Utilitarian policy in action: QUALYs

In situations of scarce tax resources and unlimited wants of its population, governments throughout the world have to decide whose wants are more worthy than those of others. They would ideally want to choose a more or less consistent yardstick to base those tough decisions on, ratehr than engage in ad-hocery in each and every case anew and trust to luck that policies in one area dont conflict with another.

Utilitarianism used to be the ‘yardstick of choice’ within economics, going back to Bentham, Edgeworth and long before and in its inception was based on the notion of the ‘greatest happiness for the greatest number of people’. Whilst much of economics has for a long time refrained from trying to measure happiness and smiply postulated that only material consumption mattered for utility, many more complex choice situations are forcing governments to make a more nuanced stance. A good example of how utilitarianism currently feeds into actual policy is given in the following table.

Costs: in Euro cost per QALY

         
Procedure

     Less than 0 (cost
reducing)

 Vaccinations, baby health checks, smoke
detectors, screening for syphilis during pregnancy, Influenza
vaccination for the elderly, help with smoke addiction, removing lead
from petrol and paint, removal of lead-containing paint layers.

0-1,000

Compulsory safety belt, training of medical staff
with asthma, screening of Chlamydia, practical motorbike exam.

1,000-10,000

Chloride purification of water, some vaccinations,
treatment of mild hypertension with beta blockers, HIV screening at some
clinics, treatment of natal broken mid-riff, influenza vaccination of
all elderly, pacemaker, MAC-values chemical industry, cholesterol tests
and food advise, by-pass operations, stroke units, Viagra, population
mammography

10,000-100,000

Heart-transplant, hip-replacement in arthritis
cases, air bags, banning asbestos in brakes, radon reducing ventilation,
lung transplants.

    100,000-1,000,000

 Neuro-surgery with malign brain tumor,
general prevention of legionnaires disease, EPO for blood-anemia for
kidney dialysis patients.

>1,000,000

General measures to reduce magnetic field exposure
near power lines, measures to reduce benzeen emissions in industry,
making homes earthquake resistant in parts of the

US


.

This Table is an excerpt of a Table compiled by civil servants in the European Union in 1999 and is based on a combination of research and wild guesses. It shows the expected costs of an additional high-quality year of life of a member of the population for dozens of interventions, such as making seat belts compulsory, immunisation of children, and making houses earthquake proof. It starts with the interventions that cost 0-1000 Euros per Qualy and goes all the way up to interventions costing more than a million Euros per Qualy. It was explicitly put together to help policy makers decide what to do. It is democratic in that every person is equally important independent of creed or colour. It is individualistic and utilitarian in the sense that what is counted is only the well-being of individuals. The crucial input, apart from technical data on how much additional years of life in which circumstances a particular policy leads to, is of course a method to measure ‘quality of life’. Now, there are whole industries concerned with measuring quality of life leading to hundreds of different methods to get at Qualys. However, there are basically just two different approaches. The first approach takes people themselves as the prime source of information and bases the estimates of how much this or that circumstance translates into a high or low quality of life on how actual people feel. This can be ascertained for instance by satisfaction responses of individuals. Sometimes it can be ascertained by what individuals choose when they have to make trade-offs. One can thus for example simply ask people how they would rate their own life now and their life under various possible circumstances. One can also deduce a scale from choice behaviour, such as the choice of patients who are told what possible effect a dangerous operation may have: the amount of improvement they need to acept a certain probability of death gives you a quality/quantity trade-off.

The second basic possibility in the Qualy literature is to view individuals as incapable of thinking coherently about their own life and as untrustworthy when they say how they feel. Then one has to revert to the opinion of ‘experts’. Nearly every Tom-Dick-and Harry has an opinion about how other people feel and what effect this or that event has on them and one can translate such opinions into an ‘expert scale’, of which there are many. If memory for instance serves, the DALY approach (Death Adjusted Life Years) simply postulates that when you have a cold, life at that moment is worth 90% of life without a cold. Similar expert judgments apply for all kinds of health and life conditions. My perception is that on balance, governments are in limbo as to whether to base Qualys on what people feel or on what ‘experts’ think that people feel.

