Time and Discounting in Private and Public Decision Making
Edited by David J. Pannell and Steven G.M. Schilizzi
Chapter 8: Discounting Future Prospects, and the Quest for Sustainability
8. Discounting future prospects, and the quest for sustainability Alan Randall SUMMARY Discounting is the standard procedure for calculating the present value of future pay-offs. With positive discount rates, discounting reduces future prospects – beneficial and adverse – to a smaller present value, the more so for pay-offs further into the future and/or when higher discount rates are used. This makes sense from a financial perspective: it would be silly to pay more for a claim to future earnings than the amount that could be invested at interest today to ensure the same future pay-off. Yet, environmentalists have complained that discounting is inherently myopic (short-sighted) – an earthshattering disaster a few generations into the future would count only as a small present-valued cost against a proposal that would bring immediate benefits. This chapter is aimed at sorting out some of the issues underlying this controversy and, in so doing, offering some speculations about issues raised in recent literature. A brief summary of my conclusions and speculations follows. Myopia – with its connotations of pathology – is something of a red-herring: while myopia could conceivably explain positive discount rates, the productivity of capital offers a more plausible explanation. The appropriate discount rate for policy is that which reflects the productivity of capital and, ultimately, the growth of human welfare. It follows that equilibrium discount rates will be hyperbolic, converging toward the real growth rate of the economy for very long-term commitments. However, the recent literature on hyperbolic discounting and time-inconsistency provides less cause for concern than...
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