Perspectives on discounting and the long-term future

Imagine that around the year 0, some nice guy who really cared about saving lives was born. If you like, you can call this guy Jesus just for the heck of it; if not, replace him with some benevolent stranger living at the same time. Suppose this fine man (or woman), after the hardships of a typical life back then, had the opportunity to sacrifice his life so as to save the lives of other people, potentially at different points in time. Suppose further that Jesus thought like a typical economist, and applied a social discount rate to this decision. Maybe he cared a lot about the future and used a relatively small discount rate, say 1%. Now let us imagine he was offered the opportunity to be crucified and give his life to either save 1000 lives right then (roughly in the year 30), or to save the entire world population of around 7.8 billion in 2020. He would have doomed all of humanity today to save 1000 people right then and there based on the simple logic of net present value when discounting with a social discount rate of 1%. In fact, he would have been almost indifferent between saving 20 people back then or the entire world population today. Luckily enough for us, Jesus did not have this choice – nor is it very likely that he would have thought about it like an economist.

You may ask yourself what this thought experiment has got to do with the types of trade-offs and decisions that we as economists face in the real world. Come to think of it, quite a lot. As our very own Christian Gollier put it, “the great uncertainty about discounting the distant future is not just an academic curiosity, but it has critically important implications for climate change policy”1. Especially in environmental economics, we need to assess the benefits and costs or damages inflicted upon future generations over very long periods of time. While the effects of most types of local pollution wear off fairly quickly, the effects of anthropogenic climate change will not cease to be relevant anytime soon. Higher temperatures, rising sea levels and an increased incidence of extreme weather events are only some of the gifts we leave for our descendants to deal with throughout the next centuries. Even more drastically, species extinction is completely irreversible and can therefore be argued to have effects that last “forever” – or at least for millions of years, the typical species longevity of many vertebrates.

Should we disregard all these long-term effects of our actions today, simply because the logic of exponential discounting leads us to assign an extremely small weight to the state of the world in a few hundred or thousand years? Should we do the Nordhaus 2,3 and conclude that things are not so bad, that an increase in average global temperature by 5-6°C until 2200 is not much more than an inconvenience if we just discount it sufficiently? Or is it maybe past time we acknowledged the fact that “the concept of time preference, which relates to individual choice, cannot be applied directly to unborn people”4 and that social discounting cannot be justified by extrapolating established principles from individual decision-making?

Philosophers like Derek Parfit and Toby Ord have been arguing against the naïve application of social discount rates in economic decision-making for decades due to their lack of intrinsic moral justification5. Frank Ramsey, one of the forefathers of economic growth theory, called the “discount[ing of] later enjoyments in comparison with earlier ones a practice which is ethically indefensible”6. Yet this admonition seems to be lost on the majority of economists who prefer to approach long-term social decision-making the same way they would approach individual investment decisions.

If we as economists want to give advice on how to make sensible decisions concerning the long-term future, we need to start taking our effect on it more seriously. Acknowledging that we should not overrule the interests of future generations by discounting them to the point of insignificance is a necessary first step in this process. It is no coincidence that the Future of Humanity Institute, an Oxford think tank producing leading research on the “big picture questions” determining the future of human civilization, is almost an economist-free zone. While interdisciplinary research teams like this try to outline possible trajectories for the future of mankind, identifying existential risks to be addressed on the way, economists stand by and break off fights about whether to discount the future catastrophes we’re causing today at a rate of three or rather four percent.

Maybe we should for once discard our fear of having our economist card revoked for venturing off the beaten path of theoretical orthodoxy. It is our own choice whether or not to use the tools and knowledge we have in a farsighted way or to just keep on doing business as usual. We owe it to this world and all the living creatures it will hopefully continue to accommodate for billions of years. As Benjamin Todd put it, “future generations matter, but they can’t vote, they can’t buy things, and they can’t stand up for their interests”7. Let us at least try to not make them pay for our myopia.

By Henrik Scholtz

1 Gollier, Christian, and Martin L. Weitzman. “How should the distant future be discounted when discount rates are uncertain?” Economics Letters 107, no. 3 (2010), 350-353. doi:10.1016/j.econlet.2010.03.001.

2 Nordhaus, William D. “A Review of the Stern Review on the Economics of Climate Change.” Journal of Economic Literature 45, no. 3 (2007), 686-702. doi:10.1257/jel.45.3.686.

3 Nordhaus, William. A Question of Balance: Weighing the Options on Global Warming Policies. Yale University Press, 2008.

4 Cowen, Tyler. “Caring about the Distant Future: Why It Matters and What It Means.” The University of Chicago Law Review 74, no. 1 (2007), 5-40.

5 Parfit, Derek. “An attack on the social discount rate.” Philosophy and Public Policy Quarterly 1, no. 1 (1981), 8-11.

6 Ramsey, F. P. “A Mathematical Theory of Saving.” The Economic Journal 38, no. 152 (1928), 543-559. doi:10.2307/2224098.

7 Todd, Benjamin. “The world’s biggest problems and why they’re not what first comes to mind.” 80,000 Hours. Last modified 2017. 

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