Austrian Economics Forum: Donny with an A -

After a little hiatus, I got another article posted on Strike-the-Root. Check it out here:

http://www. strike-th...ar/shahar6.html

Hope you enjoy it!

Hi everyone, sorry I haven't had much time to post around here lately, but here's a bit of what I've been working on recently. It's sort of long, and just a first draft, but I think it's pretty good. If anyone's interested in the practice of discounting in social policymaking, this paper might be of value. Unfortunately, in text citations and footnotes don't show up here, but the references at the end should help.

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Introduction

Forming a coherent opinion about climate change is anything but easy. The social problems it raises prevent us from applying traditionally held ethical paradigms to come up with answers. As philosopher Dale Jamieson points out, “Our current value system presupposes that harms and their causes are individual, that they can readily be identified, and that they are local in space in time.” It is readily apparent that global climate change has none of these features. Accordingly, we must come up with answers to many questions which have little precedent in existing theory. A wave of academics and policymakers representing a broad swath of disciplines has descended eagerly upon the subject, working tirelessly to fabricate what many hold to be an entirely new framework for thinking about the world.

With so many new ideas flying back and forth, controversy over conflicting opinions is inevitable. One of the most widely discussed issues surrounding climate change is the relative importance of future damage compared to present damage, and the role of discounting. As Nobel Prize-winning economist Kenneth Arrow explains, the dispute

"…surrounds the appropriate value for the social rate of time preference. This…allows for discounting the future simply because it is the future, even if future generations were no better off than we are. The Stern Review [a report released by economist Nicholas Stern discussing the effects of global climate change on the world economy] follows a considerable tradition among British economists and many philosophers against discounting for pure futurity. Most economists take pure time preference as obvious."

In other words, the question is this: should we think of future damage as if it were happening today, or should we treat it differently just because it is going to occur in the future?

Few people would argue that damage in the future is more significant than damage in the present, and for good reason. Philosopher John Broome writes, “It is a heavy demand to place on anyone to ask her to value someone else’s wellbeing more than her own,” and accordingly, people who believe in differential treatment for future damage argue that we should consider it as if its delayed nature diminished its importance. But opponents argue that discounting future damage is ethically indefensible. Determining the proper way to think about this matter is an extremely complex undertaking.

There are important points made by all sides in this discussion, and it is unlikely that all of the disagreements can be resolved by one paper. I will certainly not try to do it here. In this essay, I will argue that much of the dispute surrounding future damages and discounting is the direct result of parties’ differing views about the goals of social policy, and the sort of problem posed by climate change. I hope that by exposing this, focus will shift to these premises, and progress on the issue of discounting will be more easily attainable as a result. I will focus on four different perspectives, fully realizing that many paradigms will not be discussed, and that my examination will not be exhaustive. First, I will take a look at the presuppositions made by basic cost-benefit analysis, where climate change challenges us to allocate social resources to their most profitable uses in a changing world. Second, I will consider the opinion that the objective of social decision making is to maximize the overall good, and that climate change represents an obstacle in the way of this goal. Third, I will explore the idea that climate change represents an externality which must be internalized. Finally, I will address the belief that climate change represents an over-taking of the commons, resulting in the perpetration of an injustice against future people. Following this discussion, I will offer my opinion of which paradigm is best suited for tackling the issue of global climate change, and why I think the others should be abandoned in this context.

Costs and Benefits

In its most rudimentary form, cost-benefit analysis is a tool which allows decision makers to allocate resources in the way that best matches some relevant set of preferences. For social decision makers, the relevant set of preferences is clearly those of society as a whole. Since groups are composed of individuals, advocates of the cost-benefit approach feel that it is reasonable to extrapolate society’s preferences from the preferences of individuals. This view is implicit in the position taken by economist Jerry Taylor, who favors discounting future damage at a rate of 5% per year, because it “…matches the return on Treasury bills – or, put another way, [it is] the figure people apply themselves when considering the value of money today versus the value of money tomorrow…”

Because the simple cost-benefit perspective considers society as if it were a single decision maker, needing only to allocate its own resources according to its preferences, it is immediately clear why discounting would seem obvious. The existence of a preference for value sooner rather than later is a basic economic assumption which is rooted in cold empirical fact. From this mindset, the question is not whether to use a discount rate, but rather what discount rate to use. To debate the validity of discounting would be like asking a banker whether she thought she should charge interest on a loan, or asking an investor whether he cared about getting a return on his money.

