Utilitarianism Explored Marc J. Roberts Professor of Political Economy and Health Policy Harvard School of Public Health ID250 November 12,

The Problem of Scope The rationale for utilitarianism would seem to imply that “ALL people” means literally everyone in the world But the world in practice is composed of nation states How do we reconcile the pervasiveness of non-universal policy making with utilitarian ideals? 2

The Role of Nation States Nation states play many roles: – Delineate the geographic and human boundaries of political authority and decision making – Capture citizens’ loyalty and identity – Define the scope of redistributive policies – Are the units of participation in relationships with other nations Many larger nations are “federal” with sub-units having some role in some of these functions International organizations also may capture/perform some of these functions 3

How Should Utilitarians View Nation States? Subjective utilitarians would be forced to respect those nations that citizens themselves valued Objective utilitarians who valued the effective exercise of political participation would also have to recognize the value of nation states Truly universal analyses can help clarify issues but are unlikely to be fully persuasive to most 4

Utilitarianism and Distribution “Adding up” makes us ignore distribution— gains and losses to all are equally valuable Why not say that gains to the worse off are more socially valuable than gains to the better off—so reducing inequality, with the same total, would be socially desirable. This might be called “egalitarian utilitarianism” Would you be prepared to redistribute life expectancy if you could? 5

Adding Individual Utilities as a Decision Criteria—Go To the Furthest Out Line Utility of I lines of equal total utility Utility of II 6

Egalitarian Utilitarianism Illustrated: Gains to the Less Well Off Are More Valuable Utility of I lines of equal social utility Utility of II 7

How Do We Evaluate Benefits that Occur in The Future? Many activities produce benefits quite far in the future: basic research, girls education, some immunizations If we value future gains equal to current gains we over-save (i.e. defer consumption) since future technology will be better Humans—to a point—prefer current to future consumption given uncertainty,psychology, etc. 8

Markets Deal With Future Gains By “Discounting” Them Borrowers typically pay lenders a fee (compound interest) for using their money Borrowers can do this because they can use the money to increase output Economists value future gains by employing the reverse process—How much do I have to have today, invested at the current interest rate, to produce a specific future return. That is the “discounted net present value” 9

Implications of Different “Discount Rates” The higher the discount rate, the less valuable future gains are compared to current gains A mathematical oddity-the rule of 7 and 10: At 7%, gains 10 years from now are worth half of what they are today. At 10% that happens in 7 years At 7%, gains 30 years in the future are worth 1/8 th of current gains 10

Picking a “Discount Rate” Economists generally argue for using some observable interest rate as the discount rate Some advocate using the rate of return on private investments, others urge using the government borrowing rate Actual interest rates include an uncertainty premium—bad risks pay more, risky investments have to have higher payoffs For economists the “real” rate of interest is the apparent rate minus the rate of inflation 11

The Problem of Valuing Uncertain Benefits Suppose a benefit is uncertain If we just look at its “expected value” we do not take uncertainty into account Individuals are often “risk averse”—they treat uncertain outcomes as less valuable than their “certainty equivalent”, that is $100 for certain is preferred to “Heads you get $200, tails you get nothing” 12

Situations Where the Benefits of Public Actions are Uncertain Immunization campaigns Medical research Flood protection Disaster preparedness Terrorism prevention Bailing out failing companies Much medical treatment for serious illness 13

The Decision Theory Solution: Expected Utility Maximization Create a “utility function” that assigns a “utility” value to each outcome Then maximize expected utility—the utility value of each possible outcome multiplied by the probability it will occur If utility goes up at a steadily diminishing rate, choosers will be “risk averse”. They will refuse lotteries whose expected money value is zero 14

A Risk Averse Utility Function Utility Money 15

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