THE ROLE OF THEORY IN THE ECONOMICS OF ANIMAL HEALTH

It has become customary to speak of the economics of animal health as learning about ‘tools’. That is misleading. A ‘tool’ means an instrument, implement or, more generally, something that serves as a means to accomplish an end. But before selecting a tool the first task is to define what that end, or objective, is. In economics, it is to improve society’s well-being by using scarce resources as efficiently as possible. Always the ultimate focus is society, although we commonly investigate the well-being of different groups of people such as livestock farmers, pet owners, and consumers of animal-sourced food products. When trade-offs must be made between different interest groups, for example cattle farmers and badger supporters in UK policy for bovine TB control, we reach the limits of economics. Such decisions involve political judgements about the weights to be assigned to different group interests. On that issue, economics is silent. It takes us outside the boundaries of economics as a discipline. Unfortunately, economists frequently forget where the statements they make as analysts end, and their personal beliefs as citizens begin.

Currently, economics is under fire. Fortunately for those of us concerned with the economics of animal health, which is applied microeconomics, recent years have proved most painfully instructive in macroeconomics and, especially, its increasingly complex subfield of finance. How did the global financial crash of recent years come about? There are several reasons, but perhaps none more important that the financial sector is populated by people who know little, if anything, about economics. As I was reminded by a young quantum theorist, many people with PhDs in physics work in finance, so sophisticated mathematics rules. More and more complex algorithms – ‘tools’ if you prefer – are devised in pursuit of financial ‘value’ which anyone properly schooled in economics would know from basic theory is fantasy.  The only question was how long it would take before the house built without foundations would collapse.

The lesson applies in the economics of animal health as much as in any other field of economics. Before using any tool, essential for quantitative analysis, it is essential to know how well it maps into our understanding from economic theory. In other words, any quantitative model must be based on a prior theoretical model. Economic theory does not come out of the air. Since Adam Smith two and a half centuries ago, it is based on painstaking reflection and observation about how people organise society to satisfy their needs and wants from whatever resources are available. Fundamental is the metaphysical concept of ‘value’, how it can be translated into something quantifiable, increased and distributed. Very importantly, ‘value’, and so economics, is about much more than money.

Many people interested in the economics of animal health are veterinary or other biological scientists. Their knowledge concerns the tangible world. Confronted by economics, with its focus on how the intangible ‘value’ people attach to things determines resource use, naturally they may view the discipline with suspicion. The fact that people consciously adapt their behaviour in response to changing circumstances means that the economic world is as difficult to analyse and comprehend as the physical world, arguably more so. For those reasons, it is essential that economics of animal health students gain a basic appreciation of why economists look at the world as they do. That requires exposure to economic theory.

To the present day, courses in the economics of animal health are dominated by instruction in how to use tools, principally cost-benefit technique, budgeting, and farm management accounting. Decision and risk analysis are more recent additions. Others will surely follow, not least because of our work in NEAT. But what makes the emphasis on tools so enduring?

Simplicity and usefulness is one answer. From everyday life it is easily understood that if (financial) benefits exceed (financial) costs it is a ‘good thing’.  No exposure to formal economics is needed to understand that. Simple farm business accounting procedures conveniently avoid need to explain that financial value and economic value are not synonymous. Social cost-benefit studies can take care of that in relation to externalities. Both strands enable opportunity cost to be introduced, and insights gained into criteria for efficient resource allocation, including over time. But by explaining limited basic concepts as a by-product of instruction in the use of tools, students’ perceptions about the nature and scope of economics is severely limited. They may be deceived into thinking that a wide range of problems can be packaged for analysis into a few standard procedures, such as endless repetition of cost-benefit analysis.

A simple example suffices to illustrate the general point about the role of theory. Suppose the analytical problem is to investigate how improved animal health might affect the enterprise mix and profitability for an entire farm business. It could be approached as an accounting exercise, or as a farm level cost-benefit study. But the microeconomic theory of production points to linear programming (LP) as a better tool, because it copes with many input-output and substitution relationships simultaneously. However, economic theory tells us to expect non-linearity because of diminishing returns in the input-output (production function) relationships. Does this invalidate use of the tool? It depends on evidence, if available, or if compromise is deemed acceptable because the advantages of LP outweigh its disadvantages.

The crucial point is that analysts must never fall into the trap of uncritically applying any tool, as if mastering the technical aspects of how to apply it is enough. Recourse to theory is essential. It guides us in defining and structuring a problem for analysis, and cautions us about the choice of tools we use. Economic theory must always come first.

Author: Keith Howe

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