Student Blogger - Moral Relevance and the Demand Curve
Our good friend Jones has amassed a fortune through an enviable recipe of hard work and clean living. Jones has no heirs, and unfortunately for us, does not consider us to be particularly good friends of hers. Actually, she has said repeatedly that she sees little point in leaving even a cent of her money behind when she dies.
Sadly, in the past week Jones learned that she has a life-threatening brain tumor. Given the standard medical treatment, covered by the medical insurance plan Jones selected for herself, doctors tell Jones she has a 10% chance of surviving beyond one month. However, one doctor in the country has developed a ground-breaking new technique called the “super gamma knife.” This safe technique costs $10 million and imposes remarkable social costs (the doctor has to notify the local power companies before each procedure to avoid brownouts, and performing the procedure takes him away from his work as a youth mentor). But the procedure would increase her chance of surviving beyond one month to 15%. Relevantly, when researching health insurance, Jones opted against purchasing the super-expensive “DeLorean” plan, which would have covered this type of futuristic procedure.
Jones realizes that $10 million is a lot to spend for such a small increase in her chance of survival, but since her money is worth nothing to her after she dies, she might as well pay for the cutting-edge technique.
Professor Ariel Porat, in a developing paper co-authored with Avraham Tabbach and Omri Yadlin, suggests that this story should bother us for a number of reasons. Porat discussed the paper with the Law and Philosophy Workshop.
The root of the interesting puzzles Porat discusses in the paper is that though Jones values her wealth after death at zero, society continues to value that wealth at face value, since unlike Jones, we (as society) are indifferent as to who enjoys the consumption of that wealth. If Jones dies and is unable to continue consuming her wealth, somebody else will.
Porat uses this insight to develop a philosophically provocative point regarding the concept of “willingness to pay” as applied to valuing life for purposes of risk regulation. Economists often look to the price a person is willing to pay to reduce their risk of death by a given amount (or the premium they require to accept an increased risk) in order to determine the value that person places on their life.
Porat suggests that our willingness to pay for a given risk reduction is really the sum of two distinct values: the value we place on our life simply as a life, added to the value derived from the consumption of our own wealth. When we die, the social utility derived from our life as a life is lost, but the social utility derived from our consumption of our wealth is fully transferrable.
Jones values her ability to consume her wealth after death at zero, while society values consumption of that wealth after Jones’ death at full price. Jones’ willingness to pay for extravagant risk reduction will be socially inefficient since her valuation of life will incorporate her ability to continue consuming, and not simply her valuation of her life as a life. Again, Porat argues that society should not interpret Jones’ willingness to pay at face value under these conditions since it misreports the morally relevant valuation reflected in Jones’ life as a life valuation. That aspect of Jones’ payment attributable to her wealth represents a social waste, since society has no interest in increasing the probability that one person as opposed to another will be the one to consume transferrable resources. (Porat raised another argument regarding the adequacy of willingness to pay as a criterion for valuing a person’s life: when an individual who values her wealth after death at zero is willing to pay a certain amount of money to reduce a substantial risk of death, that person also discounts the payment she offers by the probability that she will die. For Jones, facing a 10% chance of survival, $10 million in her pocket has an expected value of only $1 million. To the extent her payment reflects the portion of her subjective valuation based on her ability to consume her wealth—which society ought to disregard—she overpays for treatment by discounting the cost in proportion to the risk of death she faces.)
A member of the workshop noted how this aspect of Porat’s project resonates with a history of philosophical thought attempting to reconcile two moral intuitions. One intuition is reflected in the phrase, “all men are created equal.” Morally arbitrary features like race, gender, or inherited wealth should not lead to the conclusion that one person’s life is worth more than another. In tension with this intuition is another that suggests that there must be some space for subjective valuation, that is for an individual to define her own priorities with respect to her own life. As Porat notes in the paper, the willingness to pay criterion largely runs afoul of the first philosophical intuition by treating variations in wealth as a relevant factor. Porat’s evaluation of willingness to pay suggests the possibility of eliminating the influence of wealth by ignoring the value a person places on their consumption, while still allowing the subjective valuation of a person’s life as a life.
But another member of the workshop was concerned that by complicating willingness to pay, we might practically eliminate the validity of the demand curve (that is, the information about subjective preferences reported to the market) as an indicator of individual valuation and preference. Without a demand curve, comparative welfare analysis is not possible. Unlike some of the other puzzles addressed in the paper (such as the discounting-cost problem), the elimination of the distortion based on the value ascribed to future consumption of wealth cannot be achieved through a discount calculation in the willingness to pay context. Looking at a market for risk reduction, it seems impossible to distinguish between the risk-loving person who subjectively values her life as a life relatively little, but who gains a great deal of utility from her consumption of wealth, and the timid person who values her life as a life highly, but gains little value from consumption. This is because both aspects of the reported willingness to pay reflect separate subjective valuations. If the demand curve fails to distinguish between the morally relevant and the morally irrelevant, this distortion might be an evil inherent in the best source of data we have to answer these questions of subjective valuation.