What is the Value of Life?!

This blog post is not going to be as existential as the title may suggest. Instead, I am going to try and explore the economics of placing a value on life as well as considering some of the ethical concerns this has a tendency of raising.
The first point to raise in this article is the difference between the economic use of the phrase 'value of life' and the more general understanding of the term. 'Value of Life', often prefixed with 'statistical' (life), seeks to assign economic value to reflect the quantitative benefit of avoiding loss of life. Simply, this value reflects the economic cost of a fatality and the benefit of avoiding said fatality. In statistical terms this represents the "cost of reducing the average number of deaths by one" and is a useful component in the calculation of risk and cost-benefit analyses so central to economic planning. This is aligned with the neoclassical economic perspective as an essential component within responsible governance.
Because society has limited resources that it can spend on health and safety improvements, it should obtain the greatest benefits for each dollar spent, and ascertaining an appropriate value is necessary to that effort. ... To resist placing a dollar value on a statistical life is to abdicate any sense of rational decision‐making in the regulatory realm Brannon 2004
In contrast, the way that 'value of life' is perceived in general use relates to the more intrinsic importance and worth of life rather than a technical statistics term. This can lead to sensational headlines that warp the implications of this valuation when actually the two notions are pretty unrelated and it is misguided to interpret the statistical term as an authority on the worth we associate with our own lives and the lives of those around us.
These economic ‘values of lives’ are employed wherever policymakers are confronted with a difficult trade-off between safety and other desirable features such as speed, deliverability or cost-effectiveness. Policymakers aim to achieve a balance by weighing up these concerns. If there is too little consideration for safety, lives may be needlessly put in danger. However, it is equally important to recognise that all human activity involves some degree of risk; if there is excessive concern for safety, worthwhile policy changes can become impractical or unaffordable. The VSL is not an attempt to directly evaluate the worth of a human life, but a tool that allows policymakers to strike a balance between too much and too little safety risk.                                                                              - oxera.com

So how does an economist determine the 'Value of Statistical Life'?
According to the OECD there are 3 main methods used to identify this value.

  1. Cost of Compensation- this method looks at how much insurance companies payout in the case of an accident to determine how life and damage to life is valued.
  2. Human Capital- a more future oriented approach places a value on the potential a life had to give considering the accumulation of 'human capital' that includes the given individuals skills, education, qualifications and knowledge. Thus the loss of future earnings in the instance of loss of life is used to produce a value in this method. This has been criticised more recently as lacking the holistic approach intrinsic to economic life, with less tangible goods such as leisure failing to be taken into account. Moreover there is an implication that if you do not have the capacity or skill to be employed your statistical life has no value, something that seems inherently flawed.
  3. Willingness to Pay- this method is a current favourite for life valuation. It entails asking individuals how much they are willing to pay for some given safety measure that reduces their exposure to life risk. We can see this being implicitly used when workers who have riskier jobs are offered higher wages. This effectively asks the labourer to make a trade-off between safety and money. Some individuals may require lower or higher wages depending on the value they place upon their safety, which is equivalent to their 'willingness to pay' to ensure safety.

Are all lives values equally?
In spite of our clarification that statistical life is a separate concept to actual life, it may still be shocking to note that in fact, different values are used in different contexts, countries, projects to quantify life.
Under the willingness to pay method, it would follow that people with lower incomes may have a lower willingness to pay than those with higher incomes and this could factor into WTP values provided even if participants are told to disregard their income. On a international scale, this is made further evident with the value of statistical life rising in line with GDP per capita.

According to Shepard and Zeckhauser (1984) our willingness to pay increases until we reach 40, at which point we begin to become more indifferent towards risk and our willingness to pay decreases.

Ethics of Life Valuation
Some final consideration I wanted to put into this article surrounds the ethical implications of using life valuation techniques.
Economics has traditionally been able to maintain its credibility by relegating uncertainties in knowledge and complexities in ethics firmly to the sidelines.                                                                                       Funtowicz and Ravetz, 1994: 197
Is it comparable?
As mentioned previously, the value of statistical life is important for its inclusion within cost-benefit analyses. However should we be stating that this value is a statistical term in the same way that consumption benefits from a project or increased speed can be? Arguably, this is too crude a simplification, and by attaching a value to human life, this becomes merely another cost or benefit to weigh up within an equation with no more importance than any other variable. Whilst this is countered somewhat by attaching high value to human life, the implication remains.

What discourse is created within society?
Despite this article's emphasis upon statistical and actual life being different, statistical calculation has an impact on reality. This is particularly evident in our discussion of how the value of life an differ in line with age, risk preferences income etc. Much like a correlation between young people not ing turnout to vote in general elections and the lack of attention from politicians on the issues of younger generations, if people within certain groups express lower willingness to pay than others their lives may not be protected so vigourously within project formulation and creation because in a statistical sense, the loss is not as great.
This is alarmingly demonstrated in the below email included in a presentation by Clive Splash
This email, sent from a chief economist of the world bank makes the suggestion that polluting industries should be moved to developing countries with lower wages (as we have discussed wages can encapsulate willingness to pay figures that have also been shown in this article to be lower in countries with lower average incomes). Thus implications of certain lives being valued differently or at least in accordance with the willingness to pay model is problematic from an ethical glance.

Is life valuation implicitly preference utilitarianism and is this desirable?
Preference utilitarianism values actions that fulfil the largest possible number of personal interests. Whilst at face value this may seem unobjectionable and fair, there are further implications for equality. Whose preferences are being prioritised? Are we willing to sacrifice certain preferences in order to rather strive for greater international equity? Such questions challenge the assumptions made within some economic life valuation and reinforce that these are not obvious approaches to take.

No comments:

Post a Comment