Ethical Aspects of Intertemporal Discounting and the Social Discount Rate

25 September 2018DOI: https://doi.org/10.25201/FER.17.3.109132

Author information:

Márta Somogyvári: University of Pécs, Associate Professor. E-mail:

Abstract:

The paper examines the ethical aspects of discounting during the preparation of intertemporal decisions, and the influence of this on the cost-benefit analysis of community investments. It focuses on the economic philosophy and ethical considerations that underlie discounting as a daily financial activity. The author attempts to resolve the apparent logical contradiction between the cardinal and discounted utilitarian ethical approaches. By analysing the preconditions related to the definition of the values of the parameters included in the Ramsey formula, it is presented that neither the social discount rate applied in the case of intertemporal investments nor the current practice of establishing the market discount rate used for investments representing a potential burden on the environment is suitable for the assessment of the long-term community investments and private investments burdening the environment.

Cite as (APA):

Somogyvári, M. (2018). Ethical Aspects of Intertemporal Discounting and the Social Discount Rate. Financial and Economic Review, 17(3), 109–132. https://doi.org/10.25201/FER.17.3.109132

PDF download
The works on this site are licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Column:

Study

Journal of Economic Literature (JEL) codes:

A13, D63, H43, Q58

Keywords:

discounting, social discount rate, Ramsey formula, utilitarianism, economic ethics

References:

Arrow, K.J. (1999): Discounting, morality, and gaming. In: Portney, P.R. – Weyant, J.P. (Eds.): Discounting and intergenerational equity. Washington: RFF Press, pp. 13–21.

Arrow, K. – Dasgupta, P. – Goulder, L. – Daily, G. – Ehrlich, P. – Heal, G. – Levin, S. – Maler, K.- G. – Schneider, S. – Starrett, D. – Walker, B. (2004): Are we consuming too much? Journal of Economic Perspectives, 18(3): 147–172. https://doi.org/10.1257/0895330042162377

Arrow, K. – Cropper, M. – Gollier, C. – Groom, B. – Heal, G. – Newell, R. – Nordhaus, W. – Pindyck, R. – Pizer, W. – Portney, P. – Sterner, T. – Tol, R. – Weitzman, M. (2012): How should benefits and costs be discounted in an intergenerational context? The views of an expert panel. Discussion Paper, Resources for the Future: 12–53.

Baumol, W.J. (1968): Welfare Economics and the Theory of the State. Harvard University Press, Cambridge, MA. p. 800.

Bélyácz, I. (2010): Kockázat vagy bizonytalanság? Elmélettörténeti töredék a régi dilemmáról (Risk or uncertainty? Theoretical excerpt on the old dilemma). Közgazdasági Szemle, 57(July-August): 652–665.

Bentham, J. (1907): Introduction to the principles of morals and legislation. London: Oxford Clarendon press. http://fs2.american.edu/dfagel/www/Philosophers/Bentham/principlesofMoralsAndLegislation.pdf. Downloaded: 24 October 2017.

Broome, J. (1994): Discounting the Future. Philosophy & Public Affairs, 23(2): 128–156. https://doi.org/10.1111/j.1088-4963.1994.tb00008.x

BWE (2015): Gutachtliche Stellungnahme zur Bewertung der Rückstellungen im Kernenergiebereich (Expert Opinion on the Valuation of Provisions in the Nuclear Power Industry). https://www.bmwi.de/Redaktion/DE/Downloads/S-T/stresstestkernenergie.pdf?__blob=publicationFile&v=3

CEAI (2017): Discounting for Public Policy: Theory and Recent Evidence on the Merits of Updating the Discount Rate. Council of Economic Advisers Issue Brief January 2017. https://obamawhitehouse.archives.gov/sites/default/files/page/files/201701_cea_discounting_issue_brief.pdf. Downloaded: 24 October 2017.

Cline, W.R. (1992): The economics of global warming. Washington, D.C.: Institute for International Economics.

Dasgupta, P. (2008): Discounting climate change. Journal of risk and uncertainty, 37(2): 141–169. https://doi.org/10.1007/s11166-008-9049-6

Davidson, M.D. (2014): Zero discounting can compensate future generations for climate damage. Ecological Economics, 105: 40–47. https://doi.org/10.1016/j.ecolecon.2014.05.018

Djukic, M. – Jovanoski, I. – Ivanovic, O.M. – Lazic, M. – Bodroza, D. (2016): Cost-benefit analysis of an infrastructure project and a cost-reflective tariff: A case study for investment in wastewater treatment plant in Serbia. Renewable and Sustainable Energy Reviews, 59(June): 1419–1425. https://doi.org/10.1016/j.rser.2016.01.050

Fisher, I. (1930): The Theory of Interest. New York: Kelley and Millman.

