5、tors relevant to an individual for a given situation, say, voting, may be different from what economists believe them to be. both theoretical and behavioral benchmarks are illustrated and a synthesis is provided. in essence, benchmarks are tools, as such the functioning and maintenance of this tool

6、are affected by cost/benefit considerations relevant to all tools.keywords: benchmark, ideal types, equilibrium, status quo, efficiency, justice.1. introductionin delivering the nobel speech in 1991, coase suggested that transaction costs are like the postman in chestertons novel-as features of the

7、economic system that are too common, they tend to be overlooked by economists. specifically, coase (1992, p. 713) states that, “my contribution to economics has been to urge the inclusion in our analysis of features of the economic system so obvious that, like the postman in g.k. chestertons father

8、brown tale, the invisible man, they have tended to be overlooked.” this article aims at examining a similar idea, an idea that tends to be overlooked for the very reason that it seems to be too common. specifically, the focus of the present article is benchmark. the idea can be expressed either as a

9、 noun or as a verb. as a noun, a benchmark implies that there is a reference point or a guidepost, and as a verb, benchmarking refers to the idea that a reference point has been adopted to illustrate something else that is of interest. a few examples will help illustrate the idea of benchmark/benchm

10、arking. to begin with, in microeconomics a basic assumption is that consumers pursue their self-interest through utility maximization. this assumption implies a status quo. the status quo is the starting point, or the benchmark, of choice behavior: a different status quo implies a different benchmar

11、k, and it would often lead to a different choice behavior. secondly, economic analysis emphasizes efficiency, and efficiency is implicitly defined with respect to the given endowment or income distribution. the implicit starting point has routinely been taken as given by economists, but scholars in

12、the other social sciences tend to find it problematic (okun, 1975). they argue that whether the current endowment or income distribution is legitimate and can be used as a starting point of analysis has to be examined first. finally, the two famous papers by coase (1937, 1960) are also related to be

13、nchmarks. in the 1937 classic, he adopts market mechanism as the benchmark, and then considers whether forming a firm is more efficient in resource utilization. in the 1960 article, by contrast, he identifies the world of zero transaction costs first, and then uses it as a benchmark to study the wor

14、ld of positive transaction costs. it seems evident that benchmarks are omni-present in economic analysis, but they have seldom been made explicit.in addition to economic analysis, benchmarks are even more prevalent in the daily lives of ordinary people. for instance, stereotyping is often given a ne

15、gative connotation, but most people are (guilty of) doing it unknowingly all the time, for the simple reason that it significantly lowers behavioral cost. similarly, employing a rule of thumb means that one is relying on an adopted rule to deal with the situation one faces. moreover, all kinds of va

16、lue judgment have been made with respect to various benchmarks, perhaps implicitly. these behavioral benchmarks are to be contrasted with the theoretical benchmarks in economic analysis. it should be clear from the above examples that benchmarks are indeed everywhere. interestingly, however, there h

17、ave been very few discussions in the literature. as such, the present paper attempts to systematically analyze the concept of benchmark. there exist, however, a few discussions that are closely related to the present inquiry. for instance, lewisch (2004) analyzes the identification phenomenon, and l

18、indenberg and frey (1993) examine the frame relevant to various behaviors. their analyses clearly show the importance of the reference framework of human behavior. the frames they study belong to the behavioral benchmarks in the present context; see the analysis below. in addition, for related discu

19、ssions of benchmarks, see hsiung (2001, 2004a, b)a study on benchmarks has two straightforward implications. first, by identifying the benchmark of their analysis, economists may become more conscious of the nature of their reasoning as well as the basis of the reasoning. presumably, this would make

20、 their reasoning more complete and their conclusions and recommendations more persuasive. secondly, while for policymakers economic analysis often leads to policy recommendations, for the general public it suggests a worldview instead. for both the policymakers and the general public, therefore, emp

21、hasizing the idea of benchmark will help illuminate the wider meanings of economic analysis as well as its relevance to them. alternatively, the nature of the present inquiry is qualitative rather than quantitative. judge posner (1997, p. 14) once remarked that, “the heart of economics is insight ra

22、ther than technique.” for economic analysis benchmark can be seen as both an insight and a technique, a point that will be argued further below. the inquiry is structured as follows. in the next section the meanings of theoretical benchmarks will be explored, followed by an analysis of behavioral be

