By Nathan R. Lee, MIT Thesis, 2014, Lee is now a PhD student at Stanford
Climate change generates a conflict between generations: while it is in the interest of the current generation to continue to exploit inexpensive carbon-based fuel to drive economic growth, it is in the interest of future generations that we reduce our carbon emissions by making these fuels more expensive. This raises the following question: what moral framework should we use to adjudicate between the interests of different generations? In this work, I argue that the commonly used framework of “cost-benefit analysis”—the analytic framework for public policy that developed out of the field of welfare economics—fails as a normative framework for intergenerational policy. For one, by aggregating costs and benefits across all generations, it ignores that what matters is each generation. For another, by reducing all value into a unitary objective function, it ignores important distinctions between different categories of moral claims. Third, by attempting to optimize a function across all time, it reflects a false sense of knowledge about the distant future. For all these reasons—and more—I conclude that this approach cannot offer a reasonable normative framework for intergenerational public policy. In its stead, I propose an “intergenerational threshold” principle which avoids aggregating generations together, gives space for different categories of value, and, I will argue, is more robust to the epistemic limitations of intergenerational policy analysis.
- Introduction……………………………………………………………………………………………………………. 1
- The Failure of Intergenerational Cost-benefit Analysis………………………………………………. 4
- An Illustration of the Problem…………………………………………………………………………………….. 4
- The Origins of Cost-benefit Analysis……………………………………………………………………………. 8
- The Social Discount Rate………………………………………………………………………………………… 11
- Approaches to Calculating SDR………………………………………………………………………………… 13
- Discounting in the Intergenerational Context……………………………………………………………….. 16
- Why Does Intergenerational Cost-benefit Analysis Fail?…………………………………………. 26
- A Moral Critique of Intergenerational Cost-Benefit Analysis…………………………………………… 35
- What is the Alternative to Intergenerational Cost-Benefit Analysis?………………………… 39
- A Proposal: An Intergenerational Threshold Principle………………………………………………………. 43
- Reconciling the Proposal with Cost-Benefit Analysis…………………………………………………….. 47
The planet’s average surface temperature has already increased approximately 1.2˚F in the past century, and the International Panel on Climate Change (IPCC) predicts that, absent new mitigation efforts, it will rise another 3 to 7˚F over the next century. While the magnitude of the effects remain unclear, they will almost certainly include sea level rise, more extreme weather (stronger and more frequent hurricanes, droughts, and floods), and acidification of ocean water. Besides the direct fatalities such events will cause, these changes will also put pressure on food and water supplies, reinforce geopolitical conflicts, and accelerate the spread of disease. While some of these trends have already begun, the most severe impacts of climate change will be felt by future generations (Emmanuel, 2012).
While future generations are most threatened by climate change, it is the current generation which is in the best position to prevent it. And given that preventing will require sacrifice—substituting away from carbon-based fuels will entail substantial costs, despite remarkable advances in low-carbon energy sources in recent years1—we have a misalignment of generational self-interest. As such, the question of the appropriate mitigation policy is, in a large part a moral one: how should we weigh the interests of our own generation against the interests of those that will come in the future?
This question, in turn, raises deeper questions. Can we reasonably say the current generation owes it to future generations to prevent climate change? Why should future generations suffer for something which they have no control over when it could be prevented at moderate cost by those who do? The answers to these questions ultimately depend on the basic standard we use to address questions of intergenerational ethics.
The global economy remains highly dependent on carbon-intensive energy. For example, eighty seven percent of global energy consumed in 2013 was from fossil fuel (BP, 2014).
To navigate this complex web of competing intergenerational moral claims, we need a clear framework for the normative analysis of intergenerational issues. To justify our answers that such an analysis would produce, this framework must be built on a defensible standard for intergenerational ethics more broadly. It is the development of such a standard or principle for intergenerational ethics that is the principal motivation of this thesis.
My thesis is twofold. The negative component of my thesis is that “cost-benefit analysis”—the standard analytic framework for policy dilemmas in energy and environmental policy—and its underlying moral standard of aggregate welfare maximization fail to provide a reasonable basis for resolving intergenerational policy dilemmas like the appropriate climate mitigation strategy. The positive component of my thesis is to argue that a reasonable framework for normative intergenerational analysis must be anchored by a non-maximizing, non-welfarist intergenerational “threshold” principle.
The argument is organized as follows. In the first part, I will show how cost-benefit analysis breaks down in the intergenerational context, using climate change as the canonical case. In the second part, I will show why cost-benefit analysis breaks down, exploring the question from both an operational standpoint as well as a moral-philosophical one. In the third and final part, I consider alternative approaches to cost-benefit analysis, proposing and defending the general shape of an “intergenerational threshold” principle which, I argue, avoids the features that doom intergenerational cost-benefit analysis.
The Meaning of “Cost-benefit Analysis”
But first, it is important that I define clearly what it is I am attacking. I have set out to argue that cost-benefit analysis fails as a normative framework for intergenerational public policy. One might reasonably ask: how could anyone object to the notion that a government should consider both the costs and benefits of its options before making a decision? If this is all “cost-benefit analysis” meant, I would endorse it. After all, this is equivalent to saying “perform a comprehensive analysis”.
But in political discourse, cost-benefit analysis means much more than this. It generally refers to the analytic approach that developed out of welfare economics for analyzing public policy. Underlying this approach is the normative principle of aggregate welfare maximization, as well as a particular set of analytic approaches to identifying, measuring, and aggregating welfare (we will examine all this shortly). This is all to say that the term cost-benefit analysis in this paper presupposes a particular moral-operational framework, and it is this framework I have in mind as I develop my critique.
Perhaps then I ought to capitalize it Cost-Benefit Analysis every time, but I believe this would actually be misleading. Given the soaring influence the field of economics continues to have on contemporary political discourse, the welfare-economics interpretation of these words has become all but synonymous with the words themselves.3
II. The Failure of Intergenerational Cost-benefit Analysis
A. An Illustration of the Problem
Let us say that, by an international agreement, all countries have signed a binding agreement to enact a global tax on carbon for ten years. How much should the tax be?
The standard cost-benefit analysis approach says the optimal carbon tax is that which maximizes the benefits net costs of a policy, normalized for time. In this case, the “benefits” are the monetized value of the damage that would have occurred from climate change absent the imposition of the tax. This should include the averted damage to both direct economic activity (typically approximated in terms of annual GDP) as well as some monetized equivalent for environmental goods not internalized in the market. The “costs” are the reduction in economic activity that results from the higher prices of goods imposed by the tax (again typically approximated by GDP).
Finally, to sum all these values up, we “normalize” for the fact that they are occurring at different points in time. To accomplish this, the standard framework discounts future value at some time-compounding rate to convert all values into “present value.” In the case of climate change, most of these benefits will be heavily discounted because they will occur in the distant future; the costs, on the other hand, will occur in the present. Once all future costs and benefits have been converted into their present values, we can finally sum up all the benefits and subtract the sum of all the costs. Doing this for an array of carbon tax values, we should then choose the value which yields the greatest normalized net benefits.
But why do we normalize at all? Why not simply sum up all benefits and costs irrespective of the time in which they occur? It turns out that doing this leads to absurd conclusions in many cases, including climate change. To illustrate, let’s take an ultra-simplified example. Let’s suppose we have three policy choices: $10, $100, and $1000 per-ton-of-CO2 emitted. Furthermore, let us suppose that (1) the benefits and costs can be measured purely in terms of GDP, (2) we can develop good estimates of the effects this tax will have on GDP over time. In particular, relative to some counterfactual business-as-usual baseline GDP trajectory, the economic costs and benefits of each policy will be:4
|Global Carbon Tax Policy||Annual Global GDP Impact (Years 1-10)||Annual Global GDP Impact (Years 11-50)||Annual Global GDP Impact (Years 51-200)||Net Value from Time- neutral CBA|
4 We will further assume that all numbers are adjusted for inflation and that the economy after two centuries will have the same trajectory regardless of policy choice today.
While these projects are purely illustrative, they are at least plausible. A $10/ton carbon tax is on the lower end of the range of commonly proposed carbon tax values, and it would cause very limited disruption to the global economy. The $100/ton tax is on the upper end of this range, and while it would not derail the global economy, it would entail significant adjustments costs. The $1000/ton value is intentionally selected as being implausibly severe—it is an order of magnitude outside the reasonable range of carbon tax proposals. As a short cut to seeing how devastating this would be for the global economy, we might reasonably approximate this as being a de facto ban on the use of fossil fuel. Forcing a global economy which continues to rely on fossil fuels for nearly 90% of its energy needs to shift entirely to carbon-free energy sources would clearly cause massive economic damage.
So, without discounting, which tax does our CBA tell us to choose? If we simply sum up the costs and benefits without any special accounting for time, the optimal choice is the $100/ton policy. However, notice that all policies are net positive—even the one which would cut the economy in half for an entire decade! This conclusion should give us pause, as it seems to condone what would amount to a crushing blow to the current generation for the sake of (relatively) moderate economic gain in the future.
