1 Health as human capital Since 1950, life expectancy has increased much more modestly [than that in previous

Box 10.1 Health as human capital Since 1950, life expectancy has increased much more modestly [than that in previous

decades] by 11 years in the US, 8.5 years in Scandinavian countries, 8 years in the UK, and 12.5 years in France, but by 24 years in Japan. Along with the ‘quality’ of health, American expenditures on health care have increased faster than in any developed country. Between 1960 and 1998, real per capita expenditures on US health care increased from $679 to $4,030, or at an annual rate of 4.9 per cent. Over the same period, per capita incomes grew at 2 per cent annually. By 1998, US health expenditure accounted for 12.9 per cent of national income – far more than any other country and roughly 60 per cent more than all other Organization for Economic Co-operation and Development (OECD) countries. The US is also spending much more on medical research than any other country or all European Union (EU) countries combined.

From 1970 to 1998, the reduction in death rates is concentrated at ages 55+ for men and 65+ for women. Using data for vital statistics on death rates from all causes by age and sex (National Centre for Health Statistics), we compute the economic value of the observed improvements in life expectancy from all sources over 1970–1980. Improvements totalled $200,000 for males at birth – $100,000 for 1970–1980, and $50,000 each for 1980–1990 and 1990–1998. Because these health improvements were concentrated late in life and we are using a discount rate of 3.5 per cent, the value peaks at approximately

50 years of age and not at birth. For example, at 50, the value of the 1970–1980 health improvements is roughly $150,000; 1980–1990 health improvements, $12,000; and 1990–1998 is roughly $100,000 for a cumulative total value of about $370,000. Comparable valuations for women are smaller but show similar patterns.

The aggregate gain in wealth due to reduced mortality over 1970–1998 is $45.6 trillion for men and $26 trillion for women. The mortality gains in 1970s are the largest,

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totalling $21 trillion for men and $15.8 trillion for women. The total gain across both sexes and all years is $72 trillion, which translates into a gain of about $2.6 trillion per year. By comparison, real GDP over this period averaged about $5.7 trillion. If we include the increased value of life as generated by greater longevity from 1970 and 1998 into national income measures, it would increase real output over this period by roughly 50 per cent.

Although expenditure on human health (including medical R&D) is large, a key question is whether we are spending too little or too much. The numbers given above for the US from the point of view of enhanced longevity greatly exceed medical costs. But let us take a world perspective on health benefits and costs by examining the potential loss of life due to pandemics. In the 1918–1919 world flu pandemic, 2.8 per cent of the world population died. If there was a world avian flu epidemic of a similar scale, roughly 168 million people would die. The ratio of world GDP per capita to per capita US GDP in 2004 was 0.22. Using the $3 million lives lost based on US data, a rough estimate of a world

potential wealth loss of an avian flu pandemic is staggering. One can conclude that we are most likely under-investing in R&D to reduce this probability from occurring.

In conclusion, what is the answer to the question of why we spend so much on medical knowledge, medical care and change in lifestyles? It is mainly because saved lives are so valuable.

Edited extract from Gary S. Becker (2006) ‘Health and human capital: The inaugural T. W. Schultz Lecture,’ Review of Agricultural Economics, vol 28, no 3, pp323–325.

The approach adopted here is that healthier is wealthier: we should care about health, not only because it is an intrinsic good, but also because it contributes to economic growth. It is argued that health, through its contribution to the quality of human capital, as well as increases in savings and investment that correspond to longer lives, has a strong and significant effect on economic growth. This approach puts economic growth as an end and health as a means of achieving this end.