Pure Rate of Time Preference

PrintPrint

Whether or not the limits on growth and measures of growth (from Module 10) are treated properly in economic models, the other part of the discount rate is easier to discuss ethically. The economically efficient path typically allows much global warming to occur in part by treating people today as being more important than people in the future—the pure rate of time preference. In the extreme, if you could spend a penny now to stop a problem that would cause the end of civilization ten thousand years in the future, it would not be economically justified under the simplest application of the optimizations. (Economists do understand such issues, as discussed briefly in Module 10, but reducing them to absurdity is sometimes useful to start a discussion, just as long as everyone remembers what was done.)

We do often behave as if we are more important than future generations, as observed by economists. But when we are discussing what policies we should adopt, is that an ethically justifiable stance? Especially when considering future generations, rather than just ourselves in a few decades, many people are very uneasy assuming that we matter more than they do. And, if this pure rate of time preference does not apply to future generations, or applies at a lower level, then more action is justified now to avoid climate change than is calculated in the economic optimizations.

For more on the ethics of the Pure Rate of Time Preference, and how using a lower value motivates much more effort now to reduce global warming, see the Stern Review (Stern Review on the Economics of Climate Change, 2006, Her Majesty’s Treasury, United Kingdom,).

Learning Checkpoint