Economic Evaluation of Life

The economic evaluation of life encompasses the costs associated with death, the amount people and governments pay to reduce risk of death, and the appropriate compensation for wrongful death. Costs associated with death are an accounting after the fact, often one restricted to tangible costs that ignore quality-of-life loss. The amount paid for risk reduction mirrors the value placed on death before the fact. Compensation for wrongful death is driven by deterrence, providing incentives to be diligent with other people's lives. It is constrained by widely varying state laws. This entry excludes the topic of life insurance, as it is not a valuation of life. Rather, life insurance shows how much money risk-adverse families and businesses choose to invest to ensure survivors will be able to meet their financial needs if someone dies. Some people also buy life insurance to impose discipline on their effort to provide an inheritance. Thus, life insurance purchasing does not reflect how people intrinsically value their lives.

Costs Associated with Death

Death imposes costs on survivors, employers, and governments. The venerable method of valuing these losses was stated by Adam Smith in his 1776 classic Wealth of Nations: A man is valued by what he produces, his human capital. In practical terms, that meant people were valued by what they were expected to earn during their remaining life span. Over time, that definition expanded to include the value of household work such as cooking, cleaning, maintenance, yard care, and child care. Direct costs were added for emergency services, such as police, fire, and emergency transport; medical treatment prior to death; investigation of fatal incidents; coroner and medical examiner services; and funerals, as well as employer costs to hire and train replacements for deceased employees.

Despite those expansions, human capital costs have severe limitations. They lack a theoretical basis. They fail to value pain, suffering, lost quality of life, loss of consortium and companionship, and loss of unique skills. They place minimal value on retired people, and because of wage discrimination, they undervalue women and minorities relative to white males. Men, for example, earn 25#x0025; more than do women in comparable jobs.

Value of Risk Reduction

Basing public policy choices on a method with such obvious gaps and biases is not appropriate. In the 1960s, a new economic paradigm emerged when Jacques Dreze and Thomas Schelling suggested that policy analysts should value a person's life based on the amount the person was willing to pay for a reduced probability of dying.

Unavoidably, everyone takes risks. But most individuals view life as sacred and willingly spend large sums to save people whose lives are at risk. Search and rescue operations, space shuttle failsafe measures, and heart transplants are viewed as heroic measures, regardless of their cost. Although

policymakers recognize this view, they need to make decisions about anonymous lives and daily risks. Economists assume people behave rationally in response to the risks they perceive and understand the consequences if risk taking leads to illness, injury, or death. With those assumptions, risk behavior reveals the value of risk reduction. Assuming rationality prevails, risk reduction values show how people value preventing deaths.

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