Research challenges the ‘grip’ of Cost-Benefit Analysis

A Victoria University of Wellington researcher is challenging the idea of Cost-Benefit Analysis (CBA) as an objective and apolitical tool.

Clare Markham
Clare Markham

Clare Markham, who graduated from Victoria Business School with a PhD in Accounting this week, analysed the dominance of CBA—a tool to help predict whether the benefits of a policy outweigh the costs. She says CBA has long been perceived as a useful tool to help decision-making around funding allocation, “so much so, New Zealand Treasury requires all public policy proposals to be assessed using CBA or similar techniques. “

However she says her research exposes its subjective mechanisms and in doing so, ‘shatters the illusion’ that it is an objective, logical, apolitical tool.

Her analysis was conducted by drawing on the heated public debate from 2006–2008 following the decision by PHARMAC—New Zealand’s government agency for pharmaceutical spending—not to fund 12-month Herceptin drug therapy for patients with an early form of breast cancer.

CBA was at the centre of PHARMAC’s funding decision and was held up as the reason the expensive drug treatment would not be publicly funded beyond an initial nine-week period.

Clare says CBA is riddled with subjectivity, and has received much criticism for its supposed neutrality.

“CBA often concerns intangibles, and applies costs based on estimates, judgements and assumptions. Practitioners are fully aware of its contradictions and contingencies. And yet despite long acknowledged and still unsettled difficulties, it still is held up as an authoritative, dominant tool in decision-making,” she says.

Clare looked at both sides of the Herceptin debate to unpick the contradiction, and proposes alternative contestations and defences of CBA.

Clare argues the grip of CBA’s use lies in the widespread belief that numbers can’t lie. “At the heart of it is a valorisation of science, that numbers are objective and can take the emotion out of the equation. There’s also a psychological component, people are often impelled to believe the uncertainty of the future can be controlled through numbers and objectivity.”

“What I found interesting was in the Herceptin debate, those arguing for the funding didn’t question the use of CBA—they argued in similar terms, that essentially the drug would be worth the cost.”

One of her supervisors, Professor Judy Brown from the School of Accounting and Commercial Law says Clare’s research offers “fresh and important critical insights” into the authority and use of CBA in public policy settings.

“Her research is ground-breaking in both helping explain why CBA is widely regarded as an objective tool despite being based on highly subjective decisions, and offering suggestions for ways to increase awareness of CBA’s contingency and contestability.

“It helps reflect on how accounting information might be used in a more democratic and open way,” Professor Brown says.

Clare is already starting to actively work with community groups to better understand CBA in hope of generating discussions around its authoritative use.

“I’m not saying we should never use CBA. But by strengthening other voices in the debate, we can start to loosen its seemingly impenetrable grip.”