This implication is a consequence of the fact that the benefits, albeit moderate in magnitude, persist for 150 years, whereas the costs last for ten years. As a result, the sum of the benefits swamps the sum of the costs, even if the per-year cost is greater. Indeed, if we were to remove the bound on the time horizon and consider an infinite stream of benefits—which is perhaps a more realistic case for climate change anyway—then any amount of sacrifice on the part of the current generation would be justified according to cost-benefit analysis so long as some annual benefit existed, no matter how small. This illustrates the overwhelming power of an infinite series in aggregative analyses: that any amount of continued benefit in the future will justify even the most extreme suffering on the part of the current generation is often referred to as the “tyranny of the future” problem.5
To address this, welfare economists introduce a correction factor into cost-benefit analysis that reduces the weight of the future relative to the present. In particular, each value is converted into its “present value” equivalent by being exponentially discounted the further out in time it occurs:
Later we will closely examine how economists justify such a move, but, for now, I will simply illustrate what happens to the results. For example, using a common value of r = 5%, we get:
|Global Carbon Tax Policy||Net Value (Undiscounted)||Net Value (Discounted 5%)|
5 Viewed from a standpoint of mathematics, this result is not surprising: just like a line to a point or a set to an element, an infinite series of values will always overwhelm a finite one.
6 However, we cannot conclude that intergenerational cost-benefit analysis categorically fails to produce reasonable results—after all, there do exist certain values between r=0% an r=5% that generate reasonable results. For example, at a discount rate of 2.5%, we would reject the $100/ton and $1000/ton carbon policies but accept the $10/ton policy.
The difference is dramatic. We essentially have a complete reversal: whereas in the time- neutral case even the draconian $1000/ton policy generates net benefits, with a 5% discount rate no policy is worth endorsement, even the one which would only require a ten-year sacrifice of 1% of our GDP for a century and a half of equivalent economic gain. Unlike before where the cost-benefit analysis makes the present generation a prisoner to future generations, here the cost- benefit analysis indicates that the present generation need not even lift a finger (even if a little bit of effort could go a long way).
What conclusion can we draw from this analysis? The conclusions are twofold. First, given the extreme sensitivity of the analysis to the choice of the social discount rate, if we are to apply cost-benefit analysis intergenerationally, we must choose this parameter very carefully.6 Second, and more importantly, that our basic moral intuitions about what a reasonable approach to cost-benefit analysis would be (i.e., temporal neutrality) turn out to generate completely unreasonable results suggests that there are some non-intuitive questions lurking in the background which need to be addressed before applying the approach. To get a good grasp of these questions, we must begin with the origins of cost-benefit analysis itself.
The Origins of Cost-benefit Analysis
- Welfare as Willingness to Pay (WTP)
In this paper, cost-benefit analysis is understood to be the analytic application of the principle of welfare maximization, which says that the optimal policy is that which maximizes the sum of welfare across all people. What exactly does welfare mean? In Classical
Utilitarianism, welfare was understood as pleasure, for which philosophers such as Jeremy Bentham and John Stuart Mill provided objective criteria (Bentham, 1907; Mill, 1906). Such a definition enables one to compare amounts of welfare across individuals.
However, in the 20th century, critics like Lionel Robbins argued that these definitions of welfare were flawed attempts to impose objectivity on a concept which is inherently subjective. Welfare is a mental state or disposition that can be meaningfully understood only within an individual. As Robbins famously said, “Every mind is inscrutable to every other mind, and therefore no common denominator of feeling is possible.” This line of reasoning has strongly influenced contemporary welfare economics, which defines welfare as the “satisfaction of one’s own preferences” (Robbins, 1932).
But to make the above definition practically useful, economists must have some way to actually measure preference satisfaction. Economists do this through the notion of “willingness to pay” (WTP), which is premised on the idea that the relative amount of money one is willing to spend on something is a direct indication of how much one values or “prefers” that thing. For conventional market goods, measuring WTP is a relatively straightforward affair, since WTP can be inferred from the market price. For public goods (e.g., environmental protection) or goods with imperfect or distorted markets (e.g., healthcare), however, economists must estimate WTP indirectly, employing a variety of sophisticated techniques (indeed, this is a huge part of modern- day empirical economics). While economists tend to prefer methods that gather information based on actual market behavior, one common technique for environmental goods is to actually ask people what they would be willing to pay under various conditions. This method is known as “contingent valuation” (Samuelson, 1992).
- The Modified Pareto Criterion
While the subjective preference satisfaction definition does not necessarily rule out interpersonal comparisons of welfare,(See Ken Arrow and Amartya Sen’s work on Social Choice Theory.) contemporary welfare economics tends avoid this contentious issue by focusing normative analysis on the pursuit of the Pareto criterion, namely, that a policy should be undertaken if and only if it would make at least one person better without making anyone else worse off (as defined by the individuals themselves). Such a policy is known as a Pareto improvement, and the point at which no alternative policies could be enacted that would make at least one person better off without making someone else worse off is known as Pareto efficiency (Samuelson, 1992).
Although the Pareto criterion is theoretically attractive, it turns out to be too strict for practical use. After all, it’s hard to imagine any public policy ever being enacted that wouldn’t make at least one person worse off. As such, strict compliance with the Pareto criterion would paralyze the public policy process. In recognition of this, welfare economists have developed a slightly relaxed version of the criterion known variously as the modified Pareto criterion (MPC), the potential Pareto Criterion, or the Kaldor-Hicks criterion, which says that a policy should be undertaken if it could generate a Pareto improvement (i.e., if those who are made worse off by the policy could be compensated by those who are made better off). While this is may seem like a subtle distinction, it turns out to be of monumental importance: given that welfare is defined in monetary units through WTP—and assuming we take welfare expressed in monetary terms as functionally equivalent to actual money—then for any policy that increases aggregate WTP, there will also be a hypothetical set of monetary transfers by which those made worse off by the policy could be fully compensated such that it satisfies the modified Pareto criterion. In other words, given the above premises, any policy which increases total monetary value—irrespective of its actual distributional effects—is to be endorsed (Samuelson, 1992).
C. The Social Discount Rate
Let us now turn to the question of how to compare costs and benefits across time and, in particular, to what extent we should “discount” for time. This issue turns out to be the single most contentious issue in cost-benefit analysis when applied to climate change—and it is at the core of my critique of multi-generational cost-benefit analysis—so I will examine this issue in great detail. Before going any further, let me define what discounting means from a high-level operational standpoint: discounting is a way of converting a future value into its present-value equivalent. In particular, where SDR is the social discount rate. In the standard application of cost-benefit analysis to public policy, all costs and benefits that occur in the future are converted to present values using some pre-specified SDR. It is the sum of these present values that we aim to maximize.
So that is how to discount. But why do we discount? There are several reasons for why we might engage in something that looks like discounting. Broadly speaking, we can distinguish two classes of discounting: pure discounting, which is discounting for time itself, and instrumental discounting, which is discounting for contingent reasons that happen to coincide with time.
There are six common explanations for discounting in standard cost-benefit analysis:
- Diminishing Predictive Capability (Instrumental) – We should discount future costs and benefits because our confidence in predicting these values falls exponentially with time.
- Possibility of Human Extinction (Instrumental) – Given that there is always a chance that some catastrophic event (e.g., asteroid collision, volcanic eruption, “runaway” climate change) will destroy humanity, we should prioritize the present over the
- Future will be Wealthier (Instrumental) – The global economy will continue to grow in the long-term, so people will have more money in the future. Given the diminishing marginal utility of wealth, we should discount to the extent that future people will be wealthier.
- Proper Accounting for Economic Productivity (Instrumental)— Due to the marginal productivity of capital, a unit of wealth invested today yields more than one unit in the future. As such, monetary values in the future are equivalent to the monetary values in the present that would have to be invested to generate them. We should therefore discount at the relevant market rate of
- Maximize Return on Investment (Instrumental)—To ensure we maximize total wealth over time, we should allocate scarce resources where they will achieve their highest return. Discounting future costs and benefits at the relevant market rate of return will ensure that only policies which generate “future returns” as high as the equivalent resources could in the market will pass a cost-benefit analysis test. This is also known as the “opportunity costs”
- Discounting is Democratic (Pure)— People prefer wealth in the present relative to the future. In a representative democracy, public policy should reflect people’s preferences. The discount rate reflects this
Each of these reasons is distinct—and can have very different implications for the rest of the analysis—and yet they lead to functionally equivalent behavior. Moreover, we will see in the following section that different combinations of these explanations are behind the different procedures economists use to calculate the SDR. Consequently, it is often very difficult to tease out the relevance of any particular explanation for a given cost-benefit analysis. This will turn out to be of great importance because I will argue that “pure” justifications for discounting are impermissible in the intergenerational context, while instrumental justifications are not. The difficulty in distinguishing between these justifications and when they apply is what makes the topic of intergenerational discounting so notoriously difficult.
D. Approaches to Calculating SDR
There are three general approaches to calculating the SDR: the social rate of time preference (SRTP), the social opportunity cost of capital (SOCC), and the Ramsey equation (RE).8 Let us look at all three, assuming a standard time horizon (a single generation). We will subsequently look at how these approaches might be modified for longer time horizons that include many generations.
8 There is also a fourth approach known as the “shadow price of capital.” This is a hybrid of the first two approaches, but discussing its components will be sufficient for our purposes.
