Monday, August 27, 2007

All New Meaning to "Cost of Living"

Several days ago, I was on a rant about Lou Dobbs calling economists "idiots" and "jackasses." But, while we tend to know what we are talking about a good deal of the time (usually with data and ituition to back up our stories), we are also really big jerks. Case in point: most "normal" people would hear the phrase, "you can't put a price on a human life" and agree without a second thought. Eonomists hear this, and ask, "can you back that claim up with data?" In fact, human life does have a price put on it, and economists aren't to blame.

Economists have actually done calculations to try to infer the cost of dying using data that are readily available. Frank Ackerman has "priced" a number of things, including death, in his pamphlet, "Pricing the Priceless." So how much is a human life worth? On average, between 1 and 6 million, depending on certain characteristics. But here's the catch: Computations aren't entirely made on the basis of earnings, life expectance at birth, etc.-- They're made by observing and evaluating our own behavior. If you feel this cheapens your worth as a person, you have yourself to blame. Here's one approach that's been used. Take construction workers, and survey their hourly earnings. Now survey the compensating differential between working on the first floor and working on the thirtieth floor. Next, calculate the increase in the risk of dying on the job, and there you have it. The price these construction workers have voluntarily put on their own lives using this back-of-the-napkin approach is about 2 million dollars.

So, the next time you run a red light,. think about the 30 seconds it saves you, the risk of dying you assume by doing it, and the fact that somewhere an economists might be watching.

Tomorrow, I will focus on the information distortion we get from the media-- are we evaluating the risk of death or disaster appropriately when we weigh whether or not to fly vs. drive, or in measuring our level of outrage for government action for things like mining regulations, bird flu precautions, etc.

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