Tremendous effort has gone into measuring the likely damage caused by climate change. The social cost of carbon is a concept well known to environmentally conscious investors. Yet, climate change is just one consequence of modern business. Socially responsible investors need a broader measure in their toolkit — a social cost of capitalism — to better quantify the physical and emotional costs imposed by corporations on their workforce, customers, and broader society.
The Social Cost of Capitalism
I define the social cost of capitalism as the collectively-assigned value of human life destroyed by specific business practices or the broader economy, plus related externalities. This goes beyond the approach of measures like the social cost of carbon. One major shortcoming of the social cost of carbon is that it is limited to economic damages, i.e., externalities. It includes costs related to death, disability and health care tied to climate change, but neglects the value people assign to their own physical and emotional well-being.
The key challenge is coming up with a framework for determining the collectively-assigned value of life. Human life is priceless in most circumstances. If you offered me a trillion dollars in exchange for my life, I’d turn it down without hesitation. I would only be willing to trade away life for a compensated death if I perceived it to be nearly over or insufferable. But if you offered me a sum of money today for taking on a higher (but nowhere close to certain!) risk of an early demise — well, I’d have to think about it.
We make decisions every day that could lead to premature death. Driving to work could result in a fatal automobile accident. The food we eat at a restaurant might contain harmful microbes. We could drop dead of a heart attack following strenuous exercise. Living is dangerous! But avoiding life altogether would leave it devoid of value. We constantly weigh the potential benefits and costs of our actions, and pursue the activities we perceive to be best for us despite their risks. These decisions collectively offer us clues to how much we value living longer vs. living better in the moment. We are willing to accept a higher risk of premature death if we perceive the cost of avoiding the added risk as too great.
Value of a Statistical Life
Governments often require a cost-benefit analysis of potential new policies. When the primary benefit is lives saved through reduced fatality risk, it necessitates placing a value on life. Economists have conducted studies using fatal work injury and wage data to find the average person’s willingness to accept a slightly higher chance of death in exchange for wage compensation. The result is the concept of the value of a statistical life (VSL).
The value of a statistical life does not measure the value of a specific person. Again, life is priceless! It only represents the average amount a society is willing to pay to save a single life among its population — as revealed by the prior actions of the population or by a study of hypothetical preferences. In essence, it puts a price on how much we’d need to live a bit better rather than a bit longer.
In the United States, the Bureau of Labor Statistics keeps high quality data on wages and fatal occupational injuries, making the VSL determination feasible. Other countries may need to rely upon stated preference studies or make local adjustments to values determined by other nations.
The Fair Minimum Value
One potential flaw with using a VSL to help determine the social cost of capitalism for a company is that it represents the average of a (usually national) population. There is an established link between the VSL and income. The higher someone’s income, the more they are willing to pay to avoid a marginal increase to their risk of dying. Less developed countries have much lower VSLs than rich nations. Viscusi and Masterman (2017) estimate the VSL ranges from tens of thousands of dollars for the world’s poorest countries to over $18 million for the richest.
It is clearly unfair to value human lives differently across income levels and geographies. Nearly all humans would demand an infinite amount of money to accept certain death — they differ only in their willingness to pay to avoid smaller changes in the risk of losing their lives.
But it is also unfair to impose a standard on corporations that exceeds what most individuals are willing to uphold (i.e., the VSL). One simple solution is to use Viscusi’s estimate of the VSL in the United States for the entire world.
Updated for inflation, the 2019 VSL for the United States is $10.3 million. I call this the fair minimum value of life for purposes of determining the social cost of capitalism. Too high, you say? I believe it is entirely fair to impose a global VSL consistent with a rich nation as the vast majority of public companies are owned by shareholders from such places. This figure is well above the VSL of developing nations, but below that of several smaller wealthy countries.
If anything, I’m worried the $10 million figure is too low. The U.S. VSL is inherently the product of wage negotiation between employers and employees. The diminished bargaining power of the average U.S. worker in recent decades has probably suppressed the VSL. If you think the wealth and income inequality in the U.S. and other rich nations is unsustainable (put me in that camp), VSLs will likely rise as government policy becomes more supportive of labor.
Death, Disability, Depression and Anxiety
Some links between business and human suffering are easy to identify. Fatalities or disability resulting from work in a manufacturing plant, for example. Some ills can’t be directly pinned on a company, but may be the consequence of an economic system. The coincidence of a stagnant working class in the United States and rising rates of suicide and depression is difficult to ignore.
Impacts to life that are directly attributable to a company are straightforward to measure. Each worker death linked to the provision of goods or services has a social cost of $10.3 million. Ditto for each death resulting from the use of product. Disability or dismemberment will cost some fraction of $10.3 million determined by the severity of impairment. Reference to accidental death & dismemberment insurance terms may be helpful here.
Besides the human cost, we also need to add in the economic costs to the families of the affected individuals not born directly by the company (i.e., externalities) to arrive at the total social cost. Examples of these costs include out-of-pocket medical expenses, additional childcare expenses, job training and relocation expenses. These sorts of costs will have to be estimated using industry or economy-wide data in most cases.
Internalizing the social cost of emotional injury, such as depression and anxiety, is more challenging — and more important. The underlying cause is rarely known. But the high social cost of suicide and major depression requires some action on the part of responsible investors. There were nearly 45,000 suicides in the U.S. in 2016 (nearly nine times the official number of work-related deaths). That’s a social cost of more than $450 billion on top of the economic impact using my fair minimum value of life — equal to more than 2% of GDP. The social cost of major depression? Probably in the trillions annually.
The best analytical approach may be to measure a company’s efforts to improve or safeguard the emotional well-being of its employees. Many large corporations self-insure employee health care and receive reports from their third-party administrator on claims. Workplace policies that reduce the incidence of depression and anxiety among those covered by a company’s health plan (including spouses and dependents) can be measured for a deduction to the overall social cost.
For example, let’s say a company identifies its policies as reducing the number of major depressive episodes among its covered population by 1 per year. If the average episode of major depression lasts 1 year, and the average remaining life expectancy of a worker is 40 years, I could argue the reduction in depression is worth 2.5% of a life. That translates to a social cost reduction of more than $250,000 given a fair minimum value of life of $10.3 million.
Measures to internalize the economic damage of climate change are laudable. But socially responsible investors need to go further and incorporate non-economic values like the collectively-assigned value of life into their analysis of companies. Widespread use of a social cost of capitalism may help push more companies to use a broader lens to evaluate their operations.