CHAPTER 5 Health capital Kenneth Arrow, Partha Dasgupta, and Kevin Mumford KEY MESSAGES Health is an essential characteristic of Most health capital services influence human well-being. human well-being directly rather than through the production of goods and services that are Health capital is an important part of inclu- counted in GDP. sive wealth. In the absence of better estimates of the The economic model of health capital pre- direct and productivity effects, gains in life sented in this chapter allows health to affect expectancy should be used as the primary mea- human well-being through three distinct sure of health capital. channels: direct well-being, productivity, and longevity. Annual gains in health capital in the U.S. are worth approximately US$10,000 per person. CHAPTER 5: Health capital 123 1. Introduction 2. Health as a capital asset Attempting to measure human well-being with- Health is a multidimensional concept. There is out considering health would be a great over- no single standard way to measure the health sight. Health is central to our happiness. Health of an individual or a population group. A physi- affects our enjoyment of life, our productivity in cian may examine a patient and measure health employment, and our risk of death. Our desire along several dimensions including mental for good health influences our decisions regard- health, severity of illnesses, nutrition, body ing eating, sleeping, exercising, and our demand mass index (BMI), risk of disease, and level of for medical services. As shown in Table 1, total pain or discomfort. An individual may track spending on medical care from both public exercise and eating behavior or rate his or her and private source makes up an important and own subjective health along a scale of overall fit- generally increasing share of national income ness. For a population group, a researcher may in many countries. use life expectancy, infant mortality rate, avail- The improvement in life expectancy at birth ability of healthcare services, or prevalence of has been quite dramatic in most countries over preventable diseases as indicators of the health the past 60 years (see Figure 1). Several stud- of the group. Our term, health capital, refers ies, including Nordhaus (2005), Becker et al. to a satisfactory measure of the overall health (2005), Murphy and Topel (2006), and Jones and of an individual or a population. It may be a Klenow (2011), have shown that recent gains single all-encompassing measure or perhaps a in life expectancy have been at least as impor- weighted combination of the health measures tant to human welfare as gains in income. The described above. Inclusive Wealth Report 2012 treated health The question of whether it is appropriate to as a form of wealth by estimating the value treat health as a capital asset it important. Doubts of the improvement in life expectancy over a about treating health as a form of capital arise nineteen-year period. However, health capi- when one compares health to other forms of capi- tal was treated separately from other forms of tal and notes the obvious differences. Economists capital because it was found that even modest generally describe capital as an input into a pro- gains in life expectancy outweighed other gains. duction function. We think of manufactured Though understandable, this is not a theoret- capital assets such as machines, equipment, ically-sound reason to exclude health capital buildings, roads, and ports that are used in the from an inclusive measure of national wealth. production of goods and services. Manufactured capital assets have value that is equivalent to their future marginal productivity. The produc- TABLE 1 tive services can be rented or the capital asset Total health expenditure (percentage of GDP) itself can be sold to another individual without destroying its value. Unlike inputs that are con- sumed as part of the production process, manu- Country 1995 2000 2005 2010 factured capital can be employed in the pro- Brazil 6.7 7.2 8.2 9.0 duction process multiple times. Manufactured capital may depreciate over time, but it is not China 3.5 4.6 4.7 5.0 consumed in the production of goods and ser- Germany 10.1 10.4 10.8 11.5 vices. To summarize, economists generally think India 4.0 4.3 4.2 3.7 of a manufactured capital asset as (1) a durable object that could be sold to someone else, (2) an United States 13.6 13.6 15.8 17.7 input in the production of goods and services, Source: The World Bank (2013), World Development Indicators and (3) a store of value to achieve consumption. 