On Mar 5, 8:25 am, James Annan <[EMAIL PROTECTED]> wrote:
> john fernbach wrote:
> > But the fact is that if we knew with almost 100% certainty that the
> > Battle of Armageddon and the end of the world would occur 600 years
> > from now * unless we took some moderately costly steps to prevent it
> > today, it would be "economically rational" not to take the steps
> > today. Because using the discounted present value method, the value
> > of doing something to save the world 600 years from now is just about
> > 0 today.
>
> Actually, I don't think this is true, if one assumes a nonlinear utility
> function (which is reasonable).
I'm sorry to be an ignoramus about nonlinear utility functions, but I
am.
However, I believe if you calculate the net present value of some
catastrophe that lies even 100 or 200 years in the future, using the
usuual discounting method employed by business economists and
government planners, you do end up with a net present value for the
disaster that makes it virtually irrelevant to people living in
present.
At least this was the consensus of my professors in natural resource
economics when I was in graduate school a long time ago. Maybe
business planners and government economists have changed their
discounting methodologies since then, but if so, I haven't heard of
it.
I wonder if we're miscommunicating here, though.
I didn't mean to imply that I think it actually is economically
rational -- or morallly rational -- to use discount rates in this
fashion to write off the likely impacts of our actions today on the
people of future generations.
But I was under the impression that when capitalist economists using
the standard tools of their trade think about the present value of
future events, they essentially find that the magic of compound
interest rates makes the not-so-distant future seem virtually
irrelevant to the economic welfare of the present. This is one of the
things that's wrong with mainstream environmental economics as I
understand it, and one thing that's very wrong with the way business
economists think. But I do think they discount the future in this
extremely drastic manner.
As I understand discounting against the future, it's tied to the
interest rate, and it reflects the fact that a dollar today is more
valuable to me than a dollar a year from now, a fact that's reflected
by the interest rate. So if the prime interest rate or the London
Interbank Offering Rate is just 3%, say, then $1.00 today should be
worth $1.03 next year and worth $2.00 -- double its current value --
in around 24 years.
In a century, again assuming a 3$ compound interest rate that doubles
the value of money over a period of roughly 24 years, my $1.03 should
grow to a value of more than $16, and in two centuries it should grow
to more than $256, and in four centuries it should grow to a value of
more than $256 squared, or 2 to the 16th power. In 600 years, I
believe its projected value - again assuming a compound interest rate
of only 3% - should be something like 2 to the 24th power.
That implies that the present value of something that's projected to
happen 600 years from now is 2 to the negative 24th power, doesn't
it?
I may be getting my mathematical reasoning a little wrong, but
whatever the correct math is, I think the old-fashioned way of
discounting, anyway, makes the present value of things along that time
horizon virtually meaningless.
Are business economists or government planners now using some kind of
different discounting method that gets different results, using a
"nonlinear utility function" as you suggest?
If so, I think that's great news for the environment and for the
economics profession's collective ability to think about long-term
environmental questions. But my guess is that there are still a
fairly large number of conventional economists who are discounting
value in the old way, which means basically writing off the value of
anything that looms more than a century or two in the future. And I
think such economists are still providing those who wish to believe
them with an apparent justification for a policy of "apres moi, le
Deluge."
My apologies to everyone in here if I'm sounding too intellectually
backward on this topic.
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