- The Social Rate of Time Preference (SRTP) Approach
The social rate of time preference approach takes the social discount rate to be a kind of collective preference parameter on how to trade off consumption goods across time. This approach tends to be justified by appeal to its democratic pedigree, i.e., that the government’s rate of time preference should reflect the preferences of its constituents.
If we make all the required assumptions to link preferences to the market—preferences can be understood as preferences for consuming goods, individuals’ market behavior is in accordance with these preferences, etc.—we can then employ the market as a direct source of information about people’s preferences. For example, economists use the market for government-backed securities such as U.S. Treasury bonds to infer how people discount future consumption. If one assumes that government guarantee effectively eliminates risk, this allows economists to isolate the effect of time from the effect of risk. The implied discount rate from such markets tends to be around 3% (EPA, 2010).
- Social Opportunity Cost of Capital (SOCC) Approach
The social opportunity cost of capital approach effectively looks at the government as an investor in society and asks what the minimum rate of return is needed to justify the investment. The argument goes as follows: the resources the government spends are resources that otherwise would have been spent in the private economy, since government spending is financed by taxes on private citizens and businesses. Consequently, if we wish to maximize welfare and are prepared to make the necessary assumptions to convert welfare into monetary value, we should accept only public policies that can achieve at least as a high a return as they could have in the private economy. To ensure this, we should discount the impacts of the policy by the relevant market rate of return.
One common empirical approach to calculating the SOCC is to use the stock market as a kind of “economy-wide” average rate of return on capital. There is some dispute about whether to use corporate debt or corporate equity, as it depends on what kind of background uncertainty one thinks the risk-free SDR should incorporate. But, merely by way of example, the average annual real rate of return on equity is around 7% (EPA, 2010).
- The Ramsey Approach
The Ramsey Approach is based on the Ramsey equation, which was developed by Frank Ramsey as part of his optimal growth theory. The Ramsey Approach provides a means of deriving the discount rate rather than inferring it. In doing so, it allows us to disaggregate and compare the relative contributions of the different factors that drive discounting. The equation is as follows:
The first term, ρ, is the component of the discount rate that is known as pure discounting, that is, discounting for time itself.9 The second term is the component of the discount rate that is driven by diminishing returns to increasing wealth, where is the elasticity of the marginal utility of wealth10 and the expected growth rate of the economy. The final term represents the uncertainty in our expectation of future economic growth (which offsets the second term since diminishing returns to wealth leads to a certain level of risk aversion). For standard cost-benefit analysis (i.e., single-generation), these parameters are typically inferred from the market. For example, if we take , , , and fairly common values seen in the literature), we get an SDR of approximately 6% (Weitzman, 2013).
9 This is sometimes considered to be equivalent to the social rate of time preference.
10 This parameter can also be used to represent aversion to inequality.
There is no consensus among economists which one of these three approaches is the correct one for standard cost-benefit analysis. In light of these competing methodologies and the range of values each of them can yield, the U.S. Office of Management and Budget takes a pluralistic approach, requiring federal agencies to perform their cost-benefit analyses using both a 3% discount rate (roughly corresponding to the SRTP approach) and the discount rate of 7% (roughly corresponding to the SOCC approach) (OMB, 2003).
E. Discounting in the Intergenerational Context
In the case of issues like climate change, we are evaluating costs and benefits that occur not only at different points in time, but in different generations. How should we calculate the SDR in this case? Can the discounting approaches used in standard cost-benefit analysis be similarly applied in the intergenerational case? Let’s consider each approach in sequence. I will ultimately conclude that no approach to discounting can be reasonably applied intergenerationally.
- Applying the “Social Rate of Time Preference” Approach
The “social rate of time preference” approach, as we discussed, is justified on democratic grounds and is typically inferred from markets for risk-free assets such as government bonds. However, it is not clear how this justification would extend intergenerationally. We might argue, for example, that future generations have no right to representation in our public policy decisions today since they don’t yet exist. By this logic, we might reasonably maintain the original justification for the SRTP and simply extend the time horizon. This would imply that policy decisions which affect future generations should weight the interests of future generations no less and more than the current generation weights their interests.
But even if the justification for the SRTP holds in the intergenerational context, there would remain a difficult operational question, namely, whether we could continue to use the financial markets as a basis for inferring people’s (intergenerational) time preferences. I suspect that the answer is no: the idea that we can understand an individual’s preferences about how the government should allocate resources between generations based on their self-interested financial behavior seems fool-hardy. Even if we take the neoclassical economic view that (1) people’s preferences are exogenously determined and (2) these preferences can accurately be revealed only in their behavior (rather than through considered statements, for example), it still does not follow that a person’s market behavior would represent these preferences. Such a conclusion would require that there be a market by which individuals internalize their concern for future generations as a type of good. I do not believe such a market exists.
But this turns out to be a moot point since, as I will show, the basic democratic premise of the SRTP approach—that a government’s time preferences should reflect those of its citizens—cannot hold in the case of intergenerational issues such as climate change. For one, a state can be a self-respecting democracy but defy its constituency preferences from time to time. What if the constituency wished its government to carry out a massacre of a group of foreign innocents? Should the state satisfy such a request? Perhaps one might argue that, in an absolute democracy, the state is nothing more than an organ for collective preference satisfaction. But in a representative, constitutional democracy, the state has grounds to defy its citizenry with just cause. In such a case, where satisfying the preferences of its citizens would commit a grave injustice in violation of its constitution, the state has an obligation to override these preferences. Unchecked carbon emissions may be such a case.
But more powerfully—and I believe the most compelling argument against the “discounting is democratic” argument—is a rejection of the idea that a democracy’s constituency is limited to those alive today. Instead, democracy might be considered a type of “project over time.” On this view, merely because future generations do not yet exist does not mean they should be precluded from representation (or, more precisely, represented only insofar as the current generation wishes them to be represented). In fact, taking this view might lead to the assertion that a government that accounts only for the interests of the current generation is, far from being democratic, patently undemocratic—that discounting based solely on current time preferences, for example, would be an act of disenfranchisement of future generations.
And if we take this view—a view which I believe is basically correct—how can we possibly rely on the market for information about future generations’ preferences? Even if the implied discount rate in financial markets does represent the current generation’s long-term time preferences (a point I have disputed), it most certainly does not represent the time preferences of all generations. At its neoclassical best, the market reveals the preferences of its participants. But future generations are not participants. After all, how could they be if they do not yet exist? So if we take the view that all generations merit representation, we cannot employ a methodology for calculating the discount rate which relies purely on market information. Consequently, the SRTP approach in the intergenerational context is simply untenable. We can actually draw a stronger conclusion: we cannot employ a framework which relies on knowing the preferences of people who will exist in the distant future. People’s preferences are endogenous to the social, political, economic, environmental, and cultural circumstances they live in, and we cannot plausibly project how those circumstances will change into the distant future.
- Applying the “Social Opportunity Cost of Capital” Approach
To review, the SOCC approach takes the discount rate to be an efficiency parameter to ensure we choose policies that will generate welfare returns over time at least as high as we can achieve through private investment. It infers the discount rate from the interest rate on private capital. Economists who defend this approach in the intergenerational context tend to employ a variant on the efficiency-equity decoupling argument, namely, that a government can and should separate the efficient generation of welfare (that is, maximizing aggregate welfare) from normative concerns about the distribution of welfare between generations. Consequently, intergenerational distributional concerns should not affect what investments the government makes, but rather how the welfare generated from these investments are (re-)distributed.
The selection of public investments (of which discounting is a part) is not the appropriate venue to address intergenerational distributional concerns. If the objection to the SOCC approach to intergenerational discounting is based on the implications it has for the distribution of welfare between generations, this objection is misplaced. We only have reason to be concerned with the intergenerational distributional implications of any particular investments insofar as each contributes to the comprehensive distribution of resources between generations. Economists who think along these lines tend to suggest that, instead of focusing on discounting as the battleground for intergenerational distributional issues, we instead focus on the overall rate of savings between generations (Arrow, 1995).
Put another way, the assertion that discounting at the market rate (as the SOCC would have us do) biases us toward investments with shorter time horizons is not so much wrong as it is irrelevant. There is no necessary correlation between the average time horizon for investment and the overall rate of savings between generations (since we can simply reinvest the returns from the initial investments). On the other hand, if we modify the discount rate based on concerns for intergenerational fairness—and, as a result, invest in the longer-term, lower-return projects—we will effectively lock ourselves out of the higher-return investment trajectory and ultimately hurt the very people we intended to help.12 Consequently, we can and should decouple our pursuit of intergenerational fairness from our choice of the discount rate (Posner, 2007).
12 However, this argument is valid only if the question at hand is how to allocate scarce resources between public and private investment. But if this allocation is already decided and the remaining question is how to allocate public funds between particular projects, this point is irrelevant.
