The Medical Expansion, Life-Expectancy, and Endogenous Directed Technical Change
We build a unified quantitative theory of increasing life expectancy and income growth in the last two centuries, and the emergence and expansion of a modern health sector in the 20th century.
To do so, we develop a two-sector overlapping generations model with endogenous and directed technical change in which income growth, life expectancy, the size of and technological progress in the health and the final goods sector are jointly determined in general equilibrium. The model interprets the historical record as three phases of a dynamic equilibrium in which households are initially poor and the quality-adjusted price of health goods is prohibitively high so that demand for them is non-existent, and life expectancy is short and stagnant. As technological progress starts to fuel income growth, households commence consuming basic health goods (such as a better diet and basic domestic hygiene), remaining life expectancy at age 20 starts to rise in the first half of the 19th century. 100 years later, further directed technological progress eventually leads to the emergence (in ca. 1940) and then the expansion of a modern health sector.
In counterfactual analyses the model suggests that about 20% of the life-expectancy gains between 1940 and 2020 are attributed to increased spending in the modern health sector. Furthermore, public spending on health—in the form of subsidies to health R&D during WW II and subsequently, due to the emergence of Medicare— plays a major role in the kickoff of the modern health sector during WWII and its expansion afterwards.