Tyler Cowen thinks so.
In a post this morning, economist Tyler Cowen writes:
Now consider some older people who have a lot of wealth but very little human capital. These (selfish) individuals still will pay a lot to avoid death or risk of death, but in essence there is an externality. They treat their wealth as “disappearing with their death” when in reality that wealth simply is transferred to others. Therefore they overspend to keep themselves around on planet earth, and they will overpay for risk reduction.
It’s true, of course, that their wealth doesn’t disappear with their death but is simply transferred to others. What does that have to do with there being an externality? Nothing.
I would bet that almost no one who spends his/her own money on himself/herself treats his/her wealth as disappearing with death. Virtually everyone knows full well that declining to spend when near death will cause the heirs and, if the estate is large enough, the government, to get some of that wealth.
But the person spending is spending it on its highest-valued use. Does the person spending it create pollution? noise? Maybe. But then that pollution or noise is the externality, not the spending per se.
Moreover, if Tyler is right, then everyone spending on himself or herself, whether near death or not, is creating an externality. The reason is: it doesn’t get spent by someone else.
READER COMMENTS
Rob Rawlings
Apr 21 2021 at 5:12pm
I take Tyler’s point to be that if an individual spends more to protect his own life than the value of his ‘human capital’ then this is ‘in essence’ a negative externality as it results in a net loss to total societal wealth. As you say this is exactly the case of all consumer spending and this clearly does not meet the normal definition of an economic externality.
In any case even when an individual spends less than the value of his ‘human capital’ to save their own life it is quite possible that this may still be a loss to everyone else in society apart from them. If a person had ‘human capital’ worth $1M and spend their entire savings of $900K on a life-saving operation then I strongly suspect that even though this person has increased societal wealth by $100K by paying to stay alive, I think it almost certain that the rest of society would be better off if they had instead chosen to die and given the $900K away to others.
David Henderson
Apr 21 2021 at 5:20pm
I think you correctly identified Tyler’s point. Also, as you say and I say, this is not an externality.
My human capital is not the only thing I care about. Let’s say that all I did was lie on the beach and eat raisins and never did marketable work the rest of my life. My life would still be valuable to me.
A related true anecdote. For a few months in 1976, Bob Barro was my roommate in Rochester when I was an assistant professor and he was an associate professor. He told me that he had come back from a conference at a nice sunny location. The conference was arranged by my colleague Karl Brunner and Bob had expressed to Karl his disappointment in the quality of the papers presented with this quip, “I added more to my suntan than to my human capital.” I replied to Bob, “Your suntan is part of your human capital.”
Rob Rawlings
Apr 21 2021 at 5:50pm
I was thinking of human capital in accounting terms as something like ‘the discounted value of all future earnings’ and this appears consistent with the way Tyler was using the term. I do agree though that this is not the way an individual would measure his (or her) own life’s value!
David Henderson
Apr 21 2021 at 5:56pm
I know and that is the typical usage. As my anecdote illustrates, though, it’s too narrow.
Pierre Lemieux
Apr 22 2021 at 10:11am
Another way to say this is the following (keeping within a simple Marshallian, partial-equilibrium, pre-welfare-economics setup). If my life is worth $1 million to me, but is worth only $500,000 to Joe, its “social” value is $1 million because I overbid the other bidder. There is no externality in any meaningful meaning of the term.
And note that it is quite likely worth more for me than for Joe. The proof is that he can’t pay me enough to commit suicide.
David Seltzer
Apr 21 2021 at 6:36pm
Rob, it seems to me that paying 900k to save his life went to the team that saved him. Don’t they use that 900k to consume and invest as well? If so how is 900k lost to to society?
David Henderson
Apr 21 2021 at 6:59pm
David,
The $900K isn’t lost to society because the guy is part of society.
But don’t confuse benefits with costs. The $900K is a cost. There could be producer surplus if the providers would have been willing to do it for, say, $400K. But even then, the gain to people other than this guy is not $900K but $500K ($900K minus $400K).
Rob Rawlings
Apr 21 2021 at 11:10pm
I agree that the $900K spent could in theory add to others net wealth (Note: I only said ‘it is quite possible that this may still be a loss to everyone else’, which is true).
Rob Rawlings
Apr 21 2021 at 11:42pm
And by the same token its also possible that someone could spend more than their human capital value and still increase total societal wealth. Example: My human capital value is $1M. I spend $1.1M to keep myself alive. As long as more than $100K of my expenditure adds to others wealth then society ends up better off as a result of me paying more than my ‘worth’ to stay alive.
Pierre Lemieux
Apr 22 2021 at 10:29am
Rob: Out of curiosity, what do you mean by “societal”? I have been trying to find out what people who use this term mean.
If one uses the standard term “social” with the meaning it has in economics in general and welfare economics in particular, it is easy to understand Anthony de Jasay’s argument: social wealth can only mean, if it means anything, the sum of the wealth of all individuals in society. If you substract the latter from the former, what remains is zero. (Depreciated investments in genuine public goods belong to the several individuals who have financed them, in exact proportion to their contributions. The wealth of thieves belongs either to them or to the original owners, depending on one’s moral theory.) If instead one is (properly) interested in utility, an even stronger conclusion follows; quoting de Jasay:
Rob Rawlings
Apr 22 2021 at 12:02pm
‘Rob: Out of curiosity, what do you mean by “societal”? ‘
I meant by “societal wealth” all the wealth (physical and human capital) available to a society (pretty much ‘the sum of the wealth of all individuals in society’!). I see that 1) ‘wealth’ can only be measured subjectively so ‘societal wealth’ has no real meaning and 2) that the concept of ‘society’ is itself very vague. I was however using the term in order to try and express Tyler’s views in a way that made sense even at the expense of over simplification.