Maximizing the Good

But not all who weigh in on the matter accept that social decision making should be about allocating resources to match vaguely defined “social preferences”. One significant alternative asserts that policy should focus on the wellbeing of all people, rather than economists’ estimations of the preferences of the current players in world markets. The idea that social policy exists to maximize the good is an old and familiar one, rooted in the Utilitarian ethical theories pioneered by Jeremy Bentham in the eighteenth century. And though few modern thinkers accept Utilitarianism in its original form, its basic teleological structure has persisted. As it pertains to the issue of global climate change, this sort of view has been advanced in a number of ways, but all express the characteristic belief that the best society is the one in which people are the best off, and that in deciding what to do about global climate change we should try to maximize wellbeing.
This kind of approach has a strong intuitive appeal. Famed economist Lionel Robbins perhaps put it best when he wrote:

“I am far from thinking that thorough-going utilitarianism à la Bentham is an ultimate solution to any of the major problems of social philosophy. But I have always felt that, as a first approximation in handling questions relating to the lives and actions of large masses of people, the approach which counts each man as one, and, on that assumption, asks which way lies the greatest happiness, is less likely to lead one astray than any of the absolute systems. I do not believe, and I never have believed, that in fact men are necessarily equal or should always be judged as such. But I do believe that, in most cases, political calculations which do not treat them as if they were equal are morally revolting.”

Modern thinkers generally consider the definition of human wellbeing to be more complicated than happiness, but Robbins’ main point is clear. Aiming for a world in which the most people are the best off seems like a relatively safe way for society to go about deciding what to do.

So how does all of this relate to discounting future damage? As Robbins pointed out, there is something intuitively objectionable about political calculations which do not treat people as if they were equal. But this seems to be exactly what is being done by people who treat future damage as if it were less important. As philosopher Kristian Skagen Ekeli argues, “Discounting of future benefits and costs is implicit in cost-benefit analysis that is the basis of most public policy decisions. To discount the future implies that current interests and preferences count for more than those of future generations.” And because the idea of equality is practically inseparable from teleological views concerned with maximizing the good, it is nearly certain that someone holding such a view would be unable to accept discounting of future wellbeing.

It would not follow, of course, that all discounting would be objectionable on these grounds. For example, economists Richard Newell and William Pizer point out:

“Even if the rate of discount on utility is zero, the rate of discount on consumption may be greater than zero because future generations are likely to be richer, and consumption typically becomes less valuable at the margin as this occurs. In other words, an extra $1 of consumption by the current generation could be more valuable than an extra $1 of consumption by future generations because the current generation is relatively poor and $1 is therefore more valuable.”

Keeping this distinction in mind, it seems that we can arrive at a reasonably clear view of how we ought to think of future damage if we are concerned with maximizing the good. If we are talking about proxies for wellbeing, like consumption or wealth, then we may discount in order to correct for changes in the relationship between the proxy and wellbeing. But if we are talking about wellbeing itself, we may not discount at all. To say otherwise would be to deny that all people are equal, which is clearly unacceptable.

Internalizing Externalities

The spirit behind this approach is admirable, but a large number of those who study climate change consider it to be misguided. History, they say, is littered with people who have tried to engineer society to produce the greatest possible good, and all have failed. In fact, well-meaning social engineers make up a great proportion of the most villainous figures in history. This is no mistake. Designing society to satisfy the needs of the masses requires an incredibly large amount of knowledge about people and circumstances, but this knowledge is never given to any person or group of people. Nor could it be.

