Valuation

'The Cold-War Origins of the Value of Statistical Life (VSL)' (History of Economics Society meeting paper, Vancouver 2013) by H. Spencer Banzhaf traces

the history of the "Value of Statistical Life" (VSL), which today is used routinely in benefit-cost analysis of life-saving investments. Schelling (1968) made the crucial move of thinking in terms of risk rather than individual lives, with the hope to dodge the moral thicket of valuing "life." But as recent policy debates have illustrated, his move only thickened it. Tellingly, interest in the subject can be traced back another twenty years before Schelling's essay, to a controversy at the RAND Corporation following its earliest application of operation research to defense planning. RAND wanted to avoid valuing pilot's lives, but the Air Force insisted they confront the issue. Thus, the VSL is not only well acquainted with political controversy; it was born from it.

Banzhaf comments that

The Value of Statistical Life (VSL) is a concept used in benefit-cost analysis by government and intergovernmental agencies around the world to value reductions (or increases) in premature deaths. Common applications include the benefits of highway traffic safety measures and of reductions in air pollution. Typically, these mortality values comprise the lion's share of the estimated benefits of such investments (e.g. US EPA 2011). The VSL also has been used to help augment the national income and product accounts to accommodate non-market goods (e.g. Muller, Mendelsohn, and Nordhaus 2011) and to appraise the costs of war (Bilmes and Stiglitz 2006).

The "VSL" terminology was first introduced by Thomas Schelling (1968). Schelling's crucial contribution in that piece was the notion of statistical lives—really, mortality risks—in contrast to lives of specific, identified individuals. His insight was that economists could evade the moral thicket of valuing "life" and instead focus on people's willingness to trade-off money for small risks. Thus, for example, if a reduction in air pollution in a city of one million people reduces the risk of premature death by one in 500,000 for each person, then, ex ante, the policy would be expected to save two lives over the affected population. But from the individuals' perspectives, the policy only reduces their risks of death by 0.0002 percentage points. This distinction is widely recognized as the critical intellectual move supporting the introduction of values for (risks to) life and safety into applied benefit-cost analysis (Ashenfelter 2006, Hammitt and Treich 2007, Viscusi 1993). Despite the importance of this distinction between lives and risks, the VSL maintains an important rhetorical link to the value of life insofar as it divides the average individual's willingness to pay for a given reduction in risk by that risk reduction, to normalize the value on a "per-life" basis.

Though widely used, the VSL has never been without controversy. One prominent example of a controversy arose in the United States in 2003 with the debate over the "senior death discount," in which the US Environmental Protection Agency (EPA) set a lower value for the VSLs of elderly citizens than for younger citizens, to account for their fewer remaining lifeyears. Popular outcry against this senior death "discount," given full voice in the US Congress, forced the EPA to retreat. Dismayed, economists in turn criticized Congress for political interference with rational, economic policy-making (see e.g. Viscusi 2009a).

In a comment on that view, Fourcade (2009) has argued that too often economists fail to recognize that they are but one voice in wider political debates about both social values and, materially, the allocation of resources. Indeed, as Porter (1995) has argued, the historical rise of benefit-cost analysis stems from its very appeal as a way to mediate such political conflicts; as such, it is not surprising that benefit-cost analysts sometimes finds themselves caught in the middle of them. In any case, Fourcade argues, the public has a right to enter the political debate, even if it is to reject monetization as demeaning.

Recognizing that economists are operating in a marketplace of ideas in which their paradigm is but one competitor, Cameron (2010) has called for "euthanizing" the term "value of a statistical life" and statistical lives as a unit of account. She argues that this unappealing term is a colossal failure of marketing. It misleads the public, who interpret "value" as intrinsic worth rather than a monetary measure and who understandably interpret "lives" as just that, rather than risks. It is, after all, a lot to ask of the adjective "statistical" to not only modify the noun "life" but to transform it into "risk!" Inevitably, this conflation of the notion of "lives" and "risk" leads to misunderstanding and, in turn, to needless political controversy. Cameron suggests replacing the VSL terminology with "willingness to swap" money for "microrisks."

In this paper, I trace the history of the concept of the VSL and show that such controversies are nothing new. As noted above, the first use of the term "value of statistical life" was by Schelling (1968) in his essay, "The Life You Save May Be your Own." But Schelling's piece did  not rise out of a vacuum. Its origins can be traced back another twenty years, to a controversy at the RAND Corporation following its very earliest applications of operations research (OR) to defense planning. At that time, the US Air Force (USAF) brought the same kind of political interference that was to come again with the debate over the senior discount. But, ironically, it was only this pressure from the USAF that forced RAND to think about the role of lives in its optimization framework, a problem that eventually would attract Schelling's attention.

Thus, the VSL is not only well acquainted with political controversy; it was born from it. Moreover, as we will see, this history suggests a further irony. Arguably, historically it was the very finessing of the twin notions of lives and mortality risk, which as Cameron argues has fed the political fires in recent years, which overcame the political problems in the first place and facilitated the monetization of mortality risks in benefit-cost analysis. To measure the benefits of policies that would save lives would seem to require a value of life, but that raises difficult measurement issues. Values for risk reduction are measurable, but answer a different policy question. The notion of the "value of statistical life" occupies an intellectual middle ground.