The crucial point of the Table is that it puts into perspective that governments have to make tough choices about which project to fund and which not and that this means they have to explicitly or implicitly decide what’s best for us. The logical thing for a utilitarian to do is to first fund the interventions that improve life most for the least amount of money, and then go down the list untill the money runs out. The point at which the money runs out and the government\population refuses to raise more money by higher taxes reveals how much a year of life is worth in that country.

Now, does the Australian government also engage in this classic utilitarian behaviour? Indeed it does. It does so most blatantly and most obviously for the Pharmaceutical Benefit Scheme, where it negotiates on behalf of the whole population with pharmaceutical companies about the price and subsidy accompanying new medicines on the market. The golden rule at the moment is that a new medicine will only get subsidised if its manufacturer can show that the costs per additional QUALY are no higher than 45,000 AUS. If the costs are lower, its on the scheme and if its higher its not on the scheme. There are exceptions both above and below that number, but this is roughly the golden number used.

The Qualy approach used in health, and as one can see from the above Table also in other areas of policy, shows that not only do governments make judgments about what’s best for us, but that they are trying to do this in a rational utilitarian way, i.e. based on an explicit criterion that can be used accross many different choice situations. What those who dislike utilitarianism must answer is what criterion they would use to make decisions in these context.

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Nicholas Gruen
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Nicholas Gruen(@nicholas-gruen)
14 years ago

Yes, this is the other side of the coin. It’s hard to imagine anything other than utilitarianism – for all its problems – being the framework for making decisions as to what gets funded under the PBS and what doesn’t.

conchis
conchis
14 years ago

Do you happen to know whether, when these things are used in policy-making, there’s any attempt to risk-adjust for error in the measure of potential benefits? (Do you have an opinion on whether they should? I would think ideally yes, but perhaps that’s impractical…)

Ken Parish
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Ken Parish(@ken-parish)
14 years ago

Paul

I don’t think anyone here would argue that governments should not employ utilitarian methods when deciding on spending priorities, which in turn do indeed have practical consequences in guiding/constraining citizens’ behavioural patterns. Governments have always done this and properly so. However, writers like Layard, Clive Hamilton etc clearly have something considerably more far-reaching and prescriptive, indeed qualitatively different, in mind when they advocate formation of government policy to give effect to happiness research findings. You know they are talking about something very different from the standard cost/benefit analysis on which government and private decision-making is generally based, if you’ve read some of the nanny-statist stuff that Hamilton’s Australia Institute churns out.

Tom N.
Tom N.
14 years ago

THE MATERIAL OF ECONOMICS

As a bit of an aside, Paul said “Whilst much of economics has for a long time refrained from trying to measure happiness and simply postulated that only material consumption mattered for utility…”

Only material consumption!!? While I am quite use to the critics of we “nasty, narrow-minded, New Right, neoclassical economic rationalists” misrepresenting economics, it is a worry when economists (and particularly professors of economics) themselves lapse into such errors. Surely non-material consumption also gets a guernsey in our framework – even if it doesn’t always show up in some measures like income and GDP. As the Productivity Commission once said (on page 4.21 of its 1999 report on gambling):

“A night of hot passion is not necessarily of any less value to an economist than a roll of banknotes”.

Paul Frijters
Paul Frijters
14 years ago

Tom,

the main reason I believe it is true that much of economics has for a long time been concerned with material consumption is that most of the dominant macro-models I learned as a student had utility functions with only one argument: consumption. Sure, they sometimes had leisure in them, but then often in a way that it didnt matter (i.e. no behavioural effects). Also, when implemented, they were based on national consumption data. Now of course economists paid lipservice to all kinds of other factors, but I would say then you can see from the bits they cut out when they forumalte their models what they are really concerned with. And it sure wasn’t happiness. Note also that the choice of utility functions was not based on psychological evidence, but rather on introspection and mathematical convenience (just think of those nice convexities; lack of kinks).

