In the 1970s, the motoring industry and legal world in the US was subject to the now famous Ford Pinto incident. Through a leaked memo, it was apparently discovered that Ford had realised that there was a design flaw with the car that could cause an explosion upon rear impact. To repair this, so the story goes, Ford could have spent $11 per car, but ultimately decided against it because it would have proven more expensive than any legal damages and compensation from deaths.

Now, there was a great deal of misinformation spread for both sides of the argument, but the central issue remains. What is the value of a human life? Does it make sense to accept loss of life in the name of profit maximisation?

Here is an interesting video, featuring a young man questioning Nobel prize-winning economist Milton Friedman about the Ford incident:

To summarise: the young man argues that it was wrong of Ford to do what they did. Friedman responds with the idea that the principle (i.e. performing a cost-benefit analysis where one of the costs was loss of human life) was not inherently wrong, but that the real issue was just about choosing the correct value. In other words, if the added cost of preventing this accident was tens of thousands of dollars per car, for example, would you still have wanted them to fix it? How about a million per car?

Money = Real Resources

Friedman raises an interesting point here. He mentions money, but then wisely re-frames the problem in terms of resources and ‘starving people’. Today, with a greater emphasis on psychological principles in economics, we know that the abstract nature of money is a real problem in getting people to understand its value and what it really means. People readily accept debt and refuse to save, quite often because money is regarded as a ‘number’ and not representative of ‘real stuff’.

We’ve seen a similar thing more recently with the advent of computing. Early computer users were engineers and programmer types, who understood the underlying principles of what it means to have a computer execute some function. Now that they have become embedded in society, and are natural to the newer generations, their underlying function is abstracted from to the extent that most people find it difficult to conceptualise what a computer is actually doing.

Money has been in that place for much longer. Originally, people traded in goods – barter. I’d give you 10 pints of milk for some amount of corn that we both considered fair. Money was invented as a freely exchangeable good to act as an intermediary. It allows us to put values on things so that exchanges are (in theory) fair, and we don’t need the physical goods with us to make the trade.

Because of this, it is easy to forget that money is still a proxy for real stuff. When we say something costs £1000, what we are saying is that by bearing this cost, we are forgoing that amount of resource for other purposes. In localised terms, £1000 you spend on a computer could feed you for a few months, or pay your rent. But there are wider implications. Every good needs some raw material and labour to make. All of that value is being encapsulated in its monetary cost. So when a question like ‘do we spend 100 million pounds to save 1 life?’ comes up, it is very easy to say ‘of course’ without really thinking about the question thoroughly enough.

Suppose you were a private healthcare provider faced with this question. Suppose that all your staff earn £200,000 each year. £10 million pays one member of staff for 50 years of service. So £100 million allows 10 medical professionals to more or less have their lives taken care of, in theory. Would you say this should be sacrificed in favour of a single life? How about if you factor in the potential lives that these professionals might save over each of their 50 year careers?

In summary, when we think about costs in money terms, we really need to think about ‘opportunity cost’. What are we sacrificing in order to allow this thing to happen?

Information and Transparency

Going back to the Ford case and the video, there is something else that needs to be said in order to look at the problem from all angles. This is something Friedman briefly touches upon, but I think he needed to give it more attention. Whilst it makes sense to say that a life does not have infinite economic value, it was also true in this case that there was an element of concealment. Ford were aware of issues with the car but the public would have been unaware of the extent of them if it wasn’t for the leaked internal memo.

Ultimately, Ford got away without punishment because it was deemed that their car was not less safe than other cars of the era. It is also true that people take implicit risks every time they drive a car or cross the street. And yet, there is still something disturbing about this case. I think it has to do with the lack of transparency and information.

Friedman was obviously advocating free-market economics and its underlying principles. But, one of the fundamental  requirements for markets to be efficient is that there is perfect information about everything that is going on. Only then can the true costs and benefits be calculated. Perhaps, if people were more aware of the true risk, they may not have bought the car, or driven differently for example.

Ford were guilty, not just of hiding the true risks of the product, but apparently of ignoring safety as a design priority altogether. This is fine, it’s their product. But to allow people to be able to make rational decisions about the purchase of the Pinto, they would have needed to be aware that this car was designed with safety being actively ignored.

Hence, it seems most people would agree that the value of a human life is not infinite. But in order to be able to estimate a value properly, one needs to be able to factor in true opportunity costs. If information is concealed, or if there is bias in the process, then it’s going to be impossible to get this correct.