Download This PaperThe Seen and the Unseen in Cost-Benefit Analysis
19 Pages Posted: 21 May 2020 Last revised: 20 Mar 2021
Date Written: March 19, 2021
Abstract
This paper explores the relevance of Bastiat’s famous distinction between the seen and the unseen consequences of actions to modern debates about cost-benefit analysis. In cost-benefit analysis, the opportunity cost of capital describes the unseen future returns a capital asset generates. However, there is no consensus among economists as to how to account for these returns, as disagreements are wrapped up in a broader controversy surrounding the correct social discount rate. The paper provides background on these debates and explains how adherents of the two mainstream discounting approaches both fail to live up to Bastiat’s standard of a “good economist.” The article concludes with discussion of the implications of this debate for selecting the appropriate social welfare function to be used in cost-benefit analysis.
Keywords: opportunity cost of capital, cost-benefit analysis, social discount rate, Austrian economics, subjectivism, social welfare function
JEL Classification: B53; D04; D61; H43
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