This is not about the value of life, life in general or any one life, what it means to be alive, the experience of life, or the joys and sorrows of living. Life is sacred, every life has value, and assigning a dollar figure to life devalues and trivializes it. But to an economist there is incontrovertible evidence that people, individually and in groups, make decisions that reveal a willingness to accept risk (and everything is uncertain, except for the past, and even then…), and trade off risk for wealth, income, or other things of value. People buy insurance, they pay more for safer cars, wear helmets when riding bicycles, and take off their shoes when passing through the TSA checkpoints at US airports. Consequently the economic study of the “value of life” has developed from the need to place a dollar value on policies that reduce the risks to human life, and the availability of data on how people make risk-money tradeoffs in their daily lives.
Rather than value life, economists value small reductions in the risks to life. According to H. Spencer Banzhaf (“The Cold-War Origins of the Value of Statistical Life” in Journal of Economic Perspectives, Fall 2014) the term value of statistical life was introduced by Thomas Schelling in 1968. Although the issue of placing a value on lives lost in combat attracted the attention of the RAND Corporation beginning in the 1950s at the request of the Air Force, it was not until Schelling and Jack Carlson spent time at RAND that the idea of valuing small changes in risks became the fundamental method for valuing life. The human capital approach had been the basis for placing a value on life, where the gross earnings, or earnings net of personal consumption was used to indicate the value of a life. Unfortunately this meant that those people not in the workforce had no value. Although economists had begun to deal with the idea of trading off money for risk, it was not until Schelling’s 1968 paper that the direct link was made between the tradeoff between money and risk, and the value of life. It was Carlson’s work that emphasized that society, represented by elected officials or appointed decision makers, must make the decisions regarding the value of a life and the cost of policies that ultimately resulted in losses of life. These social decisions were placed within a benefit-cost analysis (BCA) framework where benefits to many were offset, and hopefully greater, than the costs the few, sometimes in terms of lost lives. It was Carlson and Schelling who introduced the method of assigning a dollar value to small changes in risks to life. The big leap was converting this individual decision to offset small changes in risks into societal values for saving whole lives. It was Schelling who, in 1968, introduced the term statistical death by asking the question: What is it worth to reduce the frequency of death–the statistical probability of death? Schelling asked the obvious follow-up question of who’s values are relevant, and concluded these values belonged to those who would die, or not die. It is this individual calculus that forms the basis for the valuation methods employed by the Value of Statistical Life (VSL) researchers. Modern methods for valuing a statistical life include wage-risk premiums, the purchase of risk reducing devices, and willingness to pay for risk reduction, and willingness to accept higher risk, all of which are measures based on individual decisions, although statistical methods aggregate and average such values.
Although Cameron (2010) has called for abandoning the term value of statistical life as it confuses the general public, Banzhaf argues it has great historical significance. He says: “By bridging the gap between the value for lives, which is what seemingly was required for social benefit-cost analysis, and the value for risks, which is what consumers could reveal either through markets or through surveys, the VSL terminology was an appealing and persuasive way to make the case for introducing those values into benefit-cost analysis.”