Friday, 21 November 2014

How do you Prove a Decision is Bad?

McKinsey has a new report out evaluating the global harm from obesity, and the likely impact of counter-obesity policies.  They compare the costs of obesity - which they estimate at $2tn a year - with the costs of smoking, and war and violence, which they reckon similar.  To arrive at estimates like these with any semblance of certainty can only be misleading: they surely rest (as the report makes clear) on a web of inferences and assumptions that could probably be picked over to a considerable level of tedium.

But there is merit in examining McKinsey's premise, which is that obesity is clearly a net harm, thus implying a rationale for government intervention.  This is a superficially appealing premise, but it raises a number of difficult questions.  The traditional economic basis for government intervention is market failure.  This can occur for a number of reasons: if an industry is a natural monopoly, if information is expensive, if there are unmarketable external impacts (e.g. from pollution) and so on.  Government intervention against violence and war rests on a host of market failures including natural monopolies of defence suppliers but most particularly the lack of a 'market' in violence itself (the victims do not generally suffer voluntarily).  The case for intervention against smoking was (at least initially) driven by the negative externalities imposed by smokers on their co-habitees and neighbours.

It is harder to prove a market failure in the case of obesity.  The case for intervention seems to rest on the idea that people are making bad decisions about their diets, and need help to make better decisions through initiatives like smaller plates or restrictions on availability of junk food.  This is a very difficult thing to show.  It is demonstrably the case that people choose to eat food that leads to deleterious health effects.  But this behaviour is consistent with at least two hypotheses: first, that they are choosing rationally, and place a higher value on eating than health, and second, that they are choosing irrationally, and in fact place a higher value on health.  The observed behaviour simply does not allow us to sort between these two hypotheses.  

(Of course, obese people probably generally wish they were thin.  But then people who buy expensive handbags probably wish they could have the handbag and their hard-earned money.  Obesity is the cost of a certain kind of diet.   All activities have costs: their existence is not an argument for intervention.)

Is obesity like this stuck dog?

The problem of justifying government intervention with a claim of irrationality is germane to a wide range of policy questions.  But as there is no way to observe irrationality we should be particularly careful to examine arguments for intervention that rest on this claim alone.

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