The Trouble of Discounting Tomorrow

No challenge facing humanity is broader in scope and importance than achieving a sustainable future. Every dimension of our lives is affected, and every discipline and sector of society must be involved in meeting the challenge. Yet we consistently place less importance on distant events than on those close to us in time (as well as in other dimensions). This so-called discounting of our future makes more difficult our ability to achieve sustainability. Although arguments over the correct “social discount rate” have long occupied a central place in economic thinking,¹ too little has been done to confront the issues of equity that discounting implies.

At its core, sustainability is about living our lives in ways that leave the same or better options for future generations as we enjoy today;² and this implies a need to protect the broader environment on which we all depend. The basic problem is that achieving sustainability involves trade-offs. We all discount our own futures, enjoying today’s certain benefits against the uncertainty of what will happen tomorrow. Societies also discount, and do so hyperbolically,³ which means that they most severely discount the near-term future. From a social-planning point of view, the question of how to discount the future is an open one,¹ involving issues of ethics and basic fairness.^4-7 Without some form of discounting, we could never use any of a nonrenewable resource, leaving the resource untouched for future generations similarly to leave untouched … obviously a paradox.

Population growth and demographic shifts toward an older population further complicate the issue, increasing future potential demand. China’s population, for example, is aging at a very rapid rate, a result of its one-child policy and lower mortality. Caring for the interests of a large and growing population of seniors will pose great challenges for the Chinese people and will make sustainability even more difficult.

Similar problems exist, if not to the same degree, in other countries. In addition to the responsibility of today’s population for future generations, the social contract in the great majority of nations reverses time’s arrow, making younger generations responsible for older ones through social security schemes. Hungary’s National Sustainable Development Strategy, for example, states that “the decreased willingness to have children and the increased life expectancy at birth may lead to a situation where in 2050 one elderly citizen will be sustained by two workers instead of the current four.”⁸ Such trends clearly complicate any sustainability strategy and make it essential to find ways to achieve intergenerational compromise.

Discounting is in part a reflection of uncertainty about the future. But what is the right discount rate to use? It would be difficult enough were we contemplating just our own futures, or even those of our children;⁹ where concern for others and the future structure of societies is involved, there is no obvious right answer.¹⁰ Indeed disagreement about the proper discount rate to use is what divides those who accept from those who reject the findings of Britain’s Stern Commission on climate change.¹¹

But dealing with discounting in the context of intergenerational transfers is doable. Countries such as Sweden, Denmark, Germany, and Poland have employed relatively long-term perspectives, on the order of several decades, in developing national strategies for sustainable development. Finland has developed a “Programme for Sustainable Development” that incorporates intergenerational indicators that must be monitored; biodiversity preservation is one target of the scheme.¹² This is, at least, a beginning.

With a number of colleagues (including this author), the economist and Nobel Laureate Kenneth Arrow has developed a framework that addresses sustainability by considering an unlimited future, emphasizing ethical considerations that take account of the estimated utilities of future generations—that is, what the future holds for them as measured by things that contribute to their total welfare.¹⁰ The framework’s sustainability criterion requires social welfare to not decrease over time. Of course, the discount rate remains key, as does how utility is measured; most crucially, though, the framework explicitly weights the needs of future generations. By this measure, the performance of individual nations can be assessed, and changes that enhance sustainability can be prescribed. Beyond being a contribution to economic theory, Arrow and his colleagues’ approach has received wide attention and could be a basis for policy initiatives going forward.

The central issues in achieving sustainability are thus ones of temporal allocation, of prosociality toward others (that is, concern for the welfare of others), of cooperation, and of the social norms that sustain cooperative behavior. We live in a global commons, in which the collective consequences of individual actions have externalities and social costs, and these are not adequately addressed through conventional market mechanisms. These problems are magnified as the scale of organization is increased, where individual nations are the units of decision making. Garrett Hardin, in addressing the “tragedy of the commons,” argued that the solution lay in “mutual coercion, mutually agreed upon.”¹³ And indeed, such self-enforcing mutual agreements can work effectively in small communities to achieve sustainability.¹⁴ But how do we go beyond small communities to achieve cooperation at the global level?

The theory of cooperation is one of the oldest in evolutionary biology, and understanding the strongest forms of cooperation was a puzzle even to Charles Darwin. Even bacteria achieve cooperation,^15,16 and cooperative solutions to problems of public goods and common-pool resources are widespread throughout the biosphere. The emergence of multicellularity itself, one of the major evolutionary transitions, is a story of cooperation. But most examples of cooperation depend on either close genetic relatedness or spatial proximity.^17-19 Human groups form to achieve collective benefits, and they maintain those benefits through social norms, sustained through reinforcement and punishment.^20-22 As groups become larger and more heterogeneous, social norms become harder to sustain, and formal laws, contracts, and institutions become essential.²³

To achieve global sustainability, especially with regard to the most difficult features to monetize—like the services that ecosystems and biodiversity provide to humanity—we must find ways to extend cooperation beyond small groups, like the small fishing societies described by the late Elinor Ostrom. Ostrom²⁴ convincingly argues for a polycentric approach to environmental problems like climate change—that is, for an approach that does not try to do everything at once but instead builds from multiple centers for a more global solution. Trust is central to achieving enforceable agreements, and single global-scale policies are unlikely to engender such trust. Furthermore, because cooperation deteriorates as the size of a society increases, single governmental units are unlikely to succeed in addressing global-scale problems.

The conclusion of such reasoning is that a multi-scale effort is needed, providing the elements both for local experimentation and hierarchical extension to higher levels, with collectives as the bargaining units at the next level. This is, of course, not a new idea—as examples, consider the United States, with the tension between the powers of the federal government and the states; the Canadian Federation of provinces; and the former Soviet Union. Indeed, virtually