Opinion and Economic Analysis

HICKS: Measuring intangibles part of economist's job

January 21, 2012

A frequently heard criticism of economic analysis is that it focuses only on those things that can be easily measured. This is an astonishing and vacuous censure championed largely by the innumerate among us. But because such ignorance is all too common, it is helpful to explain how researchers measure seemingly immeasurable things.

Almost every public policy decision involves costs and benefits accruing to different people in different places in different times. People vary by age, wealth, health and in their concern for the future when balanced against the present. So, weighing public policies demands one of two options: The first is to try to measure these seemingly intangible matters; the second is to remand the decision to the irrational agents of our prejudices. The latter is an oft-traveled path by those unhappy with the answers good measurement provides.

To effectively evaluate the wisdom of public policies—like where to place an airport, how much to compensate victims of accidents, how much money to put into education or a sewer system, or whether environmental regulation should be tightened or loosened—we require measurement of many “intangibles.” To do a good job, we’d want to know how much airport noise is a problem for residents, how much individuals and their family members value their lives, the trade-offs to sewer systems versus education, or how damaging pollution is. This ranges in difficulty and cost, but all these are routinely estimated and employed in evaluation of policies.

It is simple to determine the ill effects of airplane noise. One need simply compare home sale prices of two otherwise similar houses, one at the end of a runway, the other outside of earshot. More sophisticated analysis would include many more variables, hundreds of observations, distances to the house, and the decibel level, but all that is just a simple data-collection exercise.

Determining the value a person places on a year of his or her life is revealed by behaviors in smoking, drinking or taking risks. We can also determine the value people place on other persons’ lives through either detailed surveys or from such acts as donating blood or organs. We can even make estimates of the value people place on freedom and the institutions of government by calculating the risks they take to preserve them. The only real assumption to all these calculations is that most people are rational (which is a safe assumption with the exception of psychologists and hockey fans).

We can evaluate the impact of a dollar invested in education or roads by calculating how things that matter to us humans—incomes, health, participative government—vary in places with different levels of investment. We also can measure the effect of pollution by estimating things like health care costs and property values.

To actually perform these measurements takes time, computers, data and familiarity with statistical modeling. To know that valuation is the critical part of evaluating public policy takes only an open mind.•

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Hicks is director of the Center for Business and Economic Research at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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