Sunday, December 16, 2007

A Fundamental Problem

This Brad DeLong post summarises criticisms of the Stern report on the economics of climate change and criticisms of the criticisms. Mostly, it's concerned with the role of uncertainty; as the tail of the distribution includes some really horrible possibilities, it's not sensible to assume that we'll be OK because the middle of the distribution is more likely.

But there is an even more serious issue here. When Stern originally reported, the thing Tim Worstall seized on to defend his priors was the social discount rate, the relationship between costs or benefits in the present and in the future. Stern assumed a low SDR; a pound's worth of future suffering was similar in value to a pound's worth today. Worstall, and a million other CEI-funded twerps, argued that this was wrong; perhaps costs to the future should be radically discounted?

In part this was based on the argument that the future would be so much richer as a result of continuing economic growth that the costs would be more affordable then; this, of course, itself rests on the assumption that the future costs of climate change would not be sufficient to imperil economic growth, a nice little logical perpetual motion machine.

More fundamentally, though, any discussion of SDRs has to come down to a choice; in a sense it's a measurement of how much you care. It has to come down to a choice because, as Dsquared pointed out at the time, it's impossible to put a real price on costs in the future because the future has no say - it cannot pay the present to change its behaviour. Intergenerational trade is always one-way, and hence there is a huge missing market problem.

But there is something genuinely silly about self-declared capitalists - capitalists! - arguing that the future has no value. Essentially all narratives of the history of capitalism agree that it required a fundamental change in attitudes towards the future; whether you ascribe it to Protestantism, or whatever, you can't have capitalism without the idea that accumulating capital is good. The notion that wealth should be used to accumulate the means of production, and that businesses have an existence independent of individuals, was a stupendously radical one.

The iconography and culture is full of the notion that saving - or rather investment in the economic sense, the transfer of income from consumption to capital formation - is virtuous. The Fable of the Bees is well-known; the bee and the hive are symbols that recur throughout the history of capitalism, combining the value of investment for the future, the work ethic, and the power of specialisation and self-organisation. Bradford's 19th-century bourgeoisie, when they found the city needed a coat of arms, chose two bees and the motto Labor omnia vincit. Similarly, the motif of ploughing a surplus back into the business is too common to need discussing.

Marxism, of course, is founded on the idea that the accumulation of capital explains all human history; development economics has always been attracted to the idea that the transition to industrial capitalism (or communism!) requires faster capital formation. The high development theorists thought there was a specific savings rate at which take-off would be achieved, an economic V-1 around 20%; more recently, the school of Hernando De Soto argues that countries that develop successfully do so primarily because of the savings of the poor, and the solution is to reinforce the property rights of the public.

Now, all this stuff assumes that, in fact, profit in the future is at least as valuable - perhaps even more so - than spending today (or saving in the sense of hoarding cash). The social discount rate must be assumed to be low, or even positive. It is certainly strange to find the people who consider themselves to be the perfect capitalists pushing a pre-economic line; let's eat the stuff we've gathered before it goes off, and make sure we get our share.

3 comments:

dsquared said...

hmmm, I need to do a bit of thinking about this. I think you're right about thrift and the protestant ethic, but the Worstallite tendency also has a lot of the (very popular in America) theory of the endless frontier to it - the idea that we need not worry at all about problems of the future because they will be solved by some as yet unknown deus ex machina, probably made out of scandium. I think that there is quite a lot in Marx about this sort of thinking - basically that all sorts of crises can be postponed by plundering other countries - that the "anti-imperialist" lot have clearly been substantially moved by but I haven't read. I suspect that anywhere between sea level and two feet above is taking the role of a new periphery.

Chris Shaw, Australia said...

Maybe money is the best way there is to put the greatest distance between our actions and their consequences. No wonder I like it so much.

Maybe economics has departed so far from reality, that it's become a belief system we can no longer afford to waste any more time on.

I tried to square the circle in this article:

STUFF

Matthew said...

I don't think these guys usually say that the future has no value--they tend to believe in science-fictional cornucopian futures.

It's more what you mentioned first, that they think the perpetual earning power of capital is so great that parting with any of it now in the name of saving the earth will do more damage to our future than letting the environment go to hell. (Hence the relationship between high discount rates and high interest rates.)

And, no, I don't believe that any more than you do.

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