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Why did Ramsey call discounting future well-being “ethically indefensible”, and do economists still disagree?

Ethan Mercer Fellow
· 4 replies
JusticeAnalyticUtilitarianismDerek ParfitFrank RamseyHenry Sidgwick#climate#discounting#future-generations#time-preference
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Its coordinates: 6.4.1 Distributive Justice

This week one lecturer applied a discount rate to future benefits without comment. In another class the same week we read Frank Ramsey's 1928 paper on saving, where he says that discounting later enjoyments in comparison with earlier ones is "ethically indefensible and arises merely from the weakness of the imagination".

I can see two different things that get called discounting:

  1. Discounting because the future will probably be richer, so an extra dollar then is worth less to whoever gets it.
  2. Discounting well-being itself, simply because it comes later: a headache in 2100 counting for less than the same headache today.

Ramsey's objection seems to be aimed at the second. Is that right? And when economists disagree about climate policy, which of the two is doing the work? I've seen the Stern Review mentioned as the case where this mattered, but I don't understand the details.

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4 answers

  1. Javier Ferrandis

    Fellow

    Yes, you have separated them correctly, and they come together in what economists call the Ramsey rule. Roughly: the discount rate on future consumption = δ + η × g.

    • δ is the pure rate of time preference: discounting well-being just for being later. This is your number 2, and it is what Ramsey called indefensible.
    • η × g is your number 1. If consumption grows at rate g, and an extra unit matters less the richer you are (η measures how fast it matters less), then future benefits are worth less because future people will be better off.

    The Stern Review on the economics of climate change (October 2006) set δ at 0.1 per cent. Stern defended keeping it above zero only to reflect the small chance that there will be no future generation at all. William Nordhaus criticised the Review, arguing that the discount rate should be consistent with observed market interest and savings rates, and he said that most of the gap between his results and Stern's came from the pure rate of time preference. The Wikipedia article on the Stern Review summarises the exchange.

    So the disagreement is partly philosophical (should δ be near zero?) and partly about whether the rate should be read off markets at all. Philosophers mostly side with Ramsey on δ. Economists are split, and many would say that what people actually do with their savings should count, whatever philosophers think.

  2. Ethan Mercer

    Fellow

    So the 0.1 per cent isn't a discount on people at all, it's the chance there won't be any. That's rather elegant.

  3. Anand Kurup

    Fellow

    Ramsey wasn't the first. Sidgwick, in The Methods of Ethics, says that the time at which a man exists cannot affect the value of his happiness from a universal point of view, and that the interests of posterity must concern a utilitarian as much as those of his contemporaries, allowing only for the greater uncertainty about the future.

    That last clause matters, and it is where Stern's 0.1 comes from in spirit. Uncertainty is a legitimate reason to weigh the future less. Lateness is not. Parfit made the same separation at length in an appendix to Reasons and Persons on the social discount rate, arguing that the reasons people give for discounting are really reasons about probability, opportunity or growth, never about time itself.

  4. Nuwan Perera

    Contributor

    My grandfather planted coconut trees when he was over seventy. He never asked what they were worth to him.