124 INCLUSIVE WEALTH REPOrt 85 80 75 70 65 FIGURE 1 Life expectancy at birth 60 Source: UN Department of Economic and Social Affairs (2012) “World Population Prospects” 55 Life expectancy at birth 50 Key Brazil 45 China Germany 40 India United States 35 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Like manufactured capital, health is dura- Health is not commonly thought of as an ble. A person’s health is relatively constant input in the production of final goods and over time. Health depreciates, but it is not services. The evidence suggests that improve- consumed as it provides current well-being. ments in health do lead to productivity gains, At times, health may depreciate rapidly due particularly in low-income countries (Bhargava to some illness, similar to the risk of some et al. 2001). The estimates suggest that large catastrophe reducing the value of a manu- increases in health cause only small increases factured capital asset. Unlike a manufactured in GDP growth rates and there is little evidence capital asset, health capital cannot be directly for productivity gains from health in devel- purchased from a health-rich person. One oped countries. However, health does provide cannot rent the well-being services that flow health services – greater enjoyment of current from health nor can one sell health to another consumption and longer life – directly to the individual. However, the ability to transfer a individual. That these health services are not capital asset to another individual does not part of measured gross domestic product does seem to be an essential characteristic of capi- not mean that they have no value. To the con- tal. The knowledge, skills, and abilities that trary, health is of great value to humans and is make up what is commonly called “human an essential characteristic of well-being. Our capital” cannot be directly transferred from view is that health capital is similar to consumer one person to another and this does not cause durables (e.g., houses, consumer electronics, fur- economists to question if human capital can niture, home appliances, and sports equipment) be considered a capital asset. that provide well-being to consumers, but are CHAPTER 5: Health capital 125 FIGURE 2 Use of capital in production Human well-being Direct provision of human Indirect provision of well-being through services human well-being through not counted in GDP production and consumption P D Consumption G Final goods and services (gross domestic product) Capital is an input in the production of goods and services Services not counted in Services not Production process Manufactured Health capital Natural capital Human capital capital not generally direct inputs in the production services which increase human well-being, and of a final good or service that is counted as part (3) a store of value to achieve the consumption of gross domestic product. of health services. Services from capital assets, Figure 2 illustrates the point that capital which are not counted as part of GDP, including assets can both directly and indirectly (through health services, have value. Therefore, the value the production process) affect human well-being. of the capital asset itself is equal to the present Machines and business equipment primarily discounted value of the future services. From the increase human well-being through the produc- point of view of an economist, health is a form of tion process. Forests have both a direct influence capital. This chapter seeks to measure the stock on human well-being through ecological and of health capital, estimate its value, and measure recreational services as well as an indirect influ- the value of the change in health capital for sev- ence through the consumption of final goods for eral countries over a period of five years. which timber is an input. Similarly, health capi- tal has a direct influence on human well-being as well as an indirect affect through increased 3. The value of health capital productivity. That health increases human well- being primarily through a direct channel rather We begin with a stylized model to illustrate the than through the indirect production/consump- role of health capital in providing human well- tion channel does not raise any concerns about being. We propose a rather simple two-period its treatment as a capital asset. model as it is sufficient for providing general To summarize, health is (1) durable and non- intuition about how to measure and value transferable, (2) both an input in the production health capital. The model is an expanded ver- of goods and services and the source of a flow of sion of the Arrow et al. (2013) model. We assume 126 INCLUSIVE WEALTH REPOrt that the economic agent is alive in period 1 with The agent’s lifetime budget constraint is certainty, but there is uncertainty about being given by + ! alive in period 2. The agent’s expected lifetime EQUATxpecIOtNe d2 Lifetime Utility = U (H,c1) (H) U (H,c2 ) utility is given by c12++ pc h≤ W() H EQUATION 1 whereExpect ewealthd Lifet icanme Ubetil ispentty = U on(H either(h),c) +consump! (H(h))-U (H(h),c) Expected Lifetime Utility = U H,c + ! H U H,c ( 1) ( ) ( 2tion) in period 1, consumption in period 2, or Expected Lifetime Utility = U H,c + ! H U H,c investing in health.