While I agree that the intergenerational savings rate, relative to the discount rate, is a better parameter for managing the normative issues we are concerned with, these two parameters cannot actually be decoupled for issues such as climate change. Over long periods of time, the opportunity cost of capital (which determines the discount rate in the SOCC approach) tracks the overall rate of savings. To see this, consider what happens if we all collectively save more: the intergenerational savings rate will certainly go up, but the overall rate of return on capital will go down (since the highest-return investments will already have been taken). In turn, the opportunity cost of capital will also fall. Consequently, these two parameters cannot be isolated from each other, nor can the criteria that they represent (efficiency and fairness, respectively). In short, the positivist defense of intergenerational discounting as a benign efficiency parameter with no distributional implications is simply untrue (Broome, 2012).13
There is a second major problem with this argument. It depends on the existence of effective ways to transfer wealth across generations (without this, we cannot reasonably decouple the generation of welfare from the intergenerational distribution of it). While this is certainly plausible between proximate generations (e.g., through direct inheritance), it is harder to see how we could enact policies that accomplish this over many generations. After all, any transfers to distant future generations must go through the hands of many intervening generations, and we have no ability to predict what these “middle men” will do with the resources they receive, nor do we have any reason to believe that they will follow our wishes. This absence of a reliable intergenerational transfer mechanism further undermines the decoupling defense of the SOCC approach to intergenerational discounting.
- Applying the Ramsey Approach
I have shown, so far, that neither the SRTP nor the SOCC approach can offer a reasonable approach to discounting in the intergenerational context. Thus we are left with one last option—the Ramsey Approach. This is the most promising of the three approaches, since the disaggregation of the input parameters allows for a clean distinction between “instrumental” and “pure” discounting. However, this approach ultimately turns out to be untenable as well. I will show that, without pure discounting (which I have argued is indefensible in the intergenerational context), the discount rate values that the Ramsey Approach produces are too low and lead to the “prisoner of the future” problem.
13 This relates to Nick Stern’s defense of his below-market discount rate choice (if I understand Stern’s argument correctly). He essentially argues that his rate is “below market” only relative to today’s market, but that our climate policy will change the market itself . This is part of his broader critique of applying cost-benefit analysis—an analytic framework meant for “marginal” projects—and applying it to policy debates such as climate change, which are “non-marginal” (e.g., we cannot take macroeconomic trends to be exogenous to the policy decision).However, if I understand Stern’s argument correctly, this seems to take a very optimistic view of the power of public policy to shape behavior in the market. This raises some interesting empirical questions: if we passed major climate reform, to what extent would it actually change people’s consumption-to-savings ratio?
I have already shown that, unlike in the case of the single generation, we cannot appeal to democracy to justify pure discounting in the intergenerational context (nor, for that matter, am I aware of any plausible justification for pure discounting across generations). On the other hand, we have a strong reason not to engage in pure discounting, namely, that doing so seems to arbitrarily discriminate against future generations. Thus we should adopt a standpoint of intergenerational neutrality ( = 0).
If we prohibit pure discounting, however, the low discount rates that result from the Ramsey Approach generate policies which are extremely demanding on the current generation. For example, Nicholas Stern, who famously argues against pure discounting on ethical grounds, adopts a Ramsey-based SDR of 1.4% (ρ = .1%14, η = 1, and g = 1.3%).15 At this discount rate, the cost-benefit analysis Stern runs says that we should dramatically change our current emissions trajectory.16 The IPCC’s baseline prediction is that annual GHG emissions will grow 1-3% per year.17 In contrast, Stern says that the optimal policy would cause our emissions to peak in 10-20 years (he published this report in 2007, so 10-20 years would be 2017-2027) and then decline year-on-year thereafter at 1-3%.18 These changes would be costly for many people today: Stern first said it would cost 1% of global annual GDP, but revised estimates have suggested 2% or higher. Nonetheless, this is certainly feasible (Stern, 2006).
14 He chooses a pure rate of time preference of 0.1% to account for the possibility of human extinction.
15 This excludes the uncertainty term about economic growth. Depending on the magnitude of this value, it could reduce the SDR still further.
16 It can been shown that the low discount rate Stern used is the principal driver of the demanding policy conclusions. When increasing the discount rate, the required emissions reductions drop dramatically.
17 IPCC predicts global GHG emissions will increase 25-90% between 2000 and 2030.
18This is corresponds to a long-term stabilized atmospheric concentration of 550 ppm CO2e.
However, that is the burden of the climate policy alone. If we apply Stern’s discount rate of 1.4% consistently across all intergenerational issues, it turns out that each generation would have to save, in total, somewhere between 40 to 97.5% of annual GDP. The upper end of this range is patently absurd, and even the lower end is extremely onerous, especially in light of the fact that each generation will tend to be poorer than the generations it is saving for (Dasgupta, 2008).
This is not necessarily objectionable: such austerity might be justified if, for example, there were a high enough chance of future catastrophic events which would greatly outweigh the suffering imposed today. However, justifying these policies via a low discount rate is to arrive at what may be the right answer through the wrong means. Namely, what’s driving the analysis of the Stern Review is not the potential for catastrophe but rather the sheer washing-out effect of using a low discount rate when aggregating benefits—no matter how minute—across an unbounded series of future generations. This is an inadequate justification for imposing austerity on the current generation (Weitzman, 2007).
Thus, the Ramsey Approach leaves us between a rock and a hard place. We cannot engage in pure discounting, but avoiding it leads to absurd policy conclusions. Clearly, for an intergenerational cost-benefit analysis to yield reasonable results, we need to discount beyond simply accounting for increasing intergenerational wealth, but the Ramsey Approach does not offer us a justifiable way of doing so. Is there any other argument for discounting across generations? The answer is no, but before I can draw this conclusion I must refute one final argument that has recently been put forth to this end.
- The “Tactical” Justification for Intergenerational Discounting19
In “Climate Policy: Justifying a Positive Social Time Preference”, Joseph Heath attempts to move us past this impasse by exploring a number of alternative arguments for intergenerational discounting. Some of his arguments have already been critiqued in this paper (e.g., he mounts a defense of discounting by appeal to opportunity costs à la SOCC approach), but one important argument he makes which I have not yet considered I will consider here: in what I will call his “tactical” justification for intergenerational discounting, he argues that even if intergenerational discounting itself is morally arbitrary, it is an efficient way of coordinating intergenerational moral efforts. Making an analogy to humanitarian aid coordination problems, he argues that, in the same way we might assign different people different geographic zones to send their donations (to prevent the classic “Baby Jessica” problem), we might similarly assign different generations different temporal zones to focus their moral efforts. In particular, we might tell each generation to focus their efforts on their own generation and (exponentially) less on future generations. In this way, we might use temporal zoning to justify a type of instrumental discounting of future generations, despite the zones themselves having no fundamental moral significance (Heath, 2013).
19 One might also refer to this as the “distributed moral responsibility” or the “institutionally mediated morality” justification to intergenerational discounting.
20 He suggests philosophers have put themselves in a corner by tending toward a categorical stand against intergenerational discounting, and I tend to agree. However, I would argue the way out of the corner is not to find ways to bring philosophical merit to discounting (and cost-benefit analysis more generally), but rather focus on a
There is a lot to be said for this argument. For one, I agree with Heath’s basic goal, namely, to find ways to reconcile philosophical critique of discounting with economic pragmatism.20 Moreover, it is certainly worth developing operational systems by which to translate abstract moral principles into specific guidelines for how to act. Finally, I am not averse to the idea that we might instrumentally justify intergenerational discounting. However, I believe this particular justification is based on a false premise. It implicitly assumes that, just as well- designed spatial zoning will tend to benefit everyone around the world, a positive rate of time preference will somehow benefit everyone across time. But, unfortunately, intertemporal relationships do not “net out” the way interspatial ones might. For example, some actions by the current generation can impose irreversible costs on all generations that come thereafter, while the converse is not true. Thus, even if people will tend to be most effective in helping their own generation, it does not follow that discounting will work to everyone’s advantage, thus undermining the premise of the argument.21
F. The Breakdown of Intergenerational Cost-benefit Analysis
To review, neither the appeal to democracy (as exemplified in the SRTP approach) nor the appeal to opportunity costs (as exemplified in the SOCC approach) can be reasonably applied in the intergenerational context. The Ramsey Approach can be applied across generations, but without pure discounting—which I argue is unjustifiable in the intergenerational context—it yields unreasonable results. Finally, we considered a “tactical” justification for intergenerational discounting, but this too turns out to be untenable. Thus we find ourselves in an impossible situation: if we engage in pure discounting, we are unjustifiably discriminating against future generations; if we don’t engage in pure discounting, we are led to policy recommendations for way of transforming the philosophical critiques of cost-benefit analysis into a constructive and operational decision framework which can compete head-to-head with cost-benefit analysis.
21 This is, of course, what makes the discounting problem for climate change so pernicious in the first place: by discounting future generations’ welfare, the current generation might find it optimal to permit severe and irreversible climate change in the future.
the current generation that are unjustifiably draconian. No matter how we approach the discount rate issue, applying cost-benefit analysis intergenerationally leads to insuperable problems.22
Given that all the choices are bad, perhaps the real problem is how we are forming these choices in the first place. In Part II, stepping back from the discount rate debate, I will show that the root of the problem lies in the underlying structure of cost-benefit analysis itself, and that the impossibility of the discount rate debate is merely a symptom of this problem. In identifying the problematic features or characteristics that lie at the core of the cost-benefit normative framework, I hope it will provide some guidance as to the shape of what an appropriate intergenerational normative framework must look like (or, at least, what it must not look like).
- Why Does Intergenerational Cost-benefit Analysis Fail?