23、nchmarks in section 3. section 4 is a synthesis that suggests a theory of benchmark. it will then be argued in section 5 that the idea that economics as a worldview can be extended so that economics can be employed as a conceptual benchmark by not only economists but more importantly the policymaker

24、s and the general public. the final section concludes the inquiry.2. theoretical benchmarksbenchmark is an important element for social sciences in general and for economics in particular. however, the benchmark involved has rarely been identified explicitly in either the social sciences or economic

25、s. in this section a series of examples, indicative rather than exhaustive, will be provided to illustrate the benchmarks implicit in various theoretical inquiries.for economists, equilibrium has an indisputably important position. nobel laureate gary becker (1976, 1993) emphasized that, as he sees

26、it, the economic approach consists of three components: stable preferences, utility maximization, and equilibrium. in this theoretical framework, the concept of equilibrium has two implications. on the one hand, it is defined with respect to stable preferences and resource endowments, with both serv

27、ing as the initial conditions. based on the subjective constraints (the preferences) and the objective constraints (the endowments), an equilibrium is reached via utility maximization. therefore, the constraints, i.e., the initial conditions, are the benchmark based on which the equilibrium is defin

28、ed. on the other hand, once the equilibrium is found, it would be natural to inquire further how the equilibrium would be affected if one of the initial conditions changes. this is comparative static analysis and it is evident that the equilibrium is treated as a benchmark for such an exercise. the

29、anthropologist yonay (2000, pp. 343-4) remarks that, “i have learned that economic theory has become much more elaborate than simple supply and demand functions; competition and general equilibrium are indeed used as benchmarks, but current models handle a much richer spectrum of situations” (emphas

30、is added).separately, that cost is an important concept in economic analysis is also beyond dispute, and when cost is mentioned by economists it often refers to the idea of opportunity cost. buchanan (1969) has a detailed discussion about the concept of cost. the value of a certain item depends on i

31、ts opportunity cost, the highest-valued alternative among all the potential alternatives. this in turn implies that in the eyes of the economists, the value of a certain item is not intrinsic in itself, but is defined with respect to the potential alternatives. the concept of opportunity cost clearl

32、y implies the idea of a benchmark. furthermore, in addition to equilibrium and cost, the idea of a benchmark is directly or indirectly invoked in economic analysis in general. maximization, optimality, and efficiency are all implicitly related to the status quo; in constitutional economics, status q

33、uo occupies a unique position, for any discussion of improvement has to take the status quo as the starting point. in their introductory essay for a special journal issue devoted to the subject, brennan and hamlin (2004, p. 128) state that, “just what is the status of the status quo in economics? th

34、e first answer, and perhaps the most obvious, is the role of the status quo as a benchmark for assessing welfare improvements within the paretian framework of traditional welfare economics.” see also the discussion of buchanan (2004) about the status of the status quo in the special issue. inflation

35、 rate, unemployment rate, growth rate, and exchange rate are all directly associated with a certain base in computing the change. the performance of polyarchies is compared with that of hierarchies (sah and stiglitz, 1986); the scenario under asymmetric information is contrasted with that under perf

36、ect information (arnott and stiglitz, 1991); second-best solutions are devised with respect to first-best solutions. it should be evident that benchmarks are almost omni-present in economic analysis; but they seem to have attracted little attention.in other disciplines of the social sciences, benchm

37、arks are also routinely invoked and in fact often surface to the forefront. max webers ideal types provide a telling example. he uses the term in at least two ways. first of all, if agents behave completely rational as argued in economic analysis, then, according to him, they would be concerned only

38、 with economic gains and losses. the consequences of their behavior can be seen as an ideal type of social phenomenon. specifically, weber (1968, pp. 21, 57) states that, “ideal types of social action which are thus unrealistic or abstract in that they always ask what course of action would take pla

39、ce if it were purely rational and oriented to economic ends alone. this construction can be used to aid in the understanding of action not purely economically determined but which involves deviations arising from traditional restraints, affects, errors, and intrusion of other than economic purposes

40、or considerations.” also, weber (1949, p. 42) argues that, “the ideal constructions of rigorous and errorless rational conduct which we find in pure economic theory have exactly the same significance.” secondly, in making an inquiry the investigator can first identify a particular position, one that

41、 is consistent with, or opposite to, ones own ethical beliefs. either way, the position thus identified is an ideal type, and it serves the purpose of illustrating the investigators argument. in particular, weber (1949, p. 43) states that, “for the purpose of characterizing a specific type of attitu