Nobel laureate Friedrich August von Hayek argued that the aim of social decision making should “…to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge not given to anyone in its totality.” The peculiar feature of an economy is that it must respond to circumstances in a world where circumstances are constantly changing. In light of this difficulty, Hayek suggested that “…the ultimate decisions must be left to the people who are familiar with these circumstances, who know directly of the relevant changes and of the resources immediately available to meet them. We cannot expect that this problem will be solved by first communicating all this knowledge to a central board which, after integrating all knowledge, issues its orders. We must solve it by some form of decentralization.” Hayek pointed to the free market as just the sort of mechanism for the job. He explained, “…in a system where the knowledge of relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” This is because high prices cause effort and materials to flow to projects which are desired most by economic agents, and can dissuade consumers from using resources that would be valued more elsewhere.

Following in Hayek’s footsteps, modern thinkers still turn to the market system as the guiding force for spontaneous order in society. But in recent decades, the field of economics has devoted significant attention to the fact that in some situations, markets fail to fulfill Hayek’s goal of efficiently allocating resources in society to match the desires of the relevant parties. And many of the scholars who study the social problems presented by global climate change point to market failure as the cause of our complaints. Correcting these problems with the market, they think, would allow us to continue to coordinate social order in a decentralized manner, but would prevent undesirable, or inefficient, results.

Many economists who take on climate change look at the problem as one bearing the features of an externality. As Terry L. Anderson and J. Bishop Grewell explain:

"The term “externality” refers to an economic concept asserting that inefficiencies result when costs incurred and benefits received by individuals involved in an economic transaction or activity do not incorporate all the costs and benefits to society. Therefore, a transaction that seems efficient to the individual parties to a transaction may therefore be inefficient from the viewpoint of society…"

Perhaps more revealing is famous ecologist Garrett Hardin’s assertion that

"The rational man finds that his share of the cost of the wastes he discharges into the commons is less than the cost of purifying his wastes before releasing them. Since this is true for everyone, we are locked into a system of “fouling our own nest,” so long as we behave only as independent, rational, free enterprisers."

It is thought that if the parties responsible for causing climate change were forced to pay the full social costs of their actions, then they would contribute only as much as would be profitable to society. In other words, if a CO2¬¬ emitting factory operator could afford to pay the entire social cost of her actions it would mean that she would be gaining more from her emissions than would be lost by the people negatively affected by her contribution to climate change. Accordingly, it would be socially beneficial for her to emit. And if she could not afford to pay, then it would be clear that her emissions were socially inefficient, and she would be forced to stop emitting. This approach is referred to as internalization of externalities.

The justice of internalizing externalities is based on an important ethical presupposition: the Compensation Principle. Working Group III of the Intergovernmental Panel on Climate Change’s Second Assessment Report explained:

"…if…[a] project yields positive net benefits, then those made better off could compensate those made worse off with something extra left over. As long as compensation is paid, the result is an unambiguous gain in welfare, without the necessity of weighing effects on different individuals."

Operationalizing this paradigm requires that a multitude of questions be answered about the compensation mechanism that would make the system work. For example, victims lack the ability to express their feelings about the damage that will be caused to them, so how would we accurately calculate how much compensation would be necessary? How would we take uncertainty about the impacts of climate change into account? Could all of the damages caused by climate change be acceptably compensated? How could we actually deliver compensation to people in the future, given the fact that we will all be dead before most of the effects of climate change are realized? How will future people know what effects were actually caused by climate change, and therefore who to give compensation to? All of these questions need answers in order for the “corrected” market to function as intended.

But since none of these questions have any bearing on the issue of what discounting practices are appropriate, we can safely ignore them here. The position of people accepting the compensation principle is clear. They would see nothing wrong with discounting, so long as at the end of the discounting period, sufficient value was produced to compensate the victims. Acceptable discounting, then, would equate to expectations about the rate of return on whatever project was to be undertaken to transfer value from today into the future. Within this framework, there is still considerable disagreement regarding appropriate rates for discounting, but the basic idea remains that whatever discounting practices we use, we still must ultimately end up with the correct value to compensate victims at the time when they must be compensated.