Frederick, S. (2006): Valuing Future Life and Future Lives: A Framework for Understanding Discounting. Journal of Economic Psychology, 27(5): 667–680. https://doi.org/10.1016/j.joep.2006.05.007

Freeman, M.C. – Groom, B. (2015): Positively gamma discounting: Combining the opinions of experts on the social discount rate. Economic Journal, 125(585): 1015–1024. https://doi.org/10.1111/ecoj.12129

Gaus, G. (2012): The Order of Public Reason: A Theory of Freedom and Morality in a Diverse and Bounded World. Cambridge: Cambridge University Press.

GLO (2017): United Nations Convention to Combat Desertification. 2017. The Global Land Outlook, first edition. Bonn, Germany.

Gollier, C. (2011): Pricing the future: The economics of discounting and sustainable development. Princeton University Press, pp. 1–210.

Gollier, C. – Hammit, J.K. (2014): The Long-Run Discount Rate Controversy. Annual Review of Resource Economics, Vol. 6: 273–295. https://doi.org/10.1146/annurev-resource-100913-012516

Greaves, H. (2017): Discounting for Public Policy. A Survey. Economics and Philosophy, 33(3): 391–439. https://doi.org/10.1017/S0266267117000062

Groom, B. – Koundouri, P. – Panopoulou, E. – Pantelidis, T. (2007): Discounting the distant future: how much does model selection affect the certainty equivalent rate? Journal of Applied Econometrics, 22(3): 641–656.

Groom, B. (2017): International Guidelines on Social Discount Rates. http://www.strategie.gouv.fr/sites/strategie.gouv.fr/files/atoms/files/07_ben_groom_international_guidelines_on_social_discount_rates.pdf. Downloaded: 24 October 2017.

Hampicke, U. (2011). Climate change economics and discounted utilitarianism. Ecological Economics, 72: 45–52. https://doi.org/10.1016/j.ecolecon.2011.08.028

Harsányi, J. (1955): Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility. Journal of Political Economy, 63(4): 309–321. https://doi.org/10.1086/257678

Hatfield, J.L. (2016): Increased Temperatures Have Dramatic Effects on Growth and Grain Yield of Three Maize Hybrids. Agricultural & Environmental Letters, 1(1), 150006.

HM Treasury (2003, updated July 2011): The Green Book – Appraisal and evaluation in central government. London.

Hume, D. (1739): A Treatise of Human Nature. https://people.rit.edu/wlrgsh/HumeTreatise.pdf

Jagannathan, R. – Matsa, D.A. – Meier, I. – Tarhan, V. (2016). Why do firms use high discount rates? Journal of Financial Economics, 120(3): 445–463. https://doi.org/10.1016/j.jfineco.2016.01.012

Jevons, W. (1911): The Theory of Political Economy. Macmillan, London.

Jonas, H. (1984): Das Prinzip Verantwortung. Versuch einer Ethik für die technologische Zivilisation (The Principle of Responsibility. Towards an Ethics for Technological Civilisation). Frankfurt a.M.

Kant, I. (1995): Kritik der praktischen Vernunft (Critique of Practical Reason). Reclam. Stuttgart.

Knight, F.H. (1921): Risk, Uncertainty, and Profit. Hart, Schaffner & Marx–Houghton Mifflin Co., Boston, MA.

Lewandowsky, S. – Freeman, M.C. – Mann, M.E. (2017): Harnessing the uncertainty monster: Putting quantitative constraints on the intergenerational social discount rate. Global and Planetary Change, 156(September): 155–166. https://doi.org/10.1016/j.gloplacha.2017.03.007

Liu, L. (2011): From the Shadow Price of Capital to the Marginal Cost of Funds: In Search of the Implementation of a Principle. Journal of Public Economic Theory, 13(3): 369–389. https://doi.org/10.1111/j.1467-9779.2011.01504.x

Malkin, J. – Vildavsky, A. (1991): Why the Traditional Distinction between Public and Private Goods Should be Abandoned. Journal of Theoretical Politics, 3(4): 355–378. https://doi.org/10.1177/0951692891003004001

Nordhaus, W. (2006): The “Stern Review” on the Economics of Climate Change. Journal of Economic Literature, 45(3): 686–702. https://doi.org/10.3386/w12741

Nordhaus, W. (2008): A Question of Balance: Weighing the Options on Global Warming Policies. Yale University Press.

