Frank Ackerman and Lisa Heinzerling's book Priceless takes a critical look at the economic method of cost-benefit analysis which is often used to direct policy and behavioral decisions regarding health, the environment and social values. The authors' primary conclusion is that such analysis is often far too opaque to be relevant. Additionally, most cost-benefit analysis is unreflective of the true values of human health, life, ecosystems and other `priceless' elements these methodologies often deal with. It's argued that using cost-benefit analysis too often leads to sub-optimal and unjust outcomes. These outcomes are rationalized only by an academic exercise where everything is deduced to monetary terms.
The book does an excellent job presenting current-day policy decisions and breaking down the assumptions and arguments that led to their adoption. In doing so, Ackerman and Heinzerling show that the `pro-free market' mantra championed by business interests, and gaining popularity in some political circles, is proclaimed a success on the grounds of cost-benefit conclusions. However, the authors dig deeper to examine the questionable methods which seemingly prove that the market creates efficient outcomes and that regulation is often only a costly hindrance. Additionally, Priceless invites readers to consider injustices imposed historically, and in the current-day free market, in the absence of regulation and laws restricting certain activities. Slavery, child labor and toxic pollution are just three examples used in the book where free market efficiency is questioned. Seemingly, "anything profitable that is not prohibited by law is likely to occur" in a free market scenario.
Free market efficiency dictates that labor is first directed to produce the most fiscally profitable goods regardless of what's socially optimal or needed. This is one serious danger of relying purely on monetary terms and profit-maximizing behavior to make choices. Similarly, cost-benefit analysis falls into the same trap. Things which are seemingly priceless, such as human life, are given a monetary value to determine whether endangering activities are prudent and/or have the right to occur. Furthermore, the costs and benefits of action are often calculated using questionable methodologies which can be manipulated to justify decisions based on the analyst's preference. One poignant example provided was the federal government's Office of Management and Budget's (OMB's) 2002 estimate that the value of protecting 60 million acres of forest land was a mere $219,000/year. This value was calculated solely by using the cost saved from not building roads in the area and not needing to provide for their ongoing maintenance. Any environmental benefits of the forest's ecosystem and the value it served as a home to plant and animal species were completely ignored. Also disregarded were the future values society might derive from its existence. In terms of cost, the OMB asserted that preserving the land was preventing society from realizing $184 million in economic activity which the forest could provide for. Given such manipulated estimates, government protection of the land was argued to make no sense from a cost-benefit standpoint and regulations which are seemingly beneficial were discounted to inefficient protectionism by free-market advocates.
Priceless devotes much time to examining human-life valuation and estimates in monetary terms. The authors' review of literature on the subject concludes that $5-6 million (in 1999 dollars) seems to be a generally agreed upon range for the value of a human life in most U.S. studies conducted during the past two decades. A quite disturbing aspect of these valuations is that all human life is purportedly not of equal value. The $5-6 million term is often discounted for the elderly, poor and those who are disabled. For example, using a Quality Adjusted Life Years (QALY) model common to health economics, those in a wheelchair are often given less valuable lives than someone who can walk. However, does a disabled or elderly person value their lives less than a healthier or younger individual? Clearly, justification for such valuation would be morally opposed by much of society and the cost-benefit calculations which assume such values would be viewed as equally unacceptable.
One of the more infamous cases of life-value discrimination appeared in the 1995 Intergovernmental Panel on Climate Change's (IPCC's) life-evaluation section. In the report, the value of lives affected by climate change was determined using the economic value produced by the countries they inhabited. This meant assigning a $1.5 million value to those in rich countries, a $300,000 value to those in middle income places and a $100,000 value to inhabitants of the world's poorest countries. The outrage which ensued led to a modification of the number in the 2001 IPCC report to $1 million/person, regardless of where they lived.
Beyond the debate regarding proper methods for financial valuation of life, the authors question whether this academic practice is even relevant. Ackerman and Heinzerling contend that reasonable people do not make choices based on the value of their lives and that the supposed price of an individual's existence is nothing more than a dangerous simplification. Rather, they argue for society to make decisions using the precautionary principle where policies should err on the side of caution when irreversible and/or devastating health and environmental effects are at stake. Qualitative factors and a sense of morality should be prioritized before any quantitative measures of how society directs or restricts their resources. On the surface, this approach may seemingly be at odds with the calculable predictions of economic practice. However, the authors argue that conventional economics do not have jurisdiction over the realm of `priceless' elements of the world and human life. After all, should human life and the environmental conditions of the earth be treated as a commodity which can be assigned a monetary value and then `sold' on the market? `No' is the resounding answer provided by the authors of Priceless.
One final critique the authors deliver against cost-benefit analysis regards the practice of discounting for the future. This method, common to modern financial decision making, `shrinks' the value of outcomes on the distant horizon so as to make them seemingly insignificant. The practice assumes money not spent now will appreciate in nominal and real terms before being handed over to future generations. In regards to climate change, there are seemingly two choices a society can make: 1) research and implement clean, renewable energy now and embark upon conservation practices; or 2) save the money which could be put to these programs in a trust fund for future generations which will deliver them principal plus the interest earned. However, the irrelevance of such an analysis becomes clear when considering that the problems of climate change may become unsolvable for future generations. Melted Polar Regions, widespread species extinction, evaporated water sources and infertile growing conditions are certainly going to not be compensated for by any amount of money put away by past societies in a trust fund. For these reasons, it appears wise for current-day society to proceed using the precautionary principle lauded by Ackerman and Heinzerling in regards to the human activities creating climate change.
Priceless concludes with the authors providing four principles which can be relied upon in lieu of the cost-benefit approach. These include: using holistic, not atomistic, methods; favoring moral imperatives over cost comparisons; adopting the precautionary approach when dealing with uncertainty; and promoting fairness towards the poor and future generations. Additionally, we should heed the extreme forecasts when contemplating potentially catastrophic events, such as climate change. Society should consider the potential implications of action (over-investment in pollution control and clean energy) versus inaction (irreversible, widespread environmental change and threats to humanity) and note that the errors on each side are not symmetrical. Erring on the side of caution in this case seems to be the indisputable ideal for society, regardless of what different economists' cost-benefit analyses prescribe.
In summary, Ackerman and Heinzerling's Priceless provides solid reasoning in favor of alternative methods to cost-benefit analysis when regarding the environment, human health and life. I would recommend this book to economists, policy makers, practitioners of law or anyone else interested in considering how such valuations and their subsequent polices are, and should be, created.