Over- Enclosing the Commons

There are some, however, who object to the notion that climate change is nothing more but an unchecked externality. They point to the fact that the actions that cause climate change would not be problematic if it were not for the excessive emissions coming from the wealthy. The intellectual roots of this argument can be traced to 18th Century philosopher John Locke, who wrote that an enclosure of some part of the commons by an individual could not be considered injurious to anyone

"…since there was still enough, and as good left; and more than the yet unprovided could use. So that, in effect, there was never the less left for others because of his inclosure for himself: for he that leaves as much as another can make use of, does as good as take nothing at all."

Though Locke’s point is stated negatively, directly implying only that enclosure is justified when no one is made worse off, thinkers following in Locke’s tradition often strengthen Locke’s “Proviso,” taking it to prohibit any enclosure that would make anyone else worse off. Economist Edwin G. Dolan writes, “In the case of greenhouse gasses, it can be argued that energy users have a right to “enclose” air-shed rights…only so long as enough and as good is left for others.” Implicit in Dolan’s point is the idea that there is an amount of greenhouse gas that could safely be put into the atmosphere by the world’s population, and that the people who are responsible for the exhaustion of that limit are responsible for over-taking.

Predictably, this is viewed as an injustice. Policy analyst Paul Baer writes, “Simply, it is wrong to harm others by abusing a commons, and if one does, one owes compensation.” That global climate change will harm people is uncontroversial, and so we are led to the same conclusions about discounting that were reached by those attempting to remedy market failure. If our goal is to remedy injustice, then nothing short of full compensation will do.

On the Differing Views

In surveying different paradigms, we have seen that very different conclusions about discounting arise naturally from different ways of thinking about the role of social decision making and the sort of problem presented by global climate change. If one believes that social decision making should organize society to match social preferences, then discounting will seem like a natural part of policy analysis. If one believes that society should concentrate on maximizing the good, then discounting will only seem acceptable when it helps us to measure the good; discounting the good itself will not do. And if the aim of policy is to correct market failure or to remedy injustice, discounting will be acceptable so long as it does not prevent victims from being fully compensated for the harm done to them by the actions of present people.

It is therefore important to discuss which of these paradigms is to be recognized as legitimate. The idea that many different viewpoints are to be encouraged in the policymaking process is in many ways a central part of the concept of democracy. But in this context, different viewpoints are leading to conflicts that can only be reconciled by the rejection of one party’s premises.

None of the frameworks discussed here are complete. Significant questions remain for proponents of any of them, and none can plausibly claim to be able to satisfactorily tell us what to do about climate change, even on their own terms. That being said, it seems that some of these intellectual programs are destined to lead to dead ends.
Specifically, the view that social decision making ought to reflect social preferences seems intellectually bankrupt. The idea that someone’s suffering should be thought of as less serious because of the fact that it will be realized in the future seems completely indefensible by any reasonable ethical standard. If one thing is clear about future damage, it would seem to be that we can not take damage less seriously because it occurs in the future. Instead, the questions seem to arise from how we ought to deal with our relationship to that damage. Should we try to outweigh damage with greater benefits? Or should we try to ensure that those damaged by climate change are provided for by those who are causing it?

It seems to me that the latter alternative is the better one. But even if we agree on this matter, we still need to decide whether compensation should function to correct market failure or to remedy injustice. Different views on this issue seem likely to lead to different views about what constitutes fair compensation, and how compensatory programs should be executed. However, deciding between the alternative modes of thinking goes beyond the scope of this paper. Hopefully this paper can serve as a starting point for that discussion, and can help to bring an end to the impasse that characterizes the current debate about discounting and future damage.

References
Anderson, T. L. and J. B. Grewell, 1999, “Property Rights Solutions for the Global Commons: Bottom-Up or Top-Down,” Duke Environmental Law & Policy Forum: Vol. 10, pages 73-101.

Arrow, K. J., 2007, “Global Climate Change: A Challenge to Policy,” The Economists’ Voice: Vol. 4: Iss. 3, Article 2.