Tom N.
Tom N.
14 years ago

Paul,

This topic probably deserves its own thread – or book – but I must say that I find it surprising that (a) you would seek to represent economics generally by the games that macro-economists play; and, more importantly, (b) you think that even they believe that “only material consumption matter[s] for utility”.

Of course, there is some truth in your point that “much of economics has for a long time been concerned with material consumption”* and that many macro-economic models omit consideration of non-material consumption. However, I would suggest that that reflects the narrow nature of the tasks that macro-economic models are often designed to undertake, and the narrowness of many of the issues that economists are often asked to advise on, rather than any judgment that non-material consumption does not matter for utility.

In my work as a micro-economist advising on public policy, I do not always explicitly mention non-material consumption (or point out that “consumption” includes non-material consumption) either, but this does not mean that it is not part of the underlying framework that I use, nor that it is intrinsically less important in my framework than material consumption. Quite the contrary.

Again, there are plenty of critics out there willing – keen, even – to misrepresent us; I don’t think we need to do it ourselves.

Tom

__________

* Note that this is a different point from the original statement with which I took issue.

Paul Frijters
Paul Frijters
14 years ago

Tom,
I think you are right that the topic is important enough to merit a separate discussion (though its slightly navel gazing) and I think it quite right that you’re trying to hold me to account. I do think you over-represent the degree to which economics in the past has allowed itself to look at non-material motives. As I was taught it, Jevons in 1872 (or thereabouts) explicitly defined political economics as the science of the view of man as a material maximiser. And Robbins in 1932 in a very influential essay concerning the nature and boundary of economics explicitly argued that the study of what makes humans happy should not be part of economics but left to psychologists, and thus that economics was about materialism. I agree that in more recent times this extreme position has slackened, but I disagree with you if you say that this was not for a long time the mainstream position in economics – not just in macro-economics. And I will also say that this has long been the strength of economics: a clear focus on a subset of behaviours that put it apart from psychology and sociology. I am not sure the behavioural revolution currently going on within economics will not turn out to weaken its prestige and influence.

Damien Eldridge
Damien Eldridge
14 years ago

Paul,

First, I am surprised that you even saw a utility function in undergrad macro. One of the main problems I have with the standard undergrad economics major is the apparent divide between micro and macro. (In my view, the problem occurs in the macro part of the syllabus, but being a microeconomist, I would say that, right?!!!).

Nonetheless, I think it is silly to assert that economists only care about material wellbeing because macroeconomists tend to focus on movements in aggregate consumption. First, and less significantly, I think this undersells the topics considered by macroeconomists. They are also concerned with employment, unemployment, interest rates and inflation. The models they employ typically have utility as a function of both consumption and leisure. There is both a time and a budget constraint in each period. Purchasing consumption goods takes time. This

Paul Frijters
Paul Frijters
14 years ago

Damien,
it shows you how old I already am that we did do all kinds of models when I was a a student. The micro-macro divide was not as strong then, certainly not amongst econometricians.
Lets take your examples one by one, and I choose to ignore the macro bit since you seem to admit that in Macro materialism has long been the name of the game (unemployment for instance has long been taken as a measure of output and one should thus not conclude from the fact that some people looked at unemployment that they were not coming from a material consumption motive).

