Sunday, June 4, 2017

"It Depends on How We They Value Time"

Peter Dorman calls attention to a NYT Upshot column by Neil Irwin about the cost of climate change. For Irwin, the question can be framed as a matter of discounting, "A dollar today is worth more than a dollar tomorrow and a lot more than a dollar in 100 years. But what discount rate you set determines how much more."

As Irwin admits, the discount rate is a "business concept." His conclusion, then, follows exclusively from a business concept of "how, as a society, we count the value of time." Why are we compelled, as a society, to count the value of time in accordance with the business concept of discounting? Because there is no other concept of time? No, there are other concepts of time. More specifically, there is a concept of time directly opposed to and critical of the business concept of time. Labor time.

What discounting is to the business concept of time, alienation is to the labor concept of time. Alienation refers not to "feelings" of alienation but to the sale of one's own time -- and consequently autonomy -- to another.

For every human being -- as for the wage worker -- there are 24 hours in a day,  168 hours in a week, 8760 or 8784 hours in a year. These are fixed amounts. You can't put it in a bank and get it back in 20 years with interest. You can't take it with you and you can't convey it to your heirs in a will. Today is here today and gone tomorrow.

The discount rate concept has nothing to do with the qualitative experience of time by humans and everything to do with the quantitative accumulation of money by property owners. Framing the cost of climate change as a contest between different discount rates is totalitarian. We live in a totalitarian society in which the non-business concept of time is invisible. Neil Irwin sounds like a thoughtful person. It simply didn't occur to him that there was any other relevant concept of time than the business concept.

That is why the climate is changing. And that is why not enough will be done about it. Because it all depends on how capital values time.

8 comments: said...

Oh dear, Sandwichman, I think I am going to disagree with some of this.

So, first of all let us think about workers and their labor time. Is it not the case that subjectively a worker will take more seriously work that s/he may be doing tomorrow (and what might be bought with the wages of that work) than work s/he might be doing ten years from now (and what might be bought with the wages of that work)? If so, well, what is this difference in salience or interest or, dare I say it, internal subjective relative valuation?

Let me also come at this from a different perspective. Let us posit some nonexistent conditions: 1) there is a global democratic socialist government that uses benign central planning, 2) this government has succeeded in "solving" distributional problems between rich and poor nations regarding the climate change issue, and 3) this government has also "solved" the problem of evaluating non-marketed ecosystem aspects of this issue, such as the problem of possible extinction of species. So, this benignly democratic central planner seeks to select the policy or set of policies to deal with climate change, to alter the future path of the global temperature, as well as all sorts of related issues, of which there are far more than those I have listed. These competing policy choices will exhibit different time patterns into the future (oh, and I am also going to eliminate uncertainty; we know what the outcomes of different policies will be). There will be costs and benefits and outcomes that may not be measurable or definable in those terms associated with different time paths into the future for each of the policy alternatives.

So, the question then becomes, in comparing and evaluating these different policies, how do rate or evaluate these future time paths? How importantly do we take what will be expected to happen 300 years from how (the time horizon of the famous Stern Report on Climate Change) as compared with what will happen next year? And if we choose to not treat them equally, is the rate by which we make this difference a "business concept" or otherwise unacceptable in such an environment where we have no private business and all economic activity is being carried out by a democratically determined plan? said...

So, I would contend that even if one falls back on what might be the ultimate default, the one advocated on moral grounds by Frank Ramsey to treat tomorrow as being equal to 300 years from now, one has in fact used a discount rate, one equal to zero. Indeed, that was essentially the decision of the authors of the Stern Report when they made their calculations for possible 300 year futures, although they made the rate slightly greater than zero due to the possibility that the human species might go extinct in the next 300 years. In any case, their chosen discount rate was very near zero. This is not a market determined rate, and I would contend that it is very hard to claim that it is coming from a "business concept."

Now, there is great debate indeed about what is the proper discount rate to use, especially assuming that one is making some sort of quantifiable benefit cost analysis, which has always involved making a present value calculation of costs and benefits in the future, since the idea was first cooked up by the US Army Corps of Engineers in the 1930s for evaluating whether or not to build dams to prevent flooding. Broadly there have been two competing approaches, neither of them picking a zero, or near zero, discount rate that would say the distant future is as valuable today as today is.

One is indeed a straight out business concept. It says that one is making a social investment, so one must consider the opportunity cost of the capital involved, and that would be the marginal return on private capital investment. That indeed informed a move in 1970 after Richard Nixon became president when Roy Ash imposed for him a US government-wide 10% discount rate on all benefit-cost analysis. This is a very high discount rate, and using such a rate for climate change policy analysis would certainly say, to heck with doing anything, all that is worth anything is about the next 25 years or so, if that.

