Everyone is talking about it: herd immunity versus isolation, exposure versus quarantine, early UK measures versus China measures. Like most of us I don’t know the answer to this question. But I do have an idea of how to approach it. In essence, this question is about a trade-offs, and economists have something to say about trade-offs. First, I will look at how to approach such a problem in general and secondly I will look at some measures of the value of Life.
Trade-offs can only be measured in a single currency. One can’t mix apples and oranges, the same way one can’t mix human life and economic prosperity. To compare these to we must standardize a human life into a quantitative measure. The easiest way is to convert it into USD. Then one can weigh up a human life measured in USD with other economic outputs also measured in USD. So we quantify whatever there is to trade off in monetary terms and then compare where monetary gain is maximized. But how do you pecuniary quantify a human life? I am glad you asked
Here I will present five different ways economists put a value on a human life.
1. Opportunity Cost of Work: This approach is straight forward. How much can a person earn from now until the end of his days – that’s how much his/her life is worth. This runs into a lot of problems because many measures of work compensation are non-monetary. Domestic work for example is not compensated by wage but has a value. Fringe benefits (company car, work place environment) have non-monetary values that are not shown in a persons wage, but contribute to the value of his work. This leads to smaller average evaluation of women’s wages compared to men’s, which seems blatantly unfair. So, this is not the most popular way to go.
2. Life Insurance Premium: This approach is interesting because there is a market for life insurance. This market has demand and supply, and an equilibrium. Thus, the invisible hand decides what a life is worth. But unfortunately, we know that humans aren’t great at calculating risks and probabilities and especially not when it comes to their own deaths. Thus, this measure is also not the most established.
3. Consumer surplus for vital health medication: Consumer surplus is the area above the demand curve, showing the willingness of people to buy medication above the equilibrium price. This again is an interesting way to look at it because it uses a market mechanism. But unfortunately hypothetical answers to questions like: how much would you pay for this medication?, are not going to be the most reliable. These answers might be biased.
4.Value of Statistical Life (VSL): I really like this approach. It calculates the implied cost of averting a fatality (ICAF). Lets take an example. You are offered a job for 50K or for 43K. The 50K job has 100 fatalities out of 100,000 a working this job. On the other hand the 43K job has only 20 in 100,000 fatalities. The reduction of risk of fatality is 0.08%, while the gain is 7K. Thus the VSL is 7K/0.0008=8,750,000$. Here the cost of decreasing your chances of death by 0.08% costs you 7000$ resulting in a VSL of 8.75 million dollars. It is also called the value of preventing a fatality (VPF). This measure is pretty popular. (Example taken from here)
5. Quality Adjusted Life Year (QALY): This approach incorporates the quality of life. Here one calculates the Length of Life* Quality of Life. The weights of quality of life are measured by the Time-Trade-Off (TTO). Here people are asked whether they would like to stay in an ill state or trade off perfect health now for a shorter life. Another way to quantify the quality of life is by the Standard gamble (SG). Here people are asked whether they want to stay in an ill state or undergo a procedure that might kill them, this taking a gamble.
So what does that tell us about herd immunity versus social distancing… I don’t know. But I think it can help guide the discussion. We must compare apples with apples. The trade off between economic prosperity and human lives can only be made when quantifying human lives. American infrastructure departments put the VSL at about 7 Million Dollars, which I think is a pretty good measure. Now one could calculate what social distancing policies might cost and how many lives are saved. If the cost exceeds the quantities of lives saved times 7 Million Dollars, then it might not be worth it. This would be a valid approach. The QALY would probably put a lower number on a value of life saved because of the fragility and age of the lives saved, while the consumer surplus calculation would probably favour a social distancing measure.
My overall point is that this is an economic problem of trade-offs which we can calculate: Let’s define a Value of Life (1,2,3,4 or 5). Calculate how much value we lose in a social distancing scenario, and how much we lose in a herd immunity scenario. The one with the least cost wins. Even better, let’s take multiple scenarios and optimize for the highest value.
You can find a great discussion on this here on Gene Tunny’s Podcast Economics Explained.
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