6. Economic Criteria and the Public Interest
The maximization principle is applied in normative economics, first, as
efficiency criterion for limited operations under restrictive assumptions and,
second, as the assumed over-all objective of individuals and groups.
As efficiency criterion, the maximization principle is used, for example,
in finding the optimum output under given cost and revenue functions and also
in determining minimum costs for each output under given production functions
and given price schedules of productive factors, that is, in determining a cost
function. For these purposes the maximization principle is necessary. There
can be no disagreement on the usefulness of such operations. One may call this
application of the maximization principle "efficiency economics" or, more appro-
priately in some cases, "efficiency engineering."
If applied as the assumed over-all objective of individuals and group,
on the other hand, the maximization principle is a construct, a scientific fic-
tion.1/ It is useful in economics, especially in modern western culture, if
employed in connection with another construct--the "firm." Frequent references
in recent economic literature to maxima of individual and social satisfaction
indicate that the maximization principle is more and more applied as a fiction.
A fiction is permissible in science if its character is clearly understood.
A fiction is a deliberate, conscious deviation from reality. A fiction, however,
is not an hypothesis or theory. By itself, a fiction is not intended to be vali-
dated by testing with empirical evidence. But a scientific fiction should be useful
as a stimulus for or as a part of hypotheses and theories which can be tested. That
means the test of a scientific fiction is its conceptual usefulness, its expediency
1/Next to mathematics and law, economics is the discipline in which scientific
fictions are most common. But the natural sciences, especially modern physics,
frequently employ fictions.
~I~ I____*_Y_________Y___111_1_____ __I
in understanding, explaining, and predicting reality. A fiction becomes mere
dogma and, therefore, unscientific if its two characteristics--consciousness
of its fictional nature and conceptual usefulness--are obliterated. There are
many examples in the history of science of fictions changing into dogma.
One may wonder whether or not the maximization principle has sometimes
become dogma in economics. There is increasing emphasis on techniques which
facilitate greater numerical accuracy in the determination of optima for the
firm. These same techniques are then used for maximizing social satisfaction
of whole groups with no conceptual gain and at the expense of "assuming away"
essential economic relations; an example of such use was just given (Section 5).
It was suggested above that, under certain conditions, an increase of
aggregate national income may be accepted as a criterion for resource policies.
The Pareto criterion, likewise, is suited only for ascertaining whether or not
an increase of social welfare has occurred but not for determining a maximum.
The criterion "increase of aggregate national income" can be employed
effectively in appraising water policies of more limited scope, for example, in
appraising an individual water development project or in deciding a particular
case of controversy in water allocation. This is the approach of benefit-cost
analysis referred to earlier (Sections 2 and 3). These limitations on the
applicability of this criterion are imposed by a number of theoretical and
practical difficulties some of which can be overcome only by restrictive
The quantities of goods and services making up the national income must be
evaluated (weighted) in order to be aggregated. The weights used--market prices
and unit values derived indirectly from prices and in other ways--are affected by
income distribution and by the host of institutions which influence this distri-
bution. Both value weights and quantities are affected by market form. Policies
to be appraised may change income distribution and market form. Such an appraisal
deals with the future. Over time, individual preferences and technology--both
affecting value weights and quantities of national income--change, and these
changes are uncertain. Again, policies to be appraised affect these changes.
Besides such "structural" changes, there are changes connected with economic fluc-
tuations of various amplitude and duration. These, likewise, are related to the
policies to be appraised. All these problems are of interest for benefit-cost
analysis, input-output studies of the Leontieff type, and other systematic attempts
at a quantitative economic appraisal of policy.
Practical approximations to a solution of some of these difficulties are
possible but only under restrictive assumptions with respect to institutions,
preferences, technology, and time periods. Frequently, these assumptions are not
made explicit when public water development projects are appraised through benefit-
cost analysis and when judicial decisions and arguments before the courts involve
"equity" of water allocation and the interpretation of "reasonable" and "benefi-
cial" water use.
For policies of broader scope, the restrictive assumptions needed for benefit-
cost analysis become too burdensome. In appraising such policies, it is useful to
employ as criteria their effects upon significant conditions which facilitate or
impede an increase of aggregate national income rather than focus on such an increase
itself. This approach to policy criteria relies heavily on economic theory but
less on maximization. This approach is greatly interested in economic history
and in relating one time period to another but not necessarily through increasing
the number of variables and equations in mathematical models. This approach is
especially suited for natural resources policies and has been discussed in detail
The emphasis of this approach is on minimum standards in resource use rather
than on the optimum use; on establishing base levels rather than on locating
peaks; on avoiding dead-end streets and on keeping direction rather than on com-
puting the shortest distance; on mobility and adaptability of productive factors
rather than on their optimum combination; on reducing institutional obstacles to
water development rather than on maximum development; and on provisions in water
law that facilitate changes over time in water allocation rather than on an opti-
mum water allocation at particular times and places.
This approach does not pretend to establish criteria for maximizing social
satisfaction. But it offers effective direction signals for pursuing the public
interest turn by turn.
It becomes apparent now in what sense security and flexibility of water
rights can be regarded as economic criteria and why so much attention was given
to these concepts previously (Sections 2-4). Both relate to significant condi-
tions which facilitate or impede an increase of aggregate national income in
a world of persistent but uncertain change. We saw that the criterion "security"
is as significant for water development as the criterion "flexibility"
-- - - - -- - - - - - -
1/Ciriacy-Wantrup, S. V., Resource Conservation: Economics and Policies
(Berkeley: University of California Press, 1952), 395p. See especially Chapter 18.
is for water allocation. We also saw that the logical polarity of these criteria
does not necessarily imply that they are "competitive" if applied in an econom-
ically meaningful way. This is a corollary of the economic interdependence of
policies concerned with water development and those concerned with water allo-
cation (Section 5).
What are the conclusions for the relations between economics and law--
taken as two important social science disciplines? Economics cannot define
social optima which the law--as "social engineering"--should aim to realize.
What economics can do, however, is to explain why and how far certain conditions,
which are decisively influenced by the law, facilitate or impede an increase of
aggregate national income. Economics can point out the essential features of
conflict situations and the probable consequences of changes in statutory pro-
visions, judicial decisions, and administrative regulations. Sometimes, these
consequences can be shown in quantitative terms under restrictive assumptions.
More often, the consequences can be indicated merely in terms of direction and
in terms of relative magnitudes and rates of change.
Economics need not be passive in fulfilling this function. Frequently, a
conflict situation can be identified in economic terms before it has arisen in
law as a controversy. After it has arisen as a controversy, the essential
economic features may not be clear to the contestants themselves.
A first, but necessary, step toward implementing such a relation between
economics and law is mutual understanding with respect to the interpretation
and application of key concepts used as economic criteria. In the area of
water law, such concepts are security and flexibility of water rights.
To such an understanding, both normative and positive economics can
make a contribution. If a value judgment is permitted, one may add that the
contribution by positive economics has been far greater and that this will
probably hold also in the future. The law, on the other hand, is essentially
a normative discipline. For this reason, doubt was already expressed (Section 1)
that "integration" of law and economics is possible or desirable. But in
spite of--or possibly because of--differences in basic orientation, positive
economics and law have many complementary relations. To explore and to
strengthen these relations will benefit both social science disciplines.