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Fukushima and the economics of the price of life

Fukushima and the economics of the price of life

Oct 13, 2015
byNoriyuki Morimoto

 

Despite its unethical aspect, it is inevitable to take people’s lives into account when making economic calculations. If standards for some types of danger related to the safety of people’s lives are set far above scientific expectations, it is needless to say that the costs to maintain such standards become exceedingly high, and economic feasibility will be lost when that cost is reflected in prices.

 

When considering the protection of lives, we cannot apply economic calculations assuming that market principles are going to work perfectly: minimum safety standards have to be set by regulation. On the other hand, even those regulations may function only based on a certain level of economic rationality.

 

Should safety regulation standards require nuclear stations to withstand an earthquake much stronger than magnitude 9.0, or a 40-meter tsunami? Will it make sense for the consumers if that additional cost is reflected in utility prices? Suppose we conclude that nuclear power generation lacks economic feasibility in terms of price competitiveness, compared with other options such as thermal power generation, is it possible to maintain stable power supply, which is a fundamental element in people’s livelihood?

 

This issue can only be approached through political decisions that make economic sense. The decision is essentially made by the citizens. We have to recognize that Japan’s nuclear power industry has also been run due to the decision of the Japanese people. From a citizen’s perspective, we cannot blame the decisions made in the past; our sole option is to change decisions going forward.

 

Beyond the realm of rational expectations, dangers of extremely low (but not zero) probability lurk at the basis of the nuclear power industry. How to handle this danger is, so to speak, a bet. The citizens’ decision is supposed to have taken this factor into account. Advanced technological capabilities may reduce the risk of accidents, but cannot eliminate the risk entirely. Even with advanced technology, we cannot create a myth of safety.

 

As long as the situation stays within rational assumptions, it is possible to strike a balance between nuclear power and safety of people. In other words, citizens can be protected while receiving the benefit of nuclear power generation: that is what economic rationality means in this context. However, when a bet against an extremely unlikely risk turns out to be a real danger, economic calculation comes to an end ?in any case, we must put an end to it. Here is the absolute boundary between economic law and ethics.

 

In Japan, the nuclear power industry is run by the private sector. Therefore, the government’s way of taking responsibility in the event of an accident is crucial in operating this industry: the government is the only entity that can take a definite stance beyond the scope of economic rationality to protect the people’s safety. The essence of managing nuclear power as a national policy lies here.

 

If we are to keep our nuclear power industry, the government’s role will not be limited to setting regulations (e.g. designing safety standards). More important is the government’s commitment to take full responsibility in case of an incident.

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Noriyuki Morimoto

Chief Executive Officer, HC Asset Management Co.,Ltd.
Noriyuki Morimoto founded HC Asset Management in November 2002. As a pioneer investment consultant in Japan, he established the investment consulting business of Watson Wyatt K.K. (Tokyo Office) in 1990, where he was Director & Consultant for 13 years. His responsibilities also included Benefit consulting and Financial Services consulting. Prior to joining Watson Wyatt, he was responsible for foreign fixed income investment, asset allocation and investment strategy at Mitsui Life Insurance Co., where he managed assets for the company’s variable life products and group annuities as a fund manager. He spent 2 and half years in London managing fixed income assets. He started his investment career as Japanese equity analyst at Mitsui Life in 1983. Bachelor of Arts (Philosophy), University of Tokyo (1981)

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