How do we value the future? Oliver Hyams learns lessons from the Stern Review.

Could you put a monetary value on your own life?

This question is less about the contents of your bank account or your life insurance policy, and more about how much another might pay to save you from a nasty fate. 

Such a cost is not easy to calculate.  In reality, the value depends on the valuer: a family member will be willing to part with more than someone you have never met.  To approach a more comprehensive answer, abstract theories come in handy.

A more subtle measure of value is “welfare”.  It is a concept that permits comparison between how different people might assess an improvement in an individual’s wellbeing: your mother might value an increase in your welfare more than the man on the street.  It illustrates that valuing the same person from different perspectives is not necessarily a matter of objectivity: it depends on the individual’s relation to the valuer.

How, then, might we value different people when looking from the same perspective? Ought I to place the same value on the welfare of Helmut Kohl and Ashley Cole?

The concept of diminishing marginal utility of income explains how an extra unit of welfare will be worth more to the less wealthy.  Say you, the reader, possess £10, and I, the impoverished writer, possess just £1.  An additional £1 of income will double my assets but increase yours by just 10%.  The corresponding increase in welfare is smaller for the wealthier individual; and therefore, when seeking to maximise welfare, some argue that it is morally necessary to allocate the extra unit of welfare to me.  These important questions of redistribution within generations already register on many people’s political consciousness, but diminishing marginal utility is also relevant to future welfare arguments.

The Stern Review on the Economics of Climate Change (2006) asks the really vital question: should we, people living in the present, value welfare the welfare of future generations identically to our own?

If we judge each successive generation’s welfare as subsidiary to our own, after no more than a few centuries, generations will possess no value at all.  This construction has startling implications for policy decisions.  The classic example is drawn from the world of environmental science, where the effects of greenhouse gases in the atmosphere will be most keenly felt by our descendants.  With valueless future generations, any policies to mitigate climate change become pointless.  We must therefore engage with the questions of justice that are raised in intertemporal policy decisions, and judge how we ought to value future welfare versus our own. 

Policymakers do have a tool for making decisions about valuing the future, even if they don’t tell us about it.  For politicians it is unnecessary to raise an issue that is complex, confusing and bound to be controversial, especially when issues of intergenerational justice rarely make it to the top of the public’s agenda.  We have seen, during the election, a focus on personalities and the diametrical policies of oppositions, rather than how much consideration we should give to future generations. This party politics is your fault. Politicians who appeal to ‘your grandchildren’ are exploiting your self-interested, dynastic instincts.

Anyway, in 1928, a Cambridge economist, aged just 24, created this mechanism for ascribing a value to future welfare.  Moving the above discussion away from ethicists, who had discovered the problem of “intergenerational equity”, and placing it in an economic framework, the model that the young Frank Ramsey produced is genuinely enlightening and exciting.  John Maynard Keynes described Ramsey’s model as having combined scientific and aesthetic qualities that challenged Thomas Carlyle’s notion of the “dismal science” of economics.

Ramsey’s formula calculates a “discount rate”, which tells us how much a benefit enjoyed in the future is worth in the present.  The rate is defined by the two motives we might have for placing less value on welfare enjoyed in the future.  Firstly, economic theory tells us that future incomes will be higher and that, as a result of diminishing marginal utility of income, additional units of income will generate less welfare in the future.  This is a reason to sacrifice future income for current income, and thus future welfare for current welfare.  Motive two is the one we are really concerned with here.  It says that welfare is worth less in the future, simply because it will be enjoyed in the future.  The proper term for this is “pure time preference”.  These two factors combine to give a percentage at which we can legitimately reduce income, and consequently welfare, in future years: the discount rate.

Discount rates are used more extensively than might be expected and are to be found in any area of policy where value must be ascribed to human welfare.  Transport ministries employ discount rates to determine whether a certain safety measure ought to be employed and health departments use them to decide what equipment to invest in.  Each makes a judgment about the value of someone’s welfare – of someone’s life.  In environmental policy, discount rates have a crucial role in deciding the extent to which we want to abate climate change to maximise welfare overall.  Due to the long time horizons involved, the choice of discount rate becomes vital: Neil Wallace, the economist, tells us that even a small change has an enormous impact on where the cut-off line is between someone being morally considerable or not.  If we set too high a discount rate, we remove a whole swathe of future people from having consideration in our policy decisions.

The first explicit discussion of discount rates in a public forum occurs in a 1995 Intergovernmental Panel on Climate Change report.  Despite having in many respects similar content, this generated little of the interest that the publication of the Stern Review aroused on its release by the UK Treasury in October 2006.  This report has been the focus of much comment, both positive and negative.  In particular, its economic model has been praised as widely acceptable to governments, and is therefore perceived as appropriate for public policy decisions.  The Nobel Laureate Joseph Stiglitz believes “it provides a comprehensive agenda – one which is economically and politically feasible – behind which the entire world can unite in addressing this most important threat to our future well being.”

This report has facilitated a new discourse that separates the normative and the positive, that is to say, looking at the way people do discount future welfare in their daily decisions as different to how we should discount future welfare.  It has renewed the question of how to value future people.  By setting the rate of pure time preference at zero, Nicholas Stern’s fundamental thesis proposes that we ought to value the welfare of current generations on a par with that of everyone who will ever live.  He tells us that a superior valuation of your granddaughter’s welfare, in comparison to her granddaughter’s, is morally insufficient.  It is a direct contradiction of a widely observed condition that Arthur Pigou famously called a “defective telescopic faculty” whereby people are impatient, selfish and short-sighted. 

Criticism of Stern, which after four years is approaching coherency, is not as compelling as it could be.  It has focused on the idea that the selected discount rate makes a judgment about future people that is inconsistent with real decisions made by individuals.  It has been observed that people actually place relatively high discount rates on the future in their everyday actions.  “Defective telescopic faculty” is related to an important philosophical tradition originating with David Hume, a tradition that considers the welfare of those emotionally closer to us as more valuable.  Being closer emotionally makes a nearer temporal location likely.  So an adaption of Hume’s concept provides justification for treating the welfare of those in closer generations as more valuable. 

This critique of Stern’s model, along with many others, argues that his model places too much weight on the distant future.  But not everyone with a “defective telescopic faculty” is convinced.  Charlie Brooker recently called time “the strangest substance known to man” because we “remain stubbornly wedged into narrow individual pockets of time”.  And he is right.  We are unable to see the world in terms of the future.  And this is the primary distinction to be drawn: between high individual discount rates – those you or I might employ in discounting our future consumption over a period of a few months or years, and social discount rates, where the rights and interests of everyone who will ever live must be taken into account.  Because policymakers must not only take account of present, but also future citizens, high discount rates are reasonable. 

Perhaps counter-intuitively, the most coherent critique of Stern suggests that his model may not protect the interests of future people far enough.  Instead, it contends that we ought to confer rights upon generations who do not yet exist, ensuring that they have a quality of life and available resources commensurable to our own.  Creating such a model might require us to save much more for the future than proposed even in the Stern Review, severely reducing our quality of life to guarantee that future people can have an adequate existence. 

While it is instinctively sensible to reject the notion that people living in Luton have fewer rights or less intrinsic value than people living in Luanda or Los Angeles, does the same instinctive logic apply when comparing your grandchildren with people who do not yet exist, or might never exist? This is a conundrum that they will inherit.

How we value the future has a considerable impact upon the decisions we take today.  It is time that these ideas were pushed further into the public sphere.  Then the voting population might be better equipped to judge policies and account for the value of future people.  

Posted 3 years ago 1 note


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