Spencer Banzhef walking a street

Professor Examines History Assigning Life Monetary Value

Posted On May 26, 2015 by Karey Perkins, Ph.D

Putting a monetary value on human life is controversial, so economists have attempted to side-step this moral thicket by transforming the question into one about the value of risks.

Economist Spencer Banzhaf reviews this topic in his paper, “The Cold War Origins of the Value of Statistical Life (VSL),” which he presented at the History of Economics Society meeting in Vancouver in June 2013.

As Banzhaf reports, one of the first tasks of the RAND Corporation after World War I was to provide benefit-cost estimates to the Air Force for military systems – the composition of the armed forces as integrated with specific strategies.

“Their estimates were to help decide such questions as: which composition of strategic bombers and fighters, using what strategies, could successfully launch a first strike? Some of these are really abstract questions, and RAND attempted to quantify them,” he says.

RAND’s first estimates were roundly rejected, however. Its scenarios, while economically cost-saving, involved high casualties for bomber crews. “The Air Force brass – many of whom were former pilots – valued their pilots’ lives and were willing to pursue more expensive military strategies to protect them,” says Banzhaf.

RAND then had the dilemma of putting a value on human life. “Economists tend to focus right in on prices, the exchange value, and now they had to think about how to make that calculation with pilots’ lives,” he says.

“The question of what value to put on their lives begged the question, ‘value to whom?’. To the Armed Forces, thus implying value as the cost of training and experience? To the economy, thus implying gross or net earnings? Or to themselves and to their families, implying something even more abstract?”

The ethics of valuing human life in monetary terms created more than its share of controversy.

Enter Thomas Schelling, the Nobel Prize-winning economist who joined RAND in the mid-1950s. “Schelling turned the question around,” Banzhaf says. “Instead of asking about lives, he looked at the problem in terms of risks.”

Schelling called this the “value of statistical life” (VSL), a measure still widely used for evaluating public policy in medicine, the environment and transportation safety. “He finessed the distinction between risks and lives,” Banzhaf says, offering an example:

“Suppose you won a million dollars in the lottery, but you have to drive across town to pick up the check. Although there’s some small probability you’ll get killed in a car crash on the way over there, you’d still go pick up that check. We couldn’t live without making these kinds of tradeoffs.”

Banzhaf’s paper argues that Schelling’s contribution in 1968 made calculating the value of statistical life allowable today. “Instead of looking at the tradeoff between benefits and lives, economists and policymakers are looking at benefits and risks. They feel more comfortable with that.”

However, Schelling’s contribution also has led to more than a little misinterpretation and unnecessary controversy, Banzhaf suggests. “It is probably time to revisit the term, ‘value of statistical life.’ The ‘value of mortality risks’ would be less misleading.”