Baer, P., 2006, “Adaptation: Who Pays Whom?,” in Fairness in Adaptation to Climate Change, ed. W. Neil Adger, Jouni
Paavola, Saleemul Huq, and M. J. Mace, Cambridge: The MIT Press, pages 131-153.

Benson, B. L., 1996, “Restitution in Theory and Practice,” The Journal of Libertarian Studies: Vol. 12: Iss. 1, pages 75-98.

Broome, J., 1992, Counting the Cost of Global Warming, Cambridge: The White Horse Press.

Dolan, E. G., 2006, “Science, Public Policy, and Global Warming: Rethinking the Market Liberal Position,” Cato Journal: Vol. 26: No. 3, page 445-468.

Ekeli, K. S., 2004, “Environmental Risks, Uncertainty and Intergenerational Ethics,” Environmental Values: Vol. 13: No. 4, pages 421-448.

Hardin, G., 1968, “The Tragedy of the Commons,” Science: Vol. 162: No. 3859, pages 1243-1248.

Hayek, F. A., 1945, “The Use of Knowledge in Society,” The American Economic Review: Vol. 35: No. 4, pages 519-530.

IPCC, 1996, Climate Change 1995: Economic and Social Dimensions of Climate Change, Cambridge: Cambridge University Press.

Jamieson, D., 1992, “Ethics, Public Policy, and Global Warming,” Science, Technology, and Human Values: Vol. 17: No. 2, pages 139-153.

Locke, J., 1764, “Of Civil Government,” in Two Treatises of Government, ed. Thomas Hollis, London: A. Miller et al., pages 193-416.

Newell, R. G. and W. A. Pizer, 2003, “Uncertain Discount Rates in Climate Policy Analysis,” Energy Policy: Vol. 32: Iss. 4, pages 519-529.

Nozick, R., 1974, Anarchy, State, and Utopia, New York: Basic Books.

Robbins, L., 1938, “Interpersonal Comparisons of Utility: A Comment,” The Economic Journal Vol. 48: Iss. 192, pages 635-641.

Shahar, D. C., 2007, “Putting a Price on Injustice,” available at http://www.strike-th. ..ar/shahar5.html.

Taylor, J., 2006, “Nordhaus vs. Stern,” Cato@Liberty, retrieved Nov. 4, 2007 from http://www.cato-at-l. ..dhaus-vs-stern/.

Toman, M., 2006, “Values in the Economics of Climate Change,” Environmental Values: Vol. 15: Iss. 3, page 365-379.

The trolley problem was originally conceived by Philippa Foot. In her book, Rights, Restitution, and Risk: Essays in Moral Theory, Judith Thomson alters the problem slightly from its original form, and presents it as follows:



Thomson argues, I think correctly, that Frank would be justified in turning the trolley onto the track with the one, to avoid killing the five. It seems to me that in that case, if it were determined that it was the trolley company's fault that he died, we would need to compensate the family of the one who was killed. But what if instead we determined that the people on the track had been there on their own, and therefore the trolley company could not be held at fault? It seems that in that case, the one who was killed would bear the responsibility for his own death.

However, it seems that the only reason that he was killed was that there were five people on the other track. Do those five people owe him anything? After all, his death occurred strictly to prevent theirs. One might say that their presence on the left track put him at serious risk. More serious, even, than the risk he voluntarily accepted by wandering onto the tracks in the first place. Would we want to hold the five responsible for this?

So I've heard it argued that because the defense sector doesn't produce goods that are consumed by others, the materials consumed by those who work in defense represent a drop in the standard of living for the rest of the people in the economy. In other words, defense workers parasite value from productive workers.

But for the life of me, I can't remember who made that argument. I'm pretty sure I've heard it more than once, but I have no idea where. Since it's exactly the sort of argument that you guys love and cherish, I'm sure you guys can point me towards the source. Who makes this kind of argument, and where?

Thanks!

So if the federal reserve printed a bunch of new money and pumped it into the economy, that would be called an injection.

What if someone took a bunch of money and buried it in the ground, never to be seen again. Or burned it. Or whatever. What would that be called?