Friday, February 29, 2008

George Monbiot Doesn't Like Cost-Benefit Calculations

A Guardian op-ed takes on a topic discussed in both classes -- cost-benefit analysis. A cost-benefit approach was used to justify flattening a village to add a runway at Heathrow, and the author is not happy about it.

The article starts by noting the acceptance of this method:
But while the runway's opponents don't like the results, most people seem to agree that weighing up economic costs and benefits is a sensible method of making this decision. The problem, they argue, is that the wrong figures have been used.
And it's use in the Stern Review. Upon closer review of Stern's methods, though, the author is appalled:

Stern's methodology has a disastrous consequence, unintended but surely obvious. His report shows that the dollar losses of failing to prevent a high degree of global warming outweigh the dollar savings arising from not taking action. It therefore makes economic sense to try to stop runaway climate change. But what if the result had been different? What if he had discovered that the profits to be made from burning more fossil fuels exceeded the social cost of carbon? We would then find that it makes economic sense to kill people.


Against this is set the economic benefit of a new runway. Part of this benefit takes the form of shorter waiting times for passengers. The government claims that building a third runway will reduce delays, on average, by three minutes. This saving is costed at between €38 (£28.50) and €49 per passenger an hour. The price is a function of the average net wages of travellers: the more you earn, the more the delays are deemed to cost you, even if you are on holiday.

Consider the implications. On one side of the equation, human life is being costed. On the other side, the value of delays to passengers is being priced, and it rises according to their wealth. Convenience is weighed against human life. The richer you are, the more lives your time is worth. The people most likely to be killed by climate change do not live in this country. Most of them live in Africa and south Asia. Hardly any of the economic benefits of expanding Heathrow accrue to them. Yet the government has calculated the economic benefits to Britain, weighed them against the global costs of climate change and discovered that sacrificing foreigners - especially poor ones - is a sensible economic decision.

I can accept that a unit of measurement that allows us to compare the human costs of different spending decisions is a useful tool. What I cannot accept is that it should be scrambled up with the price of eggs and prefixed with a dollar sign. Human life is not a commodity. It cannot be traded against profits or exchanged for convenience. We have no right to decide that others should die to make us richer.

In response, the Free Exchange blog provides a defense of cost-benefit analysis:

But hold on. If we cannot place a monetary value on life, we're stuck with an insoluble equation. We're left to conclude that any life is too dear to sacrifice, and so all activities contributing to global warming--or any other potentially fatal economic process--should be halted. Mr Monbiot doesn't want this, but the placement of any monetary value on life, no matter how high, essentially values that life in terms of consumption. If a life is worth $10 million and a burger worth $1, then we cannot avoid saying that a life is worth 10 million burgers, unappealing as that sounds.

The larger failure in this argument, however, is a lack of recognition that material progress contributes to material welfare, including reduced mortality. The capitalistic push for ever more consumption has done wonders for global economic output, allowing the earth to sustain billions more people than it could a century ago at a higher standard of living than ever before. We don't set the value of life against income because income is more precious than life. We set life against income because income sustains life.

Tim Haab also responds:

But there are two problems with this indignant moral stance:

  1. Moral indignation fails to recognize that valuation methods are not valuing individuals but are valuing changes in risk.
  2. States and individuals make implicit trade-offs of life versus wealth/consumption/production all the time. Moral indignation arises when those trade-offs are made explicit.

On the first point, I give a simplistic introduction to the method for valuing statistical lives here:

To value the reduction in mortality, we will calculate the Value of a Statistical Life (VSL). VSL's are not an attempt to value a particular person's life, like the courts would do in a wrongful death lawsuit. VSL's instead give an average value of a 'statistical' anonymous person.

The method is simple, we observe trade-offs that people make between the risk of death and money. For example, people will take riskier jobs in return for more pay, or people will accept lower prices for less than perfect meat inspection programs. Using these risk/money trade-offs that individuals make, we can infer the average value that market participants place on an 'average statistical' life. Better put, individuals are making the choices, economists just use those choices to infer the implied population value of a life. So if moral indignation is in order it is to be aimed at the individual for being willing to make that trade-off and not the economist for using it.

To the second point, we can use Montbiot's trick of the contra-example to see that acting to protect human life at all cost involves just as morally reprehensible a judgment as monetizing the risk of dieing. Suppose we pass a blanket policy stance that human life is sacred and all human life should be protected. Despite invoking money, such a stance places an infinite monetary value on life and any cost is swamped by the implied benefit of protecting life.


And in the case of climate change, acting regardless of the value of lives lost, may (or may not, but the possibility at least needs to be considered) lead to an increased risk of dieing for others. Changes in the economic infrastructure structure required for reductions of carbon emission may require massive public expenditure--through direct expenditures on infrastructure and indirect expenditures on incentives for research and development of new technologies. From where will these expenditure come? Social welfare programs? Universal health care programs? Other environmental programs? Might not reducing such expenditures increase risks to other subpopulations. How then do we weigh the tradeoffs of different lives?

Any regulation that involves a change in risk to humans implicitly places some value on life. Value of Statistical Life methods just make the trade-offs explicit. And that's a good thing. Because then we start debating policy solutions and stop debating perceived moral imperatives.

Perhaps one issue that surrounds the debate around placing human lives in the category of commodities is the fact that when dealing with environmental policies, human lives values are determined for those outside of the country drafting the policy. Perhaps it is appropriate for each country to only determine the value of its own citizens and not those of other countries for placing an inequality of lives is classist.
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