Forwarded from a colleague.
-----Original Message-----
Ricardian equivalence is beyond my area of expertise. But try the following on for size:
Wealth is a stock measure and not something accurately measured. Stock arguments are more comfortable handled by determining the flow of income (and then utility) from them, because most other things measured in economic analysis are also in flows.
Nevertheless, there is a concern in environmental economics with capital (a stock). And so the question of the amount of capital bequeathed to future generations can be raised in an Ricardian equivalence sense. However, the issue gets complicated very quickly when different types of capital are developed, as is often done in environmental economics. You have human capital (knowledge, know-how, technology improvements), physical capital (buildings, machines, tools), and natural capital (natural and environmental resources which have quantitative as well as qualitative dimensions). It is clear that as an investment question, one would want the (internal) rate of return to be equal across all capital investment options, such that capital with the highest rate of return deserving the largest added investment, causing the rate of return to decline until equal to the others.
The Ricardian equivalence argument adds further complications. Suppose the rate of return on natural capital was lower than the rate of return on physical capital -- does the normal option of liquidating natural capital (exploitation, pollution, blah-blah-blah) in order to increase physical capital hold? If all information in included in the rates of return, then yes. Unless of course there are some moral (e.g. religious in nature) considerations. These moral differences are normally developed in definitions of "sustainable development" which may restrict the amount or types of capital in a next-generation bequeath. Weak sustainability would say that capital is substitutable (i.e. natural for physical) whereas strong sustainability would disallow any reduction in natural capital (or at least not allow substitutability when natural capital is below some critical level essential for human survival).
Whether or not "indifference" exists in the debt-wealth mix bequeath to future generations should be determined by the discount rate. There is an equilibrium discount rate at which indifference exists. At the efficient discount rate there is an equilibrium condition in that the debt-wealth mix is not to be changed and intergenerational welfare is maximized. Whether that discount rate is morally acceptable (equity considerations vs efficiency) is another issue.
One must note that the sustainability arguments in environmental economics are physically defined (e.g. "There should be 'X' amount of capital passed from one generation to another"). Economics requires more -- though capital used in one generation may change the amount of capital for another generation, what is of concern in economics is not the amount of capital used but the utility gained or sacrificed from its use. That is why market prices and other valuation techniques are the cornerstone of the discipline. As for Ricardian equivalence, wealth is a physical measure also, and economic analysis requires the valuation of that wealth (or marginal changes in it). So the purposed trade-off between "healthy environment and no wealth or the
wealth gained from using it up" requires that not only must the productivity of a healthy environment be known, but also the value of the output (which contributes to wealth which contributes to utility) which that healthy environment produces.
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-----Original Message-----
From: [EMAIL PROTECTED] [mailto:[EMAIL PROTECTED]]
Sent: Thursday, May 09, 2002 4:27 PM
To: [EMAIL PROTECTED]
Subject: Ricardian environmentalism
Is the use of Ricardian Equivalence as an argument against
environmentalism legitimate? In the same way that we should be
indifferent to leaving the next generation either a debt and the wealth
to pay for it or no debt and no wealth, can one say that we should be
indifferent to leaving either a healthy environment and no wealth or the
wealth gained from using it up?
Jason
[King Banaian] King Banaian
Professor and Chairman
Department of Economics
St. Cloud State University
St. Cloud, Minnesota 56301
[EMAIL PROTECTED]
http://coss.stcloudstate.edu/banaian/
"Lunches don't get free just because you don't see the prices on the menu. And economists don't get popular by reminding people of that." --Thomas Sowell