In Part II, I showed that cost-benefit analysis irredeemably breaks down in the intergenerational context as manifested through the discount rate debate. In Part III, I take a step back and look more systematically at this approach and why it breaks down in the first place. I argue (1) the framework’s use of market-based revealed preference, (2) its reliance on the assumption that goods are substitutable, and (3) the infeasibility of using “expected value” for low-probability, high-consequence events are key problems in the operationalization of cost- benefit analysis. Second, and more fundamentally, I argue that the very normative foundation for cost-benefit analysis itself—namely, the principle of welfare maximization—is fundamentally flawed in the intergenerational context in (4) its attempt to maximize an aggregate function across time and (5) its use of welfare as a unitary metric of value. It is these five problems which I argue are the key drivers behind the breakdown of intergenerational cost-benefit analysis.
22 Furthermore, even if there was some instrumental or contingent justification for discounting that happened to yield reasonable results, we could not depend on it doing so in all cases.
A. An Operational Critique of Intergenerational Cost-Benefit Analysis
- A Critique of Market-based Revealed Preference
In this section, I will critique the application of the standard methodology economists use to identify preferences in the intergenerational context. To be clear, I am not critiquing the use of preference satisfaction, per se—although I will effectively do so later in the moral critique—but rather how economists operationalize this concept. To measure preference satisfaction, we must have a means of identifying what people’s preferences are in the first place. To do this, economists typically rely on market behavior as a means of “revealing” people’s preferences.
However, I will argue that this not a reasonable approach when considering preferences in the intergenerational context.
I have already mentioned the problems that arise with using the market as a source of information for intergenerational policy. To review, the most obvious problem in relying on the market is that it can provide information only about the preferences of those who participate in it, which obviously excludes future generations, who do not yet exist. Thus, to the extent that we believe future generations merit direct representation in cost-benefit analysis, we must supplement the market with other sources of information.
I also mentioned a second, more subtle problem, which suggests that even if the only preferences we care about are those of the current generation, we still can’t rely on the market. It is this topic that I wish to examine more closely here. I will argue that we cannot plausibly rely on the market to reveal preferences about public policies with significant moral content—such as climate change and other intergenerational issues—even for those who participate in it. This is because people’s preferences as revealed through their market behavior are not likely to be the same as their preferences after consciously considering the moral implications of the issue at hand. In short, context matters, and the market is the wrong context.
In The Economy of the Earth: Philosophy, Law, and the Environment, Mark Sagoff tries to explain this idea by proposing a distinction between preferences as a “consumer” and preferences as a “citizen.” He gives the following example: imagine there is a proposal to destroy a national park to develop a new mall on the same site. Bob—a city-slicker who does not spend time in nature—is asked about his preferences about this proposal. On the one hand, Bob says he would enjoy going to the mall much more. On the other hand, he thinks the proposal itself is repugnant and should be rejected. What explains this apparent contradiction in preferences?
Sagoff argues that the first is Bob’s preference as a consumer; the latter his preference as a citizen (Sagoff, 1990). There is an alternative explanation for this same phenomenon: the relevant distinction is not between types of preferences but rather between people’s preferences and people’s considered judgments about what the right thing to do is—I will return to this issue in the moral critique.
But granting for the time being that we can understand this phenomenon as Sagoff suggests—that is, as two types of preferences—we can theoretically resolve this issue within a preference-based normative framework like cost-benefit analysis. To this end, several methodologies have been proposed for identifying these latter preferences that cannot be teased out from market behavior. For example, the Deliberative Monetary Valuation (DMV) methodology solicits people’s preferences through a discursive process in which people interact with each other and, in doing so, become more aware of each other’s interests (such an approach is sometimes referred to as “moral priming”). This type of methodology has a grounding in “deliberative” democratic theory, which suggests that preference-based public policy, properly construed, is not simply an aggregation of people’s fixed preferences (e.g., public choice theory), but a process by which people’s preferences evolve—and converge to some extent—through genuine civic discourse (Spash, 2007; Bessette, 1980).
- A Critique of Substitutability
The second component of the operational critique of cost-benefit analysis is its use of the substitutability-between-goods assumption. All welfarist normative frameworks ultimately translate all value into one value metric (namely, welfare). By measuring the value of all goods in terms of this metric, any such a framework implicitly endorses the notion of substitutability between goods, i.e., that the loss of one good can be offset by a sufficient gain in another. As before, this operational critique presupposes welfare maximization as a premise—and therefore accepts that substitutability between goods exists23—and instead critiques how it is operationalized. In particular, I will argue that the notion of substitutability is often operationalized in cost-benefit analysis without the appropriate level of nuance with regard to the relationship between non-market and market goods. I will suggest possible ways to address this problem while leaving the basic framework intact.
Substitutability between goods is a key element behind the arguments of scholars who call for a more moderate response to climate change (Nordhaus, 2013; Darwall, 2013; Lomborg, 2001). To illustrate the basic line of reasoning behind these arguments, let’s consider two categories of goods: non-market goods (which include most environmental goods) and market goods. If we take non-market goods to be substitutable with market goods, then the reduced value of for the former (e.g., through environmental degradation) can be offset by the increased 23 In the moral critique, however, I will argue that the premise of substitutability itself is flawed.
value of the latter (e.g., through economic growth). Under this line of reasoning, the common assumption that the global economy will continue to grow in the future offsets the fact that the environment will continue to degrade. Moreover, this allows one to view policies which focus on economic growth not as ignoring environmental problems but as an effective means of addressing them.
However, others respond that such arguments overlook the complexity of the relationship between market and non-market goods (Shogren and Toman, 2000; Costanza, 1996). The idea that any amount of environmental degradation can be offset by a sufficient amount of economic growth, I would agree, seems foolhardy. On the other hand, it is true that, to some extent, economic growth can help to address the problems with environmental degradation (e.g., think levies, desalination plants, and air-conditioning). In this section, I will explore how we might reconcile the limits to substitutability within the confines of cost-benefit analysis. But to foreshadow, ultimately I will conclude that, while there are a number of approaches which are compatible with cost-benefit analysis, they seem to be analytic fixes for a deeper problem with the framework itself.
One possible way of addressing the issue of limited substitutability is through the notion of diminishing returns, namely, that as we increase the amount of some good, the value of each additional unit goes down; and conversely, as we reduce the amount of something we have, the value of each additional unit removed goes up. If we take economic growth to be an increase in market goods and environmental degradation to be a decrease in non-market goods as before, then we can see how this logic plays out: (1) as the economy grows, the value of each additional unit of growth goes down and (2) as the environment degrades, the value of each additional unit destroyed goes up. It stands to reason then, that at some combination of environmental degradation and economic growth, the amount of additional economic growth which would be required to offset the degradation would be essentially infinite.
The diminishing-returns explanation is fully consistent with cost-benefit analysis. It simply requires that we be more careful with our analysis. In particular, we need to make sure that the marginal benefit and marginal cost functions of each good are sensitive to the amount of the good that exists in the system already. Put differently, the cost-benefit analysis must account for changing stocks of goods and not merely incremental flows. This makes the operationalization of the framework much more difficult, but not impossible. The methodology attempting to address this is known as “non-marginal” cost-benefit analysis (Dietz and Hepburn, 2010).
Another adjustment to cost-benefit analysis that might help with the issue of limited substitutability is something like an interaction effect between non-market and market goods. In particular, the presence of one category of goods might have some effect on the value of the other category of goods. On the one hand, the presence of one category of goods might diminish the value of the other category.24 On the other hand, the presence of one good may increase the value another good provides. If we believe certain environmental goods fall into this latter category (e.g., clean air), then if environmental degradation leads to their destruction (e.g., dirty air), then the value loss includes lost value from other goods as well (e.g., all other outdoor activities are less enjoyable in dirty air). And if this added penalty is pronounced enough, then it might not be able to be offset by the increase in market goods.
24Such a relation is itself often referred to as “substitutability,” but not in the same sense of substitutability used in this paper.
As before, this adjustment can be made within the confines of cost-benefit analysis.
Similar to the previous solution of making the marginal cost and marginal benefit functions of each good sensitive to the existing stock of that good, the solution here is to make these functions sensitive to the existing stocks of the other goods. Notably, this approach could provide an opening to build in system threshold effects or side constraints. For example, below a certain number of environmental goods, the benefit functions of all other goods could crash to zero.
Each of the solutions above would allow us to grant some degree of non-substitutability without rendering cost-benefit analysis broken. However, they are better described, I would argue, as analytic fixes to a flawed premise, namely, that we can aggregate all value into a unitary metric. I believe it is more reasonable to revise the premise: part of the value of environmental goods is of a different nature than the value of market goods. Moreover, this value is lexically prior to the latter. The inability to grant space for different priorities of value in this way, I will argue, is a key problem with intergenerational cost-benefit analysis. I will return to this in the moral critique below.
- An Epistemic Critique of Intergenerational Cost-benefit Analysis
In this final portion of the operational critique, I will argue that cost-benefit analysis is poorly suited to incorporate the expansive uncertainty that permeates intergenerational policy issues such as climate change.
Cost-benefit analysis is a probabilistic framework. Costs and benefits in the future are expected values, which is to say that each value is itself a summation of all the different possible values weighted by their probabilities (or, more precisely, some probability distribution). To make such a framework work then, we must construct a probability distribution over which a range of specified outcomes might occur. However, constructing reliable probability distributions demands large amounts of data, especially when we do not know anything about what the shape of the distribution should look like (e.g., normal, log-normal, polynomial).