James
Apr 21 2021 at 6:16pm
When a wealthy person decides how much to spend on door locks, he makes the calculation as though anything stolen from him is simply destroyed neglects the value a thief would derive from stolen property.
When a smoker decides to quit, he makes that decision as though no one benefits from receiving his belongings when he dies a decade ahead of his time from emphysema.
When a sedentary person takes up regular exercise, he does not take into account the loss of value to his heirs when he adds years to his life.
When a legislature decides to spend a specific amount of money to find and punish criminals, it makes that decision with no consideration of the enjoyment that criminals get from committing crime.
If an economist could make the case that any of these are externalities, the correct conclusion is that no public policy should ever be made based simply on the finding of an externality.
Frank
Apr 21 2021 at 7:09pm
That’s a pecuniary externality, a transfer.
David Henderson
Apr 21 2021 at 7:50pm
It’s not a transfer. It’s the absence of a transfer.
Frank
Apr 22 2021 at 4:57pm
Government gets it. Spends it. Transfer. No worries. 🙂
JK Brown
Apr 21 2021 at 8:23pm
Tyler’s thinking can lead to, say, putting COVID patients in nursing homes. After all, from this can deducted a net gain to society from the consequences of that act. Tyler plainly lays out that an old person spending there own wealth on themselves is stealing from the rest of society.
Rupert Cadell, Jimmy Stewart’s character in Hitchcock’s ‘Rope’ is of this kind of character. He delights in his thought experiments and assertions of the superiority of some over others. Hitchcock glossed over the ending, with Rupert seeing but then stepping back from the horror he was responsible for creating with his arrogance meeting students with out moral restraint. Here the scene is where Rupert is faced with the truth.
zeke5123
Apr 21 2021 at 8:39pm
It is truly an odd take by TC.
First, by definition the individual spending the money prefers the care instead of the wealth. As you point out, other people might spend that money differently, but I am sure other people would spend TC’s money different (e.g., they might not spend as much on random restaurants in random parts of the world). His argument (i.e., that he thinks money could be better spent by others) is basically a repudiation of private property.
Second, he seemingly ignores the spillover effects (i.e., maybe older people end up funding something that makes a material change in life expectancy / quality).
Art Carden
Apr 21 2021 at 8:50pm
I still need to read Tyler’s post, but what happens to my incentive to accumulate human capital and other assets if I can’t spend them down on end-of-life care?
Christophe Biocca
Apr 22 2021 at 9:35am
Arguably your incentive is to spend it on whatever the next-best alternative would be, which in practice means consuming it faster than if you were saving up for end-of-life care? But Tyler is either:
Making some arbitrary distinction between spending on a cushier retirement while still healthy vs. spending on giving yourself 6 more months of life.
Setting himself up for a massive slippery slope, where all consumption spending is “bad” since unconsumed wealth eventually ends up in other people’s hands.
Roger McKinney
Apr 22 2021 at 10:47am
This is the kind of discussion that makes most people despise economics. The whole point of saving for old age is that you can’t produce in old age what you produced as a young person. So you produce more than you need when you’re young so that you can save for the time in life when you can’t produce. So if spending savings to live longer causes externalities, so did overproducing when you were young. They balance.
I agree that there are no externalities, but the real issue is not externalities. It’s the value of life and the importance of property and using it however you want. Externalities are trivia in this case.
The issue is different with our socialist system in which old people can demand any and all treatment they desire and have someone else pay for it through Medicare. In that case, we must decide how valuable an older person is. Then we are likely to take Europe’s path and just let them die so we will have more to spend on young people. But that’s the price old people pay for voting for socialism when they were young.
Philo
Apr 22 2021 at 1:37pm
“That’s the price old people pay for voting for socialism when they were young.” Maybe old people collectively voted for socialism when they were young, but maybe not: the pro-socialist votes of other age groups may have been enough to carry the referendum (or maybe there was no referendum). In any case, the individual old person, even if he earlier voted for socialism, is almost certainly not “paying the price” for his vote, because almost certainly his vote did not decide the issue.
Frank
Apr 23 2021 at 2:28pm
Ah, old people are not paying a price for this version of socialism. The currently old are reaping the benefits without cost. Future generations get the costs and the benefits.
Michael S.
Apr 22 2021 at 4:18pm
”sozialverträgliches Frühableben” — socially beneficial premature death
that was the “Unwort des Jahres” — the year’s worst lexical faux pas — quite a while ago in Germany. It meant ‘the undeserving’ having the good taste of dying (because of their unhealthy lifestyle) and leaving the pension funds to us good people
that’s the spirit
Todd Moodey
Apr 22 2021 at 4:28pm
Loose thinking about the concept of an externality and its application is to me one of the surest signs of someone whose claim to be a true economist is weak. Don Boudreaux recently published an essay called “The Mischief of “Pecuniary Externalities”” that, while recognizing the superficial similarity of so-called pecuniary externalities to true externalities, exposes the flaws in so thinking. Another wonderful work in this vein is Demsetz’s slender volume From Economic Man to Economic System. The essay “Protecting You from Yourself” is especially lucid and compelling.
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