Micro being less materialistic inclined than macro? I’m not so sure. The whole of production and competition theory and practise is dominated by the assumption that firms maximize profits. Note that this is actually inconsistent with utility maximisation because then firms should maximise the utility of its shareholders rather than their return (something nowadays called super-rationality I believe). In terms of the bit of micro that has affected policy however, that’s a big slice almost solely in the materialist’ camp.
Labour economics not about materialism? The main model I was taught, i.e. the job-search model of Burdet and Mortensen, and variations by Pissarides and others did not include much besides material motives (there is a version based on utility but I have never seen that one implemented in empirical reality). Indeed, as far as I am aware in contemporary applications talking about labour market choices, its all about EMTRs, replacement rates, and other purely materialistic indices.
Then the Grossman model. Although developed in the 70s this model has, as far as I know, never been imlpemented the way it was designed for the mere fact that presumes people know exactly when they are going to die. That is such an absurd assumption in practise that the Grossman model has little if no empirical relevance. Sure, it in principle includes non-materialistic motives, but a model that cant be implemented doesnt say much about the role of economics in policy making does it now? The same holds for nearly all of the (im)possibility theorems: when have you ever seen these implemented? The fact that there are economists talking amongst each other about things that they for a long time refused to measure or that even in principle cant be implemented is again something that should barely register when we talk about the impact of economics for policy or its effect on society.
Yes, there have been more and more applications in recent years where economists seriously estimate and implement models with non-material motives. But I disagree that for a long time these made up more than a minority of studies.

Damien Eldridge
Damien Eldridge
14 years ago

Paul,

I agree with the fundamental point of your post. Clearly most public policy decisions involve tradeoffs and hence require the policymaker to make inter-personal utility comparisons of some sort. I also agree with you that a great dewal of economics involves the analysis of topics that could be reasaonably characterised as materialistic. This is not particularly surprising. My comment was simply pointing out that economics is by no means restricted to the analysis of only matyerialistic situations.

Having said that, I have a couple of comments or queries about your reply.

First, I am not sure that the fact that the exact time of death is unknown completely undermines the Grossman demand model. While the exact time of death may not be known, we can easily place an upper bound on this for everyone. After all, how many people live to be 200 years old these days? Also, the health capital model is similar to Becker’s human capital model. (This is probably not surprising. I think that Grossman was one of Becker’s students, although I am not certain about this.) If the lack of a known time of death undermines the health capital model, surely it must also undermine the human capital model? It seems to me that the human capital model is a reasonable description of at least some forms of behaviour with respect to education. Similarly, it seems to me that the health capital model is probably a reasonable description of at least some forms of behaviour weith respect to det, exercise and the use of medical services.

Second, I am not sure that you are right that debates about social welfare among economists don’t influence public policy decisions. While income redistribution can be given an efficiency rationale, this is not normally the nature of most policy discussions about its desirability. Similarly, opposition to things like a national identity card is probably not driven by efficiency concerns. Finally, it should be remembered that economists have considered these issues for a long time, although perhaps not always from the perspective of economics. Adam Smith wrote about moral sentiments as well as the wealth of nations. John Stuart Mill wrote about liberty and utilitarianism as well as political economy. Finally, according to Peter Groenewegan’s biography of Alfred Marshall, political economy was initially part of the moral sciences tripos at the University of Cambridge. (I think tripos is the term that the University of Cambridge uses to describe its honours programs, although I could be wrong here.)

Regards,

Damien.

Nicholas Gruen
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Nicholas Gruen(@nicholas-gruen)
14 years ago

That’s an interesting book on Marshall. I read it a while back.

Nicholas Gruen
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Nicholas Gruen(@nicholas-gruen)
14 years ago

He was a big Hegel freak – a good sign.

Paul Frijters
Paul Frijters
14 years ago

Hi Damien,
I agree with all this. I also agree with Nick who says that in practical applications the broad outlook of the initial theory often gets lost and an application emerges ni which materialistic motives are all that survives. i can think of no better example than human capital theory. Shultz, Becker, Blaug, and the rest of the early pioneers in that field were exceedingly nuanced in what they thought went into educational choices. At great pains did they stress one should look at immaterial benefits, psychic opportunity costs, benefits to society ni the form of social norms, etc. And what do you think they mainstream practise is now when looking at the decision to educate or not? There’s no more than a handful of studies looking at psychic opportunity costs. Yet there are thousands of studies running wage regressions yielding a purely monetary rate-of-return to education.

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