Time discounting and sustainability

Ecological Economics has just published an interesting paper (Climate change economics and discounted utilitarianism) by Ulrich Hampicke. He explains the controversy over time discounting in the context of sustainability and climate change - what sacrifices should we make for the good of future generations? Different choices of time discounting parameters lead to wildly different policy prescriptions. These choices are actually moral choices (or perhaps ex-post rationalizations of policy preferences). Hampicke criticizes the moral and empirical soundness of these choices, but his alternative proposal does not yield a practical, quantitative criterion for making decisions. My take is even more disheartening.

Two parameters quantify time discounting, δ and η. δ is the pure time discount rate, which expresses the lower importance we assign to future events or individuals just because they happen to be in the future. The larger δ the less we save for the future.

η (the elasticity of marginal utility relative to consumption) expresses, in Hampicke's words, how quickly people get satisfied as consumption increases. It compares how much the rich and the poor enjoy a little more consumption, and thus measures our willingness to take from the rich to give to the poor, or vice versa. As we will probably earn and consume more in the future than we do now even if we don't save, a large η justifies saving little. Saving would be akin to taking from the poor, making them substantially worse off, to give to the already satisfied rich. η also measures our aversion to risk - why take risks to earn more if more consumption adds little to our satisfaction.

For climate policy, larger δ or η imply fewer sacrifices in the present, and thus a warmer future climate.

The Stern–Nordhaus controversy shows that the “adjustment screws” δ and η have such overwhelming influence on the result of the optimization (and for ensuing policy recommendations) that a new agreement on which numbers to plug in for them would at once invalidate previous results. [...] By tweaking the adjustment screws of the model, researchers can arbitrarily lend support to any climate policy recommendation.

One can take a descriptive view of δ and η, set to empirically find their actual values in the human population, and enter those values in the equations. Or one can take a normative view of δ and η, reckoning that they are moral choices ("we ought to give due importance to future generations; we ought to satisfy ourselves with a frugal life"), and enter the morally good values in the equations. Both finding the values of δ and η that currently guide actual human behavior, and finding the morally superior ones are difficult tasks.

Given the empirical and theoretical difficulties of finding δ and η Hampicke advocates giving up entirely on the undertaking. But the alternative he tentatively proposes (doing everything in order to avoid serious evil for future generations) does not specify a quantitative criterion for making choices:

Under intergenerational fairness, each generation strives for its own happiness while recognizing that its actions and omissions imply consequences for future generations, and takes these into account. And each generation accepts that fairness is reciprocal: We must not burden our successors with morally unjustifiable disadvantages, while, conversely, our successors cannot demand undue sacrifices from us.

There is probably no good solution to the problem of time discounting. This, of course, is no excuse for collective inaction on climate change. Nor is it for collective action.

Jeffrey Sachs and vergüenza ajena

When a couple of months ago I read With 7 billion on earth, a huge task before us by Jeffrey Sachs I felt vergüenza ajena, which Wikipedia defines as:

Sense of shame on behalf of another person, even though that person may not experience shame themselves—for example, cringing when watching a very bad comic—generally more intense when the other is well known to you, though possible even when you dislike the other person—similar to the Dutch term plaatsvervangende schaamte and the German term Fremdschämen— 'external shame' or 'vicarious embarrassment', being vicariously embarrassed by someone else. The humor enacted by video clips of very bad auditions for televised talent shows leverage the vicarious pain of this emotion. It is also known as 'Spanish Shame'.

I have just found the following comment by Bradley Calder on another blog:

Sachs knows the more he agrees with people who advocate for environmentalism, the more money he is likely to make through speaking engagements and so forth. None of this surprises me.

I had the same thought when I read Sachs's article, but that didn't diminish my vergüenza ajena. Curiously, reading Calder's comment has diminished it. Perhaps seeing other people openly describe Sachs's article as a marketing device, and not as an intellectual product, somehow makes the whole act less ridiculous in my eyes.

Daly dose of fun

Every day hundreds of newsletters circulate the world giving stock-picking advice - for free. From the point of view of rational investment they are nonsense. If someone has a real clue about sound stock-picking the last thing he or she will do is to freely share it with strangers. Those newsletters only make sense, and money, for brokers earning trading commissions. That's why brokers write and publish them - to persuade clients to trade.

Herman Daly, the Pope of Ecological Economics, offers investment advice in the journal Ecological Economics (Growth, debt, and the World Bank). Unlike common stock-picking advice, which consists of random, superficially plausible just-so stories, this one is based on a patently wrong, implausible just-so story. Either that or you follow Daly's advice and get rich.

Consider. What limits the annual fish catch—fishing boats (capital) or remaining fish in the sea (natural resources)? Clearly the latter. What limits barrels crude oil extracted—drilling rigs and pumps, or remaining accessible deposits of petroleum—or capacity of the atmosphere to absorb the CO2 from burning petroleum? What limits production of cut timber—number of chain saws and lumber mills, or standing forests and their rate of growth? What limits irrigated agriculture—pumps and sprinklers, or aquifer recharge rates and river flow volumes? That should be enough to at least suggest that we live in a natural resource-constrained world, not a capital-constrained world. 

Economic logic says to invest in and economize on the limiting factor. Economic logic has not changed; what has changed is the limiting factor. It is now natural resources, not capital, that we must economize on and invest in.

I am not running to my broker to invest in natural resources because it seems to me that oil extraction is limited by extraction technology, the fish catch by aquaculture technology, irrigated agriculture by pumps, sprinklers and such, and fish catch, irrigated agriculture and cut timber by deficient private-property institutions. To increase the output of these industries we would have to invest in capital, including social capital. Not that I am suggesting you to do so - I don't know whether there will be enough demand for fish, oil, food or timber to justify more private investment.

Daly also says:

The claim [of economists] that capital is a near perfect substitute for natural resources is absurd. For one thing substitution is reversible. If capital is a near perfect substitute for resources, then resources are a near perfect substitute for capital—so why then did we ever bother to accumulate capital in the first place if nature already endowed us with a near perfect substitute?

Because what other capital "endows" us with is cheaper than what nature "endows" us with.

Daly says many more things - that atomic bombs will be thrown because of natural resource shortages, that the fact that we now live better than ever before should not count as evidence against his idea that economic growth "makes us collectively poorer, not richer" (an argument that is as good now as it was two hundred years ago and as it may be two thousand years from now), that countries "think" and but don't think very well because we can see that they don't act "in their own best interests," and on and on and on.