Odum, H.T. (1983): System Ecology an Introduction. J. Wiley, NY.

OXERA (2002): A Social Time Preference Rate for Use in Long-term Discounting. Oxera Consulting Ld. p 80.

Pearce, D. – Ulph, D. (1995): A social discount rate for the United Kingdom. Working Paper No 95–01, CSERGE, University College London, and University of East Anglia, pp. 1–22.

Popper, K.R. (1952): 1st Edition The Open Society and Its Enemies, Volume II, 1st Edition. Routledge & Kegan Paul, London. https://monoskop.org/images/6/6d/Popper_Karl_The_Open_Society_and_its_Enemies_The_High_Tide_of_Prophecy_Vol_2_1st_ed.pdf. Downloaded: 24 October 2017.

Rambaud, S. – Torrecillas, M.J.M. (2006): Social discount rate: a revision. Anales de Estudios Económicos y Empresariales, XVI: pp. 75–98. http://dialnet.unirioja.es/servlet/articulo?codigo=2315261. Downloaded: 24 October 2017.

Ramsey, F.P. (1928): A mathematical theory of saving. Economic Journal, 38(152): 543–559. https://doi.org/10.2307/2224098

Ray, D.K. – Mueller, N.D. – West, P.C. – Foley, J.A. (2013): Yield Trends Are Insufficient to Double Global Crop Production by 2050. PLoS ONE 8(6): e66428. pp. 1–8. https://doi.org/10.1371/journal.pone.0066428

Rawls, J. (1985): Justice as Fairness: Political not Metaphysical. Philosophy and Public Affairs, 14(3): 223–251.

Revesz, R.L. – Shahabian, M.R. (2011): Climate change and future generations. Southern California Law Review, Vol. 84: p. 1097.

Sen, A.K. (1973): On Economic Inequality. Clarendon Press, Oxford. https://doi.org/10.1093/0198281935.001.0001

Sinnot-Armstrong, W. (2015): Consequentialism. In: Zalta, E.N. (ed.): The Stanford Encyclopedia of Philosophy. Winter 2015 Edition.

Stern, N. (2007): The Economics of Climate Change: The Stern Review. Cambridge University Press. https://doi.org/10.1017/CBO9780511817434

Szűcs-Markovics, K. (2014): A kalkulatív kamatláb (diszkontráta) meghatározásának ajánlott és alkalmazott módszerei (Recommended and applied methods of determining the calculative interest rate (discount rate)). Controller info, 2(4): 8–13.

Tabi, A. (2012): A társadalmi diszkontráta jelentősége a fogyasztás időbeli ütemezésében (Importance of social discount rate in the scheduling of consumption). In: Fenntartható fogyasztás? Trendek és lehetőségek Magyarországon (Sustainable consumption? Trends and opportunities in Hungary) Results of OTKA research 68647 AULA, Budapest, pp. 142–173.

Tabi, A. – Csutora, M. (2011): A temporális diszkontálási szokások vizsgálata – a társadalmi diszkontráta és a társadalmi preferenciák kapcsolata (Analysis of the temporal discounting habits – Correlation between the social discount rate and social preferences). p. 19. http://unipub.lib.uni-corvinus.hu/495/1/tarsdiszkont_Tabi_Csutora20110610.pdf

Tainter, J.A. (1988): The Collapse of Complex Societies. Cambridge University Press.

Trostel, P.A. – Taylor, G.A. (2001): A theory of time preference. Economic Inquiry, 39(3): 379–395. https://doi.org/10.1093/ei/39.3.379

Weisbach, D. – Sunstein, C.R. (2009): Climate change and discounting the future: a guide for the perplexed. Yale Law and Policy Review, 27: 433–458.

Weitzman, M.L. (1998): Why the far-distant future should be discounted at its lowest possible rate? Journal of Environmental Economics and Management, 36(3): 201–208. https://doi.org/10.1006/jeem.1998.1052

Weitzman, M.L. (2001): Gamma discounting. American Economic Review, 91(1): 260–271. https://doi.org/10.1257/aer.91.1.260

Weitzman, M.L. (2009): On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics, 91(1): 1–19. https://doi.org/10.1162/rest.91.1.1

Weitzman, M.L. (2012): The Ramsey Discounting Formula for a Hidden-State Stochastic Growth Process. Environmental and Resource Economics, 53(3): 309–321. https://doi.org/10.1007/s10640-012-9594-y