Unhealthful News 160 - Calculating the dollar value of the invaluable is appropriate, except when it is not

A week ago, Chris Snowdon posted a skeptical assessment of a monetization of natural goods and an estimate of the financial cost of smoking.  I agreed with most of his criticism, but took some exception and promised to write more about it.  I did a bit in the comments, a bit a few days ago, and will do more now, also commenting on some recent posts by Don Taylor at The Incidental Economist blog.

Setting aside the point that the environmentalists in question seem to be trying to bury their real motives rather than quantify their views, as I commented in my previous post, there is a good argument to be made for converting the value of non-market goods to a market currency.  That is, many things may be priceless, but it is sometimes difficult to make policy decisions without converting them to a numerarie, which is economist-speak for a common currency, like dollars.  The numeraire is arbitrary, and could be in terms of lives years or whatever, but since most things have a natural value in terms of currency (obviously the choice of currency does not matter) it is easiest to start there and convert the values of non-marketed goods to that.

Why would we want to do that?  Well, I wrote a post on that so I will just summarize:  If we need to compare two competing choices, we need them to each have a scalar (one dimensional) value for making the comparison.  That is, if one option is worth two apples and five oranges, while the other offers three apples and four oranges, we need to know the relative value of apples and oranges to know which is best.  Moreover, we do make such decisions:  If we choose the first option in practice, we do not have an exact conversion rate, but we do know that oranges are worth more than apples.  The same principle applies to decisions that affect whether or not we spend more to save lives or wetlands.

The problem with the two examples that Snowdon found were the people making the arguments were not doing this correctly.  They were just looking at some expenditures associated with "priceless" goods (environmental and health) without doing the full calculation.  The latter consists of adding up the all the values, both the priced and the priceless.  So the value of saving a wetland park is the value it offers for recreation and aesthetic appeal (not too difficult to calculate, it turns out, even if there is no admission fee), the value in purifying water and other production values (the focus of what Snowdon wrote about, rather difficult to calculate but doable), and the value that comes from people just liking to know nature is being protected (an important real value, and theoretically measurable, but not really so in practice).  This same principle applies to the natural world, taken as a whole.

Yes, that is right – it is possible to convert the value of the functioning biosphere into a single huge number of dollars, and it has been done.  Why on Earth would we want such a number?  It actually serves a useful purpose in figuring out how much we should be willing to spend to create some disaster-movie style defense against giant meteors impacting the planet and wiping out everything we care about.  The chance of needing it in the foreseeable future is one in a billion, or ten million, or whatever the astronomers might calculate – I have no idea.  Whatever that number is, we should multiply the big value number by it to get a rough estimate of how much we should be willing to spend on the space defense system.  This is not an exact science by any means, but it has value.  If the defense system costs a tiny fraction of that number, we should probably do it – giving up more immediate desires for something that might have tremendous value, but probably will not – but if it costs an order of magnitude more than the number then we should not make the effort.

Less abstract and much more significant for thousands of everyday decisions, we need to calculate a value like that for a year of life lost to decide when a public health, safety, or medical expenditure is too high a price to pay for what it provides.  Because if we think that saving a life year is worth any price then we would give up way too much of everything else we value.  And the same applies to environmental goods – we want unspoiled land and should not squander it, but sometimes we want crops more.  Nothing has infinite value, and nothing important has zero value, so we need to figure out where in between to draw the line for practical decisions.  We can call something priceless, but when we are calculating how much to spend to save it, in an abstract statistical sense, we need a price so policies can substitute for the economic efficiency that markets provide in most circumstances.

But having said that, we need to recognize that this is a necessary and useful tool for making certain types of decisions, and there is nothing right about it beyond that.  It is a useful kludge, but should not be taken as Truth.  Taylor takes it too far.  He presents a calculation that each pack of cigarettes consumed imposes $40 worth of costs on the world.  There seem to be various problems with is calculation including some double counting, but I am not sure since has completed only three of the four posts that form the calculation and I have not read his 2004 book that this is based on.  I am pretty sure that he grossly overestimates the effects of second-hand smoke, and there may be other issues.  But setting aside whether the calculation is accurate, I disagree with his implication that it is meaningful.

Half of the $40 consists of his estimate of the value of a statistical life year, which he puts at $100,000, a typical value for this.  This is not someone's productivity (as measured by wages), but rather how much we think we should spend to save one statistical life.  I.e., if we would decide it is worth spending $10,000 to put in a guard rail that has a 1 in 10 chance of saving one life sometime, but not any more, then this is the number we have decided is right.  But there is no such decision on the line.  No one is calculating the value of an anti-smoking policy by adding up the cost of producing and distributing cigarettes, plus the impact on disease, plus the changing in productivity and consumption, plus the "priceless" value of improving longevity.  We do this for decisions about traffic safety or financing vaccines or mammography screening, but not for anti-smoking.

There are good reasons for that, such as the fact that smoking is a consumer choice, and in such cases we usually believe policies should only deal with any extra costs imposed on society (the justification for excise taxes, which more than pay for such costs).  But it is not necessary to discuss why we do not do economic efficiency calculations for anti-smoking efforts.  The simple fact is that anti-smoking policies are driven by people who feel that cost is no object, so there is no value in figuring out the limits of what we should pay.  So Taylor's calculation is not useful.  But these numbers – the value of a statistical life or planet – are, at best, only useful; they are never right.  We may use the shorthand "each dose of vaccine delivered to Africa and used is worth $127, considering the lives saved and everything else" but what this really means is "we should be willing to spend up to $127 per dose to get them delivered and used", a practical statement, not an existential measure of worth.  When health economists say "the value of a statistical life is $6 million", they are not assessing value (an implication that people quite reasonably object to), but what we should pay.

Taylor has fallen into the common trap of thinking that what his tools produce must be good.  He used the economic tools that calculate an abstract number that can have practical value (though does not in this case), and reported it as if it were the actual value of a combination of some purchases and the "priceless".  In addition to simply being epistemically wrong, this has the potential to lead to bad rhetoric and thus bad policy.  It did not (I do not remember anything being made of this in 2004), but you could imagine people screaming "economists say that cigarettes should cost $40 per pack".  The problem with this, even beyond his calculation seeming to err on the high side by a third to a half, is that most of the cost is already being paid by the smoker, so obviously having him pay it again makes no sense from an economic efficiency standpoint.  And, again, achieving economic efficiency is the only justification for these numbers.  I suspect that the reason that anti-tobacco did not pick up on this number is that they do not want to admit there is any finite limit to what we should spend to reduce smoking.  They are doing just fine with the "priceless" tactic.

But it is worth noting that since people choose to smoke despite a huge cost like the one calculated, further economic modeling would show that the benefits are also huge, and the value can be estimated. Unfortunately this is too big a topic for a blog post and I did not get to it when I was still being paid to write research papers.  Perhaps I will still get to it, but the argument still works in the abstract (though the calculations would be nice).  This is fortunate since it is one of the best arguments for why tobacco harm reduction is economically superior to promoting abstinence.