Demonstrating value in tough times: an introduction to economic analysis

Demonstrating value in tough times: an introduction to economic analysis

Fraser Battye Deirdre O’Brien

8th December 2011

This workshop is structured around five propositions. It covers theory first, then practice; we end with an exercise

2. Practice1. TheoryAgenda

Our aim is to be non-technical and informal – please ask questions at any point

1. We want more than we can have: we must prioritise

2. We should prioritise so as to get most social ‘good’

3. Economic analysis aids prioritisation

4. There are a range of approaches you can use, each has pros and cons. (SROI might be suitable here)

5. Economic analysis should form part of a case, alongside other types of evidence

Before we get going, here’s a quick three-point guide to the territory

1. A great quote

2. A bad joke

3. The monetary value of human life


The great quote

“It is the mark of an educated mind to rest satisfied with the degree of precision which the nature of the subject admits and not to seek exactness where only an approximation is possible”

Aristotle


We might not achieve precision. Services and problems are complex; the evidence always incomplete.

What we always get is a useful and robust set of concepts.

The bad joke

Q: How many economists does it take to change a light bulb?

A: Two. One to assume the existence of a ladder, and one to change the bulb


Complexity and incomplete evidence aren’t necessarily fatal to economic analysis - but they leave us relying on assumptions. Be clear what they are

2. Practice1. Theory 3. ExampleAgenda

The ‘economic problem’ is our starting point: we have unlimited wants, but resources are finite


Because we can’t have everything we want, we must make ‘trade-offs’. This leads to ‘opportunity cost’

• Buyers must trade-off alternatives, e.g.:– Should we invest in drugs or community-based services?– In Children’s Centres or universities?– In training for the unemployed or aid programmes?

• By choosing something, we forgo something else


Opportunity cost = the value of the next best alternative

Examples of opportunity cost: how many of these could have been bought instead of a year of war in Afghanistan?


Senior nurse

A&E attendance

Smoking quit (deprived group)

Year in average UK care home

Healthy school dinners

So, we need to allocate our limited resources to achieve maximise value...but how?

• Allocation under a free market:– Private decision making; consumers and producers;

supply and demand– Prices convey information (VFM is easy!)

• But, some goods / services not left to a market– Here the problem is one of allocating public

resources for the greatest public ‘good’

• This is not a new problem– But current problems have sharpened the

emphasis...


Economic analysis aids resource allocation by systematically comparing costs and benefits


COSTS

Resources consumed

BENEFITS

Outcomes resulting

Activities

A range of interventions can then be compared and the most efficient ones prioritised – we get the greatest good for available resources

Logic models are a great starting point for economic analysis. They help you to describe costs and benefits

2. Practice1. TheoryAgendaCOSTS BENEFITS

Data collection then flows from this

Once you have the data, there are two main ‘types’ of analysis, distinguished by the way they express benefits

Costs are measured in monetary units for all types of analysis

1. Where benefits are expressed in ‘natural’ units

• Cost-consequence• Cost-effectiveness• Cost-utility

2. Where benefits are expressed in monetary units

• Cost-benefit• Social Return on Investment

£ per improvement in mental health

£ per QALY

£ per reduction in domestic violence

Little philosophical distinction – but often significant technical

differences


‘Cost’ is the value of resources consumed (more than just cash spent). So, what did this 2nd hand bike cost?

“The real price of every thing...is the toil and trouble of acquiring it”

Adam Smith


For Cost-Benefit or SROI analysis, benefits are measured (as far as possible) monetarily

• This is a significant advantage, results can be shown as a ratio:– ‘For every £1 of cost, you get £x worth of benefits’– Enables comparison across wider range of interventions

• It is also tricky: how do you value ‘intangible’ / social benefits in £?– What is the £ value of: being free of fear / living near a nice

park / gaining a qualification / having a nice view / having a spouse / good education / better mental health etc.


It might not always be possible. If not, quantify but don’t monetise

There are a range of ways to monetise social benefits - each has pros and cons

• Cost of poor outcomes avoided (e.g. reductions in GP appointments / use of acute care etc)

• Actual spending on similar benefits (e.g. paying for improved mental health)

• Willingness to pay / accept (hypothetical)

• Human capital (value of time)

• Court awards (e.g. for emotional distress / injury)

The best place to start looking is existing literature


Remember: 1) value is subjective, and 2) you do this all the time

Q: What is this T-shirt worth? A: It depends...what are you willing to pay? What are sellers willing to accept?

There is no such thing as an ‘objective’ value


‘Social’ value is also a mainstream concern...


Coffee break

There are five main steps in undertaking your analysis; your task is to apply the first four to the example project

1. Setting the perspective is vital: – Costs and benefits to whom? The state? The commissioning

organisation? Society as a whole?

2. The time-frame is too: – A year? Three years? Five years? 20 years?– The further out you go, the less certain you can be

3. Costs relatively easy to work out

2. Benefits are more difficult. Two challenges:– Getting good outcome data (evaluation)– Valuing these outcomes (if doing CBA / SROI)

• Be clear about your assumptions / workings and sensitivity in the model


Many thanks for coming to this workshop.Please get in touch with any follow-up questions

[email protected]

0121 2338900

GHK is an independent, employee-owned research and consultancy firm.

We specialise in the analysis of public policy for a range of clients across government and the third sector.

For more information, visit: www.ghkint.com

Demonstrating value in tough times: an introduction to economic analysis

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