One aspect of economic research I think is especially powerful is the ability to measure or monetize the things humans clearly value but for which a market price is not necessarily apparent.
We must first accept that the price of a good that is bought or sold reflects some measure of value. If someone crashes into my car, we all accept that the value of the car to me can be measured by the price of a replacement. We might not agree on just exactly which replacement is appropriate, but the fact that the insurance company and I are arguing about the appropriate replacement price admits that a replacement price is an appropriate measure of value.
The problem is that many things we value are not bought and sold, and so have no visible price. When we are confronted with policy decisions about scarce resources, the absence of a value measure increases our risk of making bad choices.
Environmental issues are most commonly associated with this issue, and economists have two tools for measuring value. The first is the performance of psychology-like experiments or surveys. These studies have shown great promise but are costly to perform.
The second method of assigning value is to observe the price of an item consumed along with the good in question—two identical houses, one nestled in a quiet neighborhood and the other at the end of a busy airport runway, for example.
These measures can and are used for the many types of valuation of otherwise immeasurable items, from the costs of pollution and noise to the negative effects of living next to a crack house or a casino or the benefits of being close to a community park or walking trail.
This bothers a few folks who argue that some things have infinite value and should not be measured in mere dollars. But frankly, it is hard not to dismiss these folks. We live in a world where we cannot have all the things we wish, and so we must weigh our options. Ultimately, things not measured will be treated as if they have no value, so some measure will be better than none.
Most policymakers are comfortable with these types of measures, but the most difficult part of this type of work lies in assessing the value of human life. This is a necessary thing to do for insurance purposes, for compensating victims or for considering how much to reduce flood risk.
Of course, we all place some value on our own lives. Measuring that is the challenge to economists.•
Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at firstname.lastname@example.org.