42、de, the investigator may construct either an ideal-type which is identical with his own personal ethical norms, , or one which ethically is thoroughly in conflict with his own normative attitudes.” webers former way of using the ideal type is similar to the ideas of perfect competition or first-best

43、, and his latter is close to the moral philosophies or various doctrines common in legal studies. while weber has employed the same term of idea type in different ways, it is quite clear that he has used it as a benchmark to illustrate his argument, to make his point.in legal studies, benchmarks hav

44、e been employed to an even greater extent, but interestingly, if not strangely, they tend to be overlooked to a similar degree as in economics. a few examples suffice. in his widely read book, taking rights seriously, dworkin (1977) argues for a right-based theory. specifically, he states that, “the

45、 basic idea of a right-based theory is that distinct individuals have interests that they are entitled to protect if they so wish” (p. 176); “plainly, any right-based theory must presume rights that are not simply the products of deliberate legislation or explicit social custom, but are independent

46、grounds for judging legislation and custom” (p. 177); “any one who professes to take rights seriouslymust accept at the minimum, one or both of two important ideas. the first is the vague but powerful idea of human dignity. the second is the more familiar idea of political equality” (p. 198). in sho

47、rt, for dworkin, human dignity and political equality are self-evident ideals, and any right-based theory should accept these two ideals. that is, regardless ones personal moral and/or ethical beliefs, or any other considerations, one should accept these ideals and agree that man should enjoy certai

48、n basic rights. these rights surpass, or trump, laws, institutions, or any other values; these rights are the starting point, or benchmark, for any meaningful discussion of law, institutions, and other values. it should be no exaggeration to say that dworkin identifies the ideals as the benchmark to

49、 construct his theory that takes rights seriously. a similar example is the book by harris (1996), property and justice. the first part of the book explains the concept of property, and the second argues for a just property right structure. to make the connection between the concept of justice and p

50、roperty right structure, he stipulates in chapter 10 three basic conditions that he believes to be self-evident. specifically, he believes that, for any normal society and/or any reasonable citizen, the three conditions will be adopted willingly. as such, the property right structure that satisfies

51、these three conditions can be considered as just. the three conditions are: natural equality, the value of autonomous choice, and the banning of unprovoked invasions of bodily integrity.in addition to legal theories such as dworkins the legal system relies on various doctrines to decide cases on a d

52、aily basis. for instance, the hands rule, strict liability, the last clear chance rule, the but-for criterion, the foreseeable criterion, the least-cost avoider doctrine, etc are all benchmarks in essence. it is interesting that posner (1985, p. 104) states that, “the question arises, in what frame

53、of reference should that discretion be exercised? pragmatic? utilitarian? christian? darwinian? rawlsian? nozickian? i suggest that wealth maximization provides the most acceptable frame of reference” (emphasis added). see also posner (1995, 1998). there is, however, a subtle but important differenc

54、e between dworkins benchmark and the various doctrines. dworkins benchmark is implicitly based on the moral philosophy he believes in, as such it is normative in nature; alternatively, the doctrines are crystals resulting from cases decided by various courts over the centuries and therefore are posi

55、tive in nature. holmes famous remark that “the life of law has not been logic; it has been experiences” seems to echo more of the doctrines than of dworkins theory.from the many, but certainly not exhaustive, examples mentioned above, it is quite obvious that economics as well as the other social sc

56、iences are closely associated with benchmarks in their discourse, either directly or indirectly, explicitly or implicitly. by identifying the benchmarks underlying the discourse, the meanings of the discourse become clearer and more complete. moreover, from the perspective of benchmark, it is often

57、relatively easy to illustrate the commonality as well as differences between different arguments. two examples speak for themselves. to begin with, consider the article of coase (1974) that has a figurative title, “the market for goods and the market for ideas.” he argues that in the market for good

58、s there are supply and demand, competition, and special interests; in the market for ideas, the situation is similar. therefore, he is adopting the market for goods as the benchmark so as to illustrate, by way of comparison, the nature of activities in speech, publishing, broadcasting, television an

59、d so on. rosen (1997) employed coases forceful framework and then argued that in the market for ideas, the austrian school has failed the market test and faded away. yeager (1997) argued otherwise, however. he agreed that scholars working along the austrian tradition have declined in number, but while in the market for milk, it is a-dollar-a-vote and the votes are of equal weights, in the market for truth, it is not a-person-a-vote and ne