January 5, 2008

“an indifference curve between money and bereavement”

Filed under: Economics — duncan @ 5:41 pm

Sometimes I worry that I’m misrepresenting economics. The discipline’s orthodoxy can’t really be as bad as I ignorantly imagine. Maybe once I get past the superficialities of first year undergraduate textbooks, everything makes a lot more sense.

But then I come across stuff like this [via Economist’s View], and my worries shrivel and die. It’s an article on ‘Vox’ (‘Research-based policy analysis and commentary from Europe’s leading economists’): ‘A New Approach to Awarding Compensation in Courts’. I never got round to commenting when it was first published; but now I’ll quote just a few choice snippets.

“[M]ost judges are left to their own devices in awarding compensation packages they think would make sense in court, and they do so by using rules of thumb that have no conceptual foundation based on solid, scientific findings…. From a scientific point of view, this raises a question of whether we can develop a systematic method for calculating a reasonable compensation package that would closely reflect the genuine damages generated by bereavement.

Our approach to answering this question focuses on the use of surveys of happiness to estimate compensation that would ceteris paribus make up for the average well-being gap between those who had experienced the loss of loved ones and the rest of the sampled population. In other words, our approach involves empirically tracing out a form of indifference curve between money and bereavement…

In our empirical analysis, we use two different measures of subjective well-being – a seven-point-scale life satisfaction (1 = very dissatisfied… 7 = very satisfied) and a twelve-point scale record of a person’s mental health status in the general health questionnaire (GHQ) – in the long-run British Household Panel Survey (BHPS) carried out annually by the University of Essex…

Using the two measures of subjective well-being, we are able to estimate how much happiness can be gained on average by a higher income of X thousand euros, and how much happiness is lost by the death of loved ones. We then calculate the ratio of the two, which will give us a satisfactory statistical measure of a marginal rate of substitution between the pleasure of money and the pain from the death of a loved one.”

Oswald and Powdthavee deploy this method to reach some “solid, scientific findings”:

“Losing a partner is extremely damaging to subjective well-being and requires on average a compensation package of £114,000 (E160,000) in real income to make the person feel indifferent about the situation.”

I really don’t think there’s any point in discussing this in detail – or even satirising it. As Tom Lehrer said: “I gave up satire the day Henry Kissinger won the Nobel Peace Prize.” Most of the all-too-obvious objections can be found in the Economist’s View comment thread. But I will mention one thing the commenters failed to bring up. Since, as we know, money, like everything else, is subject to the law of diminishing marginal utility, it follows that one Euro is worth less to the wealthy than it is to the poor. And since the paper’s authors aim to calculate the amount of compensation that would provide happiness equal to the loss of happiness created by the death of a loved one, it follows that the poor should receive less money than the rich when family members die. If Oswald and Powdthavee believe their own arguments, they should supply a formula for the judge in question to calculate the appropriate amount of compensation, based on the bereaved individual’s wealth and/or income.

Of course, the paper doesn’t advance this idea. But that’s just another example of the way in which economics covers up the utter inhumanity of its fundamental axioms.

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