Comments on William D. Nordhaus's, "Irving Fisher and the Contribution of Improved Longevity to Living Standards"

American Journal of Economics and Sociology, The,  Jan, 2005  by Robert W. Dimand

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Bill Nordhaus's paper would, I think, have greatly pleased Irving Fisher. It brings together two major themes of Fisher's career: the economic value of improving the health of the population, and the measurement of economic quantities. After his recovery from tuberculosis, Fisher was a prolific writer on health issues, warning against alcohol, tobacco, stress, lack of exercise, and poor diet, sanitation, and hygiene as preventable causes of illness and death. He published more than 60 articles and pamphlets on health from 1910 to 1915 alone, not counting a dozen specifically on tuberculosis (Allen 1993: 139). The first 19 editions of Fisher's How to Live, written jointly with Dr. Eugene Lyman Fisk and first published in 1915, sold more than 400,000 copies in the United States by 1937, and the book was translated into Spanish, German, French, Polish, Russian, Italian, Swedish, Norwegian, Chinese, and Japanese (Sudela 1937: 443). In addition, Metropolitan Life distributed between 12 and 15 million copies of a pamphlet condensation of How to Live (Allen 1993: 140). Fisher donated all his royalties from this phenomenal bestseller to his Life Extension Institute.

In his opening paragraph, Nordhaus mentions that Fisher "made an early (perhaps the earliest) estimate of the impact of mortality and morbidity on national output." This was in National Vitality, Its Wastes and Conservation, Report of the National Conservation Commission, completed in November 1908 and published as a U.S. Senate Document in 1909 (the report's summary is reprinted in Fisher 1997, Vol. 13: 21-40). Fisher wrote this report, paralleling reports drafted by other commission members on waste and conservation of natural resources. In Chapter XII, "The Money Value of Increased Vitality," Fisher estimated the economic value of life as the present discounted value of likely future earnings after subtracting the cost of maintenance, an approach that he attributed to the British statistician and public health official William Farr. Assuming $700 per year as average earnings in middle life and three-quarters of Americans of working age as income earners or housekeepers, Fisher found that

   the average value of a person now living in the United States is
   $2,900, and the average value of the lives now sacrificed by
   preventable deaths is $1,700. The latter is smaller than the
   former because the age of the dying is greater than the age of
   the living. Applying the $2,900 to the population of eighty-five
   and a half millions, we find that our population may be valued
   as assets at more than $250,000,000,000; and since the number of
   preventable deaths is estimated at 630,000, the annual waste from
   preventable deaths is 630,000 times $1,700, or about $1,000,000,000.
   This represents the annual preventable loss of potential earnings.
   (Fisher 1997, Vol. 13: 38)

Fisher estimated that the annual loss from preventable illness was at least another half-billion dollars. In 1930 in The Theory of Interest, Fisher reported that Louis I. Dublin (head of the statistical department of Metropolitan Life) "computes the total value of the 'human capital' of the United States to be 1,500 billion dollars, or about five times the value of all other capital" (Fisher 1997, Vol. 9: 72n).

Fisher's innovation was in quantifying the annual preventable loss of potential earnings through illness and death, rather than in valuing human capital. In Verbiem Sapienti and on the Value of People, written around 1665, Sir William Petty estimated the total stock of England and Wales at 250 million [pounds sterling] (144 million in land, 30 million in houses, 3 million in ships, 36 million in livestock, 6 million in money, 31 million in durable goods) and the interest rate at 6% per annum, so that the annual return on stock accounted for 15 million of an annual expenditure of 40 million [pounds sterling]. Taking the remaining 25 million [pounds sterling] per year as the return to labor, and discounting at 6% per annum, Petty valued the total human stock of England and Wales at 416.66 million [pounds sterling] sterling, and cited auction prices of young adult slaves in confirmation of his per capita estimate (see Olson 1993: 64-65).

Nordhaus mentions that "[w]hile Fisher thought and cared deeply about index numbers, measurement of income, utility theory, and health, he never connected these different concepts together," whereas Nordhaus begins his analysis of the valuation of life expectancy with a lifetime utility function. It is striking that, when Fisher estimated the loss from preventable death and illness or the benefits of Prohibition, he did so in terms of earnings and production, not in terms of the utility analysis of his 1892 Mathematical Investigations in the Theory of Value and Prices (Fisher 1997, Vol. 1), a landmark in the use of indifference curves. Utility theory is conspicuous by its absence from some other works of Fisher. In particular, The Making of Index Numbers (1922; Fisher 1997, Vol. 7) concerns statistical tests that an "ideal" index number formula should satisfy, in contrast to the work of A. A. KOnus in the 1920s on the economic theory of "exact" index numbers that correspond to an underlying utility function (see my introduction and postscript to Fisher 1997, Vol. 7). The most important appearances of utility in the work of Fisher's maturity (apart from his Elementary Principles of Economics) are the role of impatience in his interest theory, represented by the indifference curves of his two-period consumption diagram (The Rate of Interest, 1907: 409; Fisher 1997, Vol. 3), and, rather isolated from the main lines of Fisher's research, a 1927 essay on "A Statistical Method for Measuring 'Marginal Utility' and Testing the Justice of a Progressive Income Tax" (Fisher 1997, Vol. 12).