This is apparently an absurd question: for instance, slavery has thankfully long been illegal. Human lives are meant to be priceless. This week, however, I am going to wear an economist hat and reveal to you that the value of a human life is actually widely calculated and is essential to the functioning of many industries, not least the financial services but also healthcare, legal, workers safety and government accounts.
First, I want to reassure my readers – I have neither concluded a pact with some evil creature nor accepted an indecent proposal (although you may send me creative suggestions both on the evil and indecent sides).
She knows her worth.
Second, let’s get down to some methodology: what are we taking into account?
In many studies the value of life includes the marginal cost of death prevention in a certain class of circumstances but also the quality of life, the expected life time remaining, as well as the earning potential of a given person especially for an after the fact payment in lawsuits for wrongful death.
Basically, how much does it cost to avoid you dying plus how much you are going to earn, on average, over your life, should you stay alive as long as expected.
The calculation can give wild outcome ranges.
The income you will generate over a life time is the sum of an annual income generated. This annual income is often taken from the average national disposable income (all your income after taxes which is available to spend or save freely) of your country. It is then multiplied by the life expectancy. However, one euro in 10 years may have a lower value than one euro today if there is inflation. Therefore, we need to make sure that the purchasing power of the years in the future corresponds to the current purchasing power. We therefore need to apply a discounting rate.
What rate would this be? This is open to interpretation and can generate large changes.
In France, until 2013, the discount rate was set at 6% annually. From 2013, it was dropped to 4%, enabling the value of one life to double. Nice!
In the US, the value of a life is calculated differently by different government agencies. The EPA (environment agency) sets the bar at $9.1m, the Food and Drug Administration at $7.9m. The French government has raised the value from €1.5m to €3m in 2013, thanks to a lower discount rate. You can see that the Americans have a higher estimate of their life, in particular because the national average disposable income is higher and because avoiding deaths costs so much more there due to enhanced health and safety regulations.
Why does this matter?
You can find many applications to the calculation of the value of life.
First, you may get better terms in a pact with the Devil by questioning his discount rate assumption.
More seriously, there are many areas where this calculation is useful – I quote a few quickly:
- Risk management: if you were a coldly rational health and safety manager, you could calculate whether it is economically sensible to invest X amount of money for a piece of safety equipment which will have a Y probability to save Z lives in the future.
- Legal claims: imagine a relative dies because of an addiction (tobacco), a bad healthcare procedure or even an accident. A court will use such estimate of a value of life to compensate you plaintiff. This cost the tobacco industry a fortune in the 1990’s as they had to compensate victims of tobacco related deaths.
- Illegal claims: if you are a kidnapped French national and a ransom of more than €3m is demanded, you could start feeling anxious. The UK Foreign Office noted that the average ransom by Islamic terror group ISIL was $2.7-2.9m in 2014 (see here), amazingly close to the French value of life estimate. Fact not to forget though: the US and the UK do not pay ransoms.
Next week, we will see a controversial application of this concept.