For intergenerational issues such as climate change, we are deficient on both counts: (1) we do not have much data and (2) we do not know the shape of the distribution. This leads to highly uncertain probability distributions. This point alone is not grounds to throw out cost- benefit analysis. It simply conveys the difficulty of probabilistic analysis for policy issues in which we lack a strong empirical basis to ground our predictions. But what makes intergenerational issues such as climate change uniquely difficult is that these facts are combined with the fact that the plausible range of outcomes is enormous. Indeed, they range from inconsequential to civilization-ending. These factors combine to lead to some counter-intuitive results, which call into question the basic cost-benefit approach (Broome, 1992).
This point is famously made by Harvard Economist Martin Weitzman, a critic of the standard CBA framework for climate change whose work focuses on economic analysis of extreme events. In what he coined the “Dismal Theorem,” he shows that, unless we make arbitrary assumptions about the shape of the probability distribution, standard cost-benefit analysis leads us to the conclusion that we should be willing to pay an infinite amount to mitigate climate change. This, of course, is analytically ludicrous (Weitzman, 2009).
I will illustrate this problem with the setting of a global carbon tax. According to cost- benefit analysis, the optimal tax—that is, the tax which will maximize benefits net costs—should equal the marginal cost imposed on society of emitting carbon dioxide (or, equivalently, society’s aggregate “willingness to pay” to avoid carbon emissions). This is known as the “social cost of carbon” (SCC). In a simple, two-period model with initial welfare W0, the best case scenario is that climate change has no effect (i.e., W=W0); the worst-case scenario is that it destroys human civilization (Wà 0). The likelihood of these various outcomes is characterized by some probability distribution, p(W). Under these conditions, it can be shown that the SCC will be (Weitzman, 2009):
Recall that a logarithm function approaches infinity as its argument falls to zero. For SCC to have a finite (and therefore meaningful) value, this means the probability distribution has to fall to zero faster than ln(W) grows to infinity. So what does the probability distribution look like as we approach zero welfare? Weitzman argues that, without knowledge of the appropriate shape of the distribution and without empirical data about these extreme events—as is the case for climate change—the standard statistical approach is to assume a polynomial decay function (what is known as a “fat tail”). However, a logarithm function—the inverse to the exponential function—grows faster than a polynomial function falls, and therefore the SCC in such a case is infinite (meaning we should be willing to pay an infinite sum to avoid climate change).
Wetizman points to this “crazy” result as a weakness of the standard CBA approach.
Of course, the SCC values used by the U.S. government are very much finite. Why is this? It’s because the analysis behind those numbers has assumed that the probability distribution exhibits exponential decay (thin tail) rather than polynomial decay (fat tail). The exponential probability decline offsets the logarithmic growth in lost welfare, ensuring that the function converges at the limit and thus providing a finite SCC. However, Weitzman argues that this assumption is unjustified in the case of climate change and is arbitrarily imposed to maintain analytic tractability (Weitzman, 2009).25
25 Weitzman further argues that when we choose a thin-tail, the CBA switches from excessive sensitivity to catastrophic events to inadequate sensitivity to such events.
B. A Moral Critique of Intergenerational Cost-Benefit Analysis
So far, I have taken for granted welfare maximization as the appropriate normative basis for intergenerational policy analysis and instead focused on issues with how it is operationalized through cost-benefit analysis. For each of the issues examined—whether it be on measuring preferences, addressing non-substitutability between goods, or overcoming the epistemic limitations of assessing the distant future—the solutions I have explored seem to be, at best, analytic fixes to a deeper set of problems that remain unresolved. Simply put, regardless of whether these problems can be resolved, cost-benefit analysis seems to fundamentally misrepresent what matters most about perpetuating human society over many generations. In this section, I will attempt to address this deeper problem, which I will argue derives directly from the moral underpinnings of welfare maximization itself. My critique is twofold: (1) by maximizing across all generations, we ignore the fact that what really matters is each generation in and of itself and (2) the aggregation of all value into a unitary welfare measure ignores important distinctions between categories of moral concern. A viable framework for intergenerational normative analysis, therefore, must be appropriately sensitive to both the distinction between generations and the distinction between moral claims.
- The Problem with Aggregative Maximization
The first problem with intergenerational cost-benefit analysis is that we aggregate all generations’ welfare together. As the number of generations included in the analysis increases, the framework becomes decreasingly sensitive to what any particular generation will experience. When aggregating over enough generations, each generation become a trivially small piece of a much larger pie. As a result, a policy could be extremely harmful for a particular generation while still being justified in summation.
The obvious solution to this problem, it would seem, would be to not aggregate generations together. However, aggregation is effectively a precondition for intergenerational welfare maximization. True, there exists a form of non-aggregative welfare maximization that we have already discussed known as the Pareto principle. This principle says that a policy should be undertaken if and only if it would make at least one person better off without making anyone else worse off. If we try to conceive of an “intergenerational Pareto principle,” we would say that welfare is maximized when there are no alternative policies which would make any generation better off without making any other generation worse off. However, this essentially rules out any policy which imposes any sacrifice on any generation. Take climate change mitigation: to the extent that curtailing carbon emissions today will impose costs on the current generation, the strict Pareto principle rules it out. As such, this principle cannot plausibly act as a standard for intergenerational ethics.
This is why economists rely on the modified Pareto criterion (MPC), as we discussed before, which says that a policy should be undertaken if it could generate a Pareto improvement (i.e., if those who are made worse off by the policy could be compensated by those who are made better off) without ensuring that it will, in fact, be a Pareto improvement. This subtle distinction is the foundation for cost-benefit analysis. It provides cover for simply maximizing aggregate welfare (net benefits) irrespective of who actually gets what since, by definition, if total welfare increases,26 there will always be a hypothetical set of transfers by which those made worse off can be compensated by those made better off.
But if we are committed to non-aggregation, the MPC can be justified only if, in the end, it will at least tend toward the satisfaction of the actual Pareto Criterion. In some policy arenas, economists make this case: that over enough independent “policy iterations”, the distributional consequences will tend to average out such that we can focus simply on increasing net benefits and, in the end, everyone will win. But in the case of intergenerational issues such as climate change, this argument clearly does not hold: the climate policy we choose today will have a decisive influence on the basic trajectory of economic development in the coming generations. We do not get to re-run history a thousand times and hope that the intergenerational distributional impacts will somehow balance out. As such, we cannot ignore the distributional impacts that maximizing aggregate welfare has on different generations, and thus we are back to where we started! So since neither aggregative maximization (modified Pareto criterion) nor non-aggregative maximization (strict Pareto criterion) offer a reasonable avenue for intergenerational ethics, it’s appropriate to conclude that intergenerational maximizing of any sort is untenable. Consequently, the appropriate normative framework for intergenerational policy must avoid this feature.
26 And assuming welfare is transferable between people which, in monetizing it, we take it to be.
- The Problem with Welfare
In the first component of the moral critique, I argued against the maximization element of intergenerational welfare maximization. Here I turn my critique to welfare itself. I will argue purely welfarist intergenerational normative frameworks conflate what generations owe one another from a standpoint of intergenerational political morality with what it might be good or nice for generations to provide one another across time. We do not owe each other a certain amount of welfare, I will argue, but rather the maintenance of certain background conditions that must be satisfied before any welfare measurements can be taken.
In particular, a minimal condition we must certainly satisfy is something like a “livable planet.” The narrow temperature range maintained by a remarkably precise balance of inert and heat-trapping gases in the atmosphere is not worth preserving simply or even mainly because it will provide future generations welfare (however they define it); rather, it is nothing less than a precondition for human existence. We need not commit ourselves to any particular conception of political morality or justice to recognize that a livable planet is simply on another plane of importance from other moral claims, be it a welfare claim or any other.
A unitary value framework such as welfarism fails to make this distinction. By lumping the value of these preconditions with the value of the goods built on these conditions, welfarist approaches construct a false notion of unbounded substitutability. It suggests, for example, that environmental damage which jeopardizes the condition of maintaining a livable planet can somehow be offset by a good whose value presupposes the satisfaction of this condition.
This is certainly not to say that a livable planet is the only condition on this plane of importance, or that any good associated with the environment is lexically prior to any good associated with the market. For one, there is some degree of substitutability between the two (e.g., it is certainly true that greater wealth can buy stronger levies against the rising seas). For another, some of the other background conditions may be economic goods themselves (e.g., perhaps a basic income condition). The point is simply that there are certain foundational background conditions—be they environmental or economic in nature—and the preservation of these conditions trumps all other moral claims. Conventional cost-benefit analysis—along with all other purely welfarist frameworks—fails to make this distinction and, as such, misrepresents the basic issue at hand. Therefore, the appropriate normative framework for intergenerational matters must distinguish between these different categories of moral claims.