As it was, parts of the government dealing with longer time horizon issues complained, with the US Forest Service being the first to get away from Ash's 10%. It was argued that a business concept rate was inappropriate and that what should be used is a "social rate of time discount" that is independent of markets, although in practice such rates have usually been derived from real rates on various government securities. For the Forest Service they began using 4%. But theorists of this matter, including the late Kenneth Arrow, have argued that the true social time discount rate should not be tied to any market rate of interest, although it has long remained unclear how it is to be determined, which is why this is an ongoing debate. said...

The final point is to simply reiterate that if one is not going to simply abjure any sort of benefit cost analysis or considering future outcomes and comparing them over time, then what does one do in comparing competing policy proposals about climate change? Simply pick some desideratum out of the huge slew of them involved in the issue and simply go with fixing it ("Let no species go extinct!")? Does one pitch the whole thing to non-economists such as climatologist James Hansen who has been running around saying that Paris agreement is no good because it allows for nations to use cap and trade systems rather than just taxing carbon? Do we just throw darts at boards? What do we do, Sandwichman, to make such a decision, if somehow we were in that ideal world I posed, or even in our very far from ideal world? I am not sure that talking about alienated labor really helps to solve this particularly or obviously.

Sandwichman said...


I have discussed the political dimension of benefit cost analysis and discounting extensively in the past. Both practices incorporate and conceal assumptions that are both extremely biased and demonstrably false. It is not possible for me to pretend I don't know the embedded assumptions and carry on a discussion of the concepts "as if" they are neutral tools of analysis.

Public Works, Economic Stabilization and Cost-Benefit Sophistry

Been Discounted So Long It Looks Like Up To Me

"There is no such thing as a secondary benefit"

Opportunity Costs and Secondary Benefits

"From him exact usury whom it would not be a crime to kill."

Optimization and Its Discounts

Cost-benefit analysis as "unacceptable nonsense"

Sandwichman said...

However, the critique of discounting and benefit cost analysis was not the central point I was trying to raise in my post. My main point was the total absence of an alternative perspective grounded in the sale (alienation) of labor power, which is how the vast majority of people get their income in modern society. The sale of labor power has an entirely different structural and temporal dimension than does the receipt of interest on a principal sum. This is why one cannot use discounting as an "analogy" for wage income. It is not even a bad analogy. It is chalk and cheese. said...

Fair enough.

I will note, and this is also a reply to Peter, that workers who are looking at their labor time do make internal subjective discounting evaluations, and we can measure those. Whether such internal subjective discount rates should be used for public policy or anything else, they really do exist and they strongly influence individual behavior regarding work, consumption, and many things.

A well-known fact is that many people have wildly different internal subjective discount rates over different time horizons, with the usual discrepancy being that many people have very high discount rates for very short time horizons, especially like a day or two, and then have somewhat lower ones for longer time horizon. This is now understood to tied to different parts of the brain, with very short term decisions coming from lower parts of the brain where "fight or flight" and "eat or dring" or "have sex now with this person or not" kinds of decisions are made. There are good evolutionary reasons why people take very seriously what is happening right now or in the immediate future, but it also leads to all sorts of behavior that looks unwise from a financial perspective in a modern economy, such as not buying a slightly more expensive refrigerator that will save one lots of money over time in energy bills (and be better for the environment as well). Behavioral economists have come to call this phenonmenon "hyperbolic discounting."

Of course this goes against the usual pattern of the time structure of interest rates, where we see market interest rates higher for longer time horizons, although this can be explained by risk.

No one has mentioned this, as most of this discussion has been about how terrible discount rates and how using them is just some sort of capitalistic tom-foolery, but Graciela Chichilnisky some time ago proposed the "green golden rule," which says that people in the present should not shaft those in the future, while those in the future should not shaft those in the present. She proposes to deal with this than went BCA is done especially for very long time horizon problems like climate change, one should use different discount rates for different time horizons, with somewhat higher ones in the near term, possibly linked to some sort of market rates, with those declining as the time horizon expands and heading towards zero. So the near term higher rates mean that interests of the present are somewhat accounted for while the lower long term rates meant that the interests of those in the future are somewhat accounted for, although there is no neat formula to say exactly how this should be done, and I recognize that this is way off from what you are talking about, S-man.

Sandwichman said...

Reposted at Naked Capitalism:

Anonymous said...

Perhaps it is true that we cannot take the future out of the present and the same situation occurs with our past. So it could be, not so much a matter of placing a value on the future, but recognising the unity of time.

Therefore, it could be concluded that it is better to travel well than to arrive. (Buddha)

Myrtle Blackwood