Kokomo Tribune; Kokomo, Indiana

Columns

April 17, 2014

Hicks: Measuring the unmeasurable

Many things we value are not bought and sold, and so have no visible price

One aspect of economic research I think is especially powerful is the ability to measure or monetize the things that humans clearly value but for which a market price is not necessarily apparent. This is one of the aspects of economic analysis that gives it such dominance over other social sciences.

To begin, we must first accept that the price of a good that is bought or sold reflects some measure of value. So, 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 like C.S. Lewis describing fair play, the fact the insurance company and I are arguing about the appropriate replacement price necessarily 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. On most occasions this does not matter, but 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 of these is the performance of psychology-like experiments or surveys. These studies have shown great promise but are very costly to perform.

The second method of assigning value is to observe the price of an item consumed along with the good in question. Take for example two identical houses in every respect, except that one is nestled in a quiet neighborhood, while the other is at the end of a busy airport runway. The price difference between these two homes is a good approximation of the value of quiet or the disamenity value of noise.

These measures can and are used for the many different 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.

Of course this bothers a few folks who argue that some things have infinite value and should not be measured in mere dollars. But quite frankly, it is hard to not be dismissive of 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 at all.

Most policymakers are comfortable with these types of measures, but in my view 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.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and a professor of economics in the Miller College of Business at Ball State University.

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