IV. What is the Alternative to Intergenerational Cost-Benefit Analysis?
In Part I, I showed that cost-benefit runs into insuperable problems when applied across many generations. In Part II, I examined why this happens, identifying a specific set of analytic features which I have argued are the sources of the problems. Now, in Part III, I will answer the following question: what must a normative standard for intergenerational policy look like if it is to avoid the problems that doom cost-benefit analysis? I will begin by considering whether the oft-cited “precautionary principle” might provide an answer. I will show that, while it offers useful insights which reinforce the critique of intergenerational cost-benefit analysis, it does not offer a constructive alternative. I will then propose what I believe is a constructive alternative framework, namely an “intergenerational threshold” principle. Finally, I will consider how this threshold principle might be reconciled with standard cost-benefit analysis.
A. Precautionary Principle?
At its most basic level, the precautionary principle is a formalization of the “better safe than sorry” mantra. In the case of environmental policy problems such as climate change, it is often used as a justification for regulations in the absence of definitive proof that the relevant human behavior is causing environmental damage. Put differently, it tends to put the burden of proof on those who would claim that human behavior is not damaging the environment. In this section, I will explore two questions: (1) What moral framework underpins the precautionary principle? (2) Can this framework offer a reasonable alternative to intergenerational cost-benefit analysis? I will answer this pair of questions for what I consider to be the three most plausible interpretations of the precautionary principle.
- Precautionary Principle as General Risk Aversion
One normative interpretation of the precautionary principle is that society ought to favor policies which reduce overall risk. This is based on the premise that there is something bad about uncertainty in an expected outcome, independent of what that expected outcome is. To operationalize this, we should favor policies, all else equal, which tend to narrow the possible range of outcomes.27
However, the precautionary principle interpreted as such does not necessarily run counter to cost-benefit analysis. On the contrary, welfare economists recognize that people are willing to pay a premium to insure against risk. To address this, economists often make the presence of uncertainty just one of many costs to be considered (or, conversely, they make the avoidance of uncertainty a benefit). Because this interpretation of the precautionary principle can be internalized within the cost-benefit approach, it does not offer a fundamentally different alternative.
It is worth making one other note on this interpretation: given that most regulatory decisions have risks on both sides (e.g., in the case of environmental regulations, it is often risk of environmental damage vs. risk of slowing economic growth), there is no reason to believe that such a framework will systematically support more rather than less regulation.
- Precautionary Principle as Aversion to Particular Risks
Another interpretation of the precautionary principle is not as a general aversion to risk but rather an aversion to particular risks. For example, the precautionary principle may emphasize the priority of avoiding risks to the environment generated by human activity.
However, this, too, may be understood within the context of cost-benefit analysis: if environmental concerns seem to be emphasized more than other concerns, perhaps it is because the measurement processes involved in implementation of cost-benefit analysis tend to under-emphasize environmental impacts (e.g., by ignoring costs/benefits which are difficult to monetize or by underestimating the costs of irreversible environmental damage). Under this interpretation, the precautionary principle is not an objection to the premise of cost-benefit analysis but rather a plea to be more careful in how we apply it.
That being said, the emphasis on environmental concerns may go beyond a mere compensation for under-emphasis in the measurement process. Indeed, perhaps this interpretation of the precautionary principle is better understood as a real prioritization of environmental concerns over other issues. If this is the case, then such a prioritization requires justification (otherwise it is nothing more than the imposition of one group’s preferences). One such justification is offered by Douglas Kysar by appeal to the agency of the state and its positive responsibility to the environment (Kysar, 2010).
27 If one takes the view that no policy actually reduces overall uncertainty but rather shifts uncertainty within domains (e.g., replaces environmental uncertainty with economic uncertainty), then this principle would be of no practical use.
- Precautionary Principle as an Epistemic Critique
The third interpretation of the precautionary principle that we will consider is, in essence, a call for humility in trying to predict the impacts human behavior has on the environment. The argument is that optimization frameworks like cost-benefit analysis demand a level of precision in predicting the impacts of our policies which we cannot plausibly satisfy given the complexity of the ecosystem (Gardiner, 2004).
Unlike the first two versions, this version does amount to a direct attack on cost-benefit analysis itself. However, its argument is purely negative: it critiques cost-benefit analysis, but it offers no constructive proposal to replace what it tears down. As such, while I generally agree with the argument underlying this version of the precautionary principle—indeed, it is consistent with the epistemic critique of cost-benefit analysis I developed in the previous section—it cannot provide a reasonable alternative to cost-benefit analysis.
A Proposal: An Intergenerational Threshold Principle
I wish here to propose and defend, at a high level, an alternative framework for intergenerational normative analysis. Developing a fully operationalizable normative framework for intergenerational public policy requires addressing a dizzying number of complexities, ranging from various puzzles in moral philosophy and democratic theory to the epistemic constraints that result from our profound ignorance of the distant future. Addressing these complexities is a huge undertaking, and requires the joint effort of many minds. However, these complexities cannot be solved without first agreeing on some shared framework for approaching intergenerational ethics more broadly. It is this limited but critical step which I hope to advance here.
- An Overview of the Principle
In this section, I outline the general shape that I believe an intergenerational normative principle must have if it is to accurately represent what we owe to each other across time as a matter of political morality. The methodology I initially employed in developing this proposal was to find a principle which avoided the problematic features of intergenerational cost-benefit analysis I highlighted in the previous sections (e.g., maximization, unitary value aggregation, unrealistic epistemic requirements, etc.). I ultimately found that the appropriate principle should have the shape of what I will call an “intergenerational threshold,” that is, a sufficiency criterion to be maintained across time.
In particular, I propose the following:
Each generation should do its reasonable best to produce and perpetuate the basic conditions necessary to allow future generations to live in a prosperous society.
Each element of this principle requires elaboration.
A “prosperous society” is simply a stand-in for the type of society that we can reasonably agree we owe each and every generation the opportunity to achieve.28 Perhaps it might be understood in terms of material well-being, cultural advancement, or social harmony.
Importantly, the meaning of this criterion should not depend too heavily on any particular generation’s conception of the good; it must be independent of the changing circumstances of time. Beyond this, I will not make particular claims about the meaning that “prosperous society” should have, as it is not necessary for the current goal of delineating the overarching structure of the principle. Like the other elements of the principle, giving this phrase a content that will be reasonable for the purposes it is to serve will require further substantive philosophical inquiry.
The “basic conditions” are then the background conditions or goods that are necessary to provide each generation a reasonable chance of living in such a prosperous society. They will clearly depend on how we define a “prosperous society,” but at a minimum, they will include the physical conditions necessary for human life (e.g., reasonable temperature range, breathable air, dry land, etc.). Furthermore, they will likely also include the social and political institutions necessary to ensure safety and civil liberty, as well as some combination of knowledge, technology, and physical resources that together ensure the conditions for the reproduction of some basic quality of life.
28 We might say a “just society” instead, but I wish to avoid any claims about justice for now.
“Each generation should do its reasonable best” is necessarily vague and will need to be defined contextually. One might be tempted to simplify this principle into its stronger, simpler form: “each generation should do what is necessary to ensure that these conditions will be met across time.” However, such a principle would be overly demanding, since no matter what we do as the current generation, we cannot guarantee the conditions will be met across all generations.29 Worse still, we do not even have a clear sense of what the actions we can take today are that will help increase the odds. In light of these constraints, we can do nothing more than our reasonable best to satisfy these conditions.
- Defense of the Principle
This intergenerational threshold principle, while it raises a host of questions that require answering before it can be operationalized, I nonetheless believe illustrates the basic shape that a reasonable principle for intergenerational ethics must have. My principal justification is that it avoids the fundamental ways in which cost-benefit analysis misrepresents the intergenerational dilemma. For one, it avoids maximizing an aggregative function across all generations; instead it anchors the principle in the interests of each generation. For another, it does not force all value into a unitary measure such as welfare; instead, it provides space for distinguishing between different categories of normative claims. 29 The contrapositive is not necessarily true, however. For example, we could engage in a global nuclear war that guarantees that the threshold will not be met.
That it accords with our moral intuitions further supports the principle. When people think about their moral concerns for future generations, they are not concerned with the minutia of their lived experiences—with the possible exception of their proximate descendants—but rather they are concerned with establishing and maintaining the basic conditions for prosperity. Think again about the case of climate change: what grips people about this issue? Why do we care about it? We care about climate change because it might put the entire country of Bangladesh underwater. We care about climate change because it might cause natural disasters that will kill many people. We care about climate change because it might cause widespread desertification which, in turn, might undermine humanity’s capacity for food production. In short, climate change is morally compelling because it threatens some of the basic conditions that we understand to be necessary for life itself.
Finally, that the principle is more robust to practical epistemic constraints than cost- benefit analysis lends further support to it. To review, a key problem with intergenerational cost- benefit analysis is that it requires a level of precision that is impossible to achieve for issues like climate change where the relevant time horizon is extremely long and for which we lack an extensive historical-empirical foundation on which to base our predictions (Broome, 1992). The threshold principle, in contrast, recognizes the limits of what we know, making the normative target the satisfaction of some finite set of conditions rather than a comprehensive and ongoing optimization challenge. A further epistemic advantage of this principle is that the threshold principle, unlike cost-benefit analysis, does not depend on each generation’s particular conception of welfare, something which depends on a whole array of contextual circumstances that are difficult or impossible to predict.30
C. Reconciling the Proposal with Cost-Benefit Analysis
The threshold principle tells us what we owe each other as a matter of intergenerational morality. However, it leaves space for other normative claims. Instead of providing a complete rank ordering of all policy choices like cost-benefit analysis does, this principle acts more like a filter, eliminating policies that fail to satisfy it but remaining neutral to all others. Consequently, we would need a further decision rule for deciding between the policies that satisfy the principle. It is here that we might reintroduce cost-benefit analysis, or some other secondary normative framework, in deference to whatever (welfarist) reasons we have to help people today and in the future get more of whatever they happen to want. In other words, the intergenerational threshold principle could act as a side constraint on a form of intergenerational welfare or preference maximization, and in that capacity would express the most important reasons we have to provide for future generations.
