Danger Will Robinson!

Is economics bullshit?

Micro economists, besides being very small, are people who know the price of everything and the value of nothing. One type of question that I find particularly annoying goes something like this: How much does someone value their life? From Tim Harford's Slate column.

World Bank economist Paul Gertler and his colleagues reckoned that Mexican prostitutes valued their lives at about $50,000 per year, based on willingness to take money not to use condoms. At five times their annual earnings, that's a similar figure to workers accepting risky jobs in rich countries.


So how do they reach that kind of a conclusion? The basic idea is that in exchange for accepting additional risk, a person gets more money. A paradigmatic example might be a variant of Russian Roulette. Flip a coin, call it right, and you win $x. Call it wrong and you die. How much money would have to be on the table to make it worthwhile to play? If a 50% probability of winning $x is worth a 50% probability of losing your life, then you value your life at $x.

Having numbers like this make any sense depends on the bettor being able to properly evaluate the odds. If the bettor lacks a realistic grasp of the odds, the price/risk ratio tells you nothing.

In fact we all come with built in computers that are constantly making that kind of judgement - that's what evolution made brains for. There is a problem, though. Those brains were designed for a life very different from that people live today - a life where the big threats were starvation, murder and large predators - not AIDS.

This means that our attempts to value things like life, sex, or that possibly hazardous donut with our coffee are confounded by our built in systems which do the arithmetic rather differently than the accountants at the life insurance company.

This was actually noticed by Adam Smith. Soldiers, he noted, get maximal risk for crappy pay, so why do they do it?

There is another complication. Everything about life is uncertain except one: it is temporary. As far as I can tell, economists quite studiously avoid absorbing Darwin's insight. A famous biologist said: "nothing in biology makes sense except in the light of evolution." The same is true, I'm sure, for that minor branch of biology called economics. Economists (mostly) just don't realize it.

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