Human Capital Theory and combating COVID-19

One of the upsides of the coronavirus pandemic is that I have spent more time reading. I had an opportunity to browse through an interesting concept of “Human Capital Theory” and its application in determining the demand for health care.

The theory implies that the demand for health has both consumption and investment aspects. As a consumption good, health is desired because it makes people feel better. As an investment good, health is desired because it increases the number of healthy days available to work and to earn income.

Health lasts for more than one period. It does not depreciate instantly, and can be analyzed like a capital good. People inherit an initial stock of health, which depreciates with consumption factors such as age, and can be increased with investment factors such as lifestyle changes, education, etc. 

To illustrate the impact of consumption and investment aspects on the demand of health, assume a hypothetical case of a male with an average life expectancy of 63 years. The individual’s consumption behavior (such as smoking) is assumed to pose a risk of up to a 3% loss in life years, while his combined investment efforts through medical intervention, lifestyle, education, etc., is assumed to counter the risk by adding a 7% gain in life years. 

Applying the model to this scenario, the individual would gain a Health Stock of 0.04 years or 14.6 days per year. If the man is 40, he would have gained a health stock of 0.92 years, or 336 days over his original life expectancy, thereby taking his adjusted life expectancy from 63 to 64. The concept of Health Stock can also be thought of as Quality Adjusted Life Year.

The theory points to an important takeaway that an individual’s lifespan is endogenously determined by the underlying model, thereby supporting a high return on investing in healthy lifestyle changes.

The basic COVID-19 precautionary measures such as handwashing, wearing a mask, and social distancing, can all be considered as endogenous variables that can shift our own health investment curve upward, and subsequently increase life expectancy.

I respectfully urge everyone to see the investment opportunity in health and continue making rational lifestyle changes. This is the right time to adopt healthy behavior and help the Kingdom in combating the spread of this pandemic as we enter relaxation phases.