How should we balance the interests of the current generation against the interests of future generations? This, I would argue, is the central question in the debate over what to do about climate change. Indeed, it is the central question that challenges the whole of sustainable development.
30 I cannot say, however, that the basic conditions are fully independent of the changing circumstances of time— unless we make them so abstract that they are no longer useful. For example, even the need for a “livable planet” might be obviated if we managed to colonize other planets. Notwithstanding, we can certainly say that these conditions are less contingent than, say, what constitutes welfare for any particular generation.
This question is almost incomprehensibly difficult to answer. We must sort through a complex web of competing moral claims whose relative importance depends on the answers to an equally complex set of empirical questions about which we know very little. In brief, intergenerational policy dilemmas require difficult decisions of immense importance under conditions of profound ignorance.
In the face of such a daunting task, it is tempting to turn to an analytic framework such as cost-benefit analysis, which promises analytic tractability. But I would argue that to do so would be to sacrifice accuracy for precision: intergenerational cost-benefit analysis fundamentally misrepresents the basic reasons we care about these issues in the first place. Instead of addressing the conflicts of interests between different generations, it aggregates them into a singular objective function. Instead of considering the prioritization of different moral claims, it assumes that only one exists. In short, instead of working through the complexity, it ignores it.
I have argued that we should instead consider a kind of “intergenerational threshold” principle, delineated in terms of some set of basic conditions that must be maintained across time. The proposal is nothing more than a starting point for analysis, but as I hope I have shown, it is a starting point that puts the analyst in a better position to carefully navigate the relevant questions. Moreover, I believe it is more realistic about what we do and don’t know about the distant future.
To be sure, my proposal leaves many unanswered questions: What is the nature of the basic conditions that we must do our reasonable best to create and perpetuate for future generations? Given that we cannot guarantee these conditions across all time, is there some probability threshold that we must try to meet? How does the principle—delineated in terms of generations—extend to individuals and their individual responsibilities? How should we understand this principle as it relates to particular theories of justice? And, most importantly, what are the practical policy implications of such a principle?
Answering these questions will take the work of many minds, and it will no doubt be imperfect. But as Amartya Sen famously said, “It’s better to be roughly right than precisely wrong.”
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Appendix 1: Can we Owe Future Generations Anything?
In the thesis above, I presupposed that the answer to this question is yes: without being able to have moral obligations to future generations, the idea of an intergenerational moral framework for public policy would be an empty concept. In this appendix, without pretending to provide a comprehensive analysis, I will take a step back and examine whether such a move was justified, what objections one might make to it, and how such objections could be resolved.
Three common objections I will consider are the following: (1) we cannot owe groups of people anything but only individuals, (2) we cannot owe future generations anything due to the non- identity problem, and (3) we cannot owe future generations anything because of the absence of intergenerational cooperation.
Individuals vs. Generations
One objection to the idea of “owing future generations” is that one cannot owe anything to groups of people, but only to people themselves. More broadly, the idea is that morality should be understood as a question of relationships between individuals.
I agree that, at bottom, morality is a question of relationships between individuals.
However, I do not believe that this observation invalidates intergenerational normative frameworks which conceive of morality as a question of relationships between generations rather than individuals. This is because, although the moral obligations we have today are obligations to future individuals, they are not obligations to provide particular goods to particular people.
Instead, they are obligations to provide the general conditions for human society in the future to prosper. As such, we can satisfy our obligation to future individuals by considering them as groups. In short, for our purposes, “generations”—even if they are not ultimately the relevant moral agents—are reasonable placeholders.31
Another issue with intergenerational normative analysis is the “non-identity problem”, which points out that the public policy choices we make today that have significant impacts on the distant future will also affect who exists in the distant future. This brings into question the notion of harm, on which a large part of commonsense morality is based: if being “harmed” is understood as being made worse off relative to a counterfactual state of existence, it cannot be said that particular intergenerational policies harm future generations because alternative policies would lead to their non-existence and the existence of other people. As such, it is sometimes argued that we do not have any moral obligations to future generations in making decisions today, since their existence is contingent on those decisions (Parfit, 1984; Page, 2006).
Such a conclusion is unjustified. The presence of such a puzzle does not eliminate the capacity to have intergenerational moral obligations—it merely complicates them. Moreover, this puzzle is relevant if only one justifies moral obligations to future generations based on some notion of harm avoidance (my proposed intergenerational threshold proposal does not).
Furthermore, for intergenerational moral obligations that are defined in such terms, perhaps the appropriate conclusion to draw is not that such obligations are nullified but rather our notion of harm in the intergenerational context requires a revised definition which does not depend on a particular kind of counterfactual (Gosseries, 2008). 31 A further reason to delineate morality in the distant future as morality between generations is one of feasibility: we cannot plausibly map how the actions of particular people today will affect the lives of particular people in the distant future. It is much more realistic to consider how individuals today, as a whole, are affecting the general trajectory of human society.
Another objection to the idea that we can have moral obligations to future generations is that moral obligations to people require some underlying basis for cooperation, and that, because generations exist at different points in time, they cannot conceivably cooperate.
Again, this is only an objection to a particular set of moral frameworks, namely, those premised on some notion of cooperation; and my intergenerational threshold principle need not be. Furthermore, even for intergenerational moral frameworks that do require cooperation, it might be argued that generations can cooperate. For one, generations overlap in time, which allows for direct exchanges (e.g., adults pay taxes to fund the education of children; when those children grow up, they pay taxes for the provision of healthcare to those now-elderly adults).
Furthermore, the continuing cycle of asymmetric interactions between contiguous generations might be conceived of as a type of cooperation. Known colloquially as “paying it forward,” it is the idea that, for an infinite series of generations, each generation can benefit by saving for the subsequent one. Under such a regime, despite there being no exchange between particular generations, all generations across the series collectively benefit if each saves (Heath, 2013; Page, 2006; Gardiner, 2004).32
In short, while there are important points underlying each of these objections—in particular, the
32 However, assuming each generation is self-interested, a regime based purely on indirect reciprocity will ultimately fail (in fact, it will never begin). This is because, even though all generations would benefit from cooperative action, each generation has the perverse incentive not to save (it can maximize its well-being by receiving the savings from the previous generation and then not saving any for the subsequent one). Fortunately, if the potential for an indirect reciprocity regime coexists alongside direct reciprocity (i.e., mutual exchange of overlapping generations), the latter may act as an accountability mechanism for the former: a generation that withholds savings for the next generation might be, in turn, abandoned in its own time of need (e.g., healthcare in later years). In this way, the integrity of the long-term cooperative scheme based on indirect reciprocity is reinforced by the directly reciprocal pair-wise relationships of contiguous generations. non-identity problem warrants further examination—none of them preempt our capacity to have moral obligations to future generations.33
Appendix 2: Why do Individuals Discount?
There are three reasons individuals might engage in discounting behavior:
Risk to Individual in Future – The future is risky for any individual. For example, there is always a possibility of death. As such, individuals tend to be biased toward the present.
More money in future – If an individual expects to be wealthier in the future, then that individual will tend to place a higher value on money in the present if there are diminishing marginal returns to wealth.
Impatience – All else equal, an individual tends to prefer having something sooner rather than later. It is useful to point out that, while the third phenomenon reflects true discounting for time, the first two are not truly discounting for time but rather factors that correlate with time. Furthermore, these three parameters vary by person and by context. Consequently, one can observe a wide variety of discount rates in the economy. For example, a pension fund manager will have a relatively low discount rate because the investment risks tend to be low, the long- term expected growth in the fund is moderate, and the fund manager is patient. In contrast, an early-stage startup company run by a young entrepreneur will have a much higher discount rate since the risks are much higher, the expected rate of growth is higher, and the general degree of impatience is too. In this way, discount rates vary by circumstance and psychology.
33 However, it is important to note that the fact that we can have moral obligations to future generations doesn’t mean that we do, in fact, have them.
Indeed, this variance in discounting is fundamental to the financial industry: a (voluntary) loan occurs where the interest rate is between two individuals’ discount rates. At such an interest rate, the lender—the individual with a lower discount rate—will gladly sacrifice some money in the present to enjoy the interest payments in the future. In contrast, the borrower—the individual with the higher discount rate—values the loan in the present more than the cost of the interest payments in the future. As such, different discounting behavior is crucial for a market economy.
Finally, it is important to note that we cannot necessarily conclude that all people discount all of the time. Some behavior might actually indicate negative discounting (e.g., act of charity, sacrifice for one’s children), but whether this behavior is indicative of negative discounting depends on what we understand the psychology behind the act to be.34
34 Personally, I do not think such behavior is evidence of negative discounting.