Tuesday, October 6, 2009

The Price of a Human Life

Prices for the most part just plain make sense. Econ 100x shows how prices are formed in the market process and how interworkings of the system were buyers compete buyers and sellers compete with sellers helping price to be determined. Prices are usually the the most efficient way to allocate resources. Notice the words "most" and "usually" in the previous sentences (If you're a diehard Austrian fan "woot-woot" I bet those words felt like a red hot serrated knife cutting out your invisible heart and feeding it to your friend's pet giraffe named Skippy -note I am really sleepy right now.

In all seriousness though: I do believe that some things shouldn't have a monetary price tag attached to them. One of these things would be human life. Can we really put a monetary price on someone's life?

Well the answer to this is you can, and that's exactly what the Ford motor company did. In the 1970's the Ford motor company put a price on life, this price: $200,000

Why, did the Ford Company do this? They were simply being good economists setting up a cost-benefit analysis to help them make a choice. They did so after creating the "flaming deathtrap of doom" the Ford Pinto (which had it's gas tank ridged so if someone rear ended you, your car would explode into a ball-o flames, and due to another engineering glitch all of the doors would also jam at the same time...oh how convenient). Soon after discovering the gas tank flaw the Ford Company developed a small part that cost about $11 (about $56 today adjusting for inflation) that could be installed into the Pinto to prevent the whole gas tank blowing up issue. Ford then assigned the price and did a little math. They stated that a life was worth about $200,000 and calculated the number of people who would be killed by the Pinto and compared this number to the amount that it would cost to install the said part into existing Pintos, and found that it would cost them less to just leave the Pinto as was and make payouts to the families who would lose loved ones (In the long run it ended up costing them a lot more because of all of the negative PR and the avenge of Ralph Nader)

I am not at all arguing against the price system here. But there is something seriously wrong with Ford's past logic. We need markets to create prices! Somethings shouldn't have a price because there is no market for them due to their abstractness, and by assigning a price to these things in a way we are using a round-a-bout method of creating price controls hence we get the same ugly gut feeling that occurs when Hugo Chavez states that a pound of beef will cost no more than a certain amount.

I love the subjectivity of prices because they can show us how much we value things. They reflect our own personal elasticities of demand for certain goods that then can be compared with that of others in measurable units. But, shouldn't somethings be just left priceless?

PS I don;t mean to sound like a master card commercial here (as noted earlier me sleepy). I think I still agree with all of the above unless I get a job selling life insurance...

4 comments:

  1. Ha, ha Camilla I love the post. But how do you just "leave something priceless"? Won't people try to apply a price to it regardless (like Ford did)? I think it is impossible for human life to have infinite value (unfortunately) because someone will always place a finite value on it.

    Some people place a very low, finite value on it (every evil dictator, murderer, etc.). So for those of us that believe in the sanctity of human life we simply have to set a very high (though finite) value on life to drive up the price. We do this by incentivizing entities who respect life and punishing those that don't.

    This is where the government comes in, I think, as a arbiter to ensure that basic human rights are protected. The government places a high value on human life by assigning punishments to those that violate its sacredness.

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  2. I loved the part about the red hot serrated knife and feeding an invisible heart to giraffe named skippy. All joking aside...
    I completely agree. Human life should never be thought of in monetary terms. It's too abstract and, in my opinion, too priceless. In the case of Ford, it seemed to me that they used the cost-benefit analysis method to justify their laziness in not wanting to fix the part. They also essentially justified killing off human beings in the name of costs outweighing the benefits. (Although, I don't think it was worth it if their PR went down and Ralph Nadar decided to exact revenge). So on top of a round-about way to create a price control, they also justified killing people under the banner of a cost-benefit analysis.
    I think people have done this to children right now. Back in the day (and still in some developing countries that are mostly agrarian), if you told someone you had 10 children, their immediate response was "Wow! You must be rich!" because you had essentially 10 extra farm hands so you could have a bigger farm. Bigger farm means bigger crop, which means more income for you. Now, if you tell someone you have 10 children, the immediate response (right after "Are you mormon?" {no offense intended}) is "How do you afford that?" Children have gone from added benefits to added costs. I think this is part of the reason why in certain "developed" countries, particularly European ones, people have stopped having so many children. We've put a cost on human life, in this case, a child's life, and decided it's not worth it.
    How sad.

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  3. It may be unpopular but a rational price must be put on a life for the society to make the best decisions.

    For example: Lets suppose Fairbanks could tax its citizens at say 50% income tax and spend the proceeds to hire more police to combat drunk driving. Spending all this money would save 10 lives per year. The taxes spend would be 500 million. Should Fairbanks do this?

    This would cost 50 million per life saved.

    One could conclude that a life is worth more than 50 million and say yes or a life is worth less than 50 million and say no.

    One could also look at the opportunity cost and ask what else could the money be spent on? What is the next best dollar to life ratio that can be achieved?

    Lets assume there is a whole range of options that range from 1000 dollars per life saved and 10 billion. Obviously it's worth 1000 dollars to save a life.

    Now I will ask you the hard questions you don't want to answer. And no, you are not a monster for answering honestly.

    Should we spend 10000 per life saved?
    1 million?
    10 million?
    100 million?
    50% of GDP?
    50% of World GPD?

    There is a limit! Human life in clearly not priceless, it has a price.

    How do we put a rational price on life?

    For starters I would argue a relative value that young are more valuable than old. Lets suppose resources are scarce (not to hard hu?) and you have 100k dollars. Your 90 year old grandfather needs 100k to be saved but your new born niece needs 100k to live as well. The decision is yours, save one or the other, or party like its 2009 and let both die happily. I for will pick the baby. For the same reason I would consider murder of the elderly an inferior crime to murder of the extremely young.

    We can discount future earning of an individual to present value. This will confirm that in general the young are worth far more than the old. We assume the young have more years in the work force and that the earning of future generations increases relative to past. This has its possible pitfalls to. Does this mean if there is a correlation between intelligence and earnings that smart people are worth more than dumb people or that rich people are worth more than poor people? Any way I digress.

    These are question that make us uncomfortable. I reiterate that they must be answered in order for society to make the best choices or in a way societies choices will in fact answer the question we where to fearful to answer our selfs.

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  4. funny video on the dollar
    http://www.youtube.com/watch?v=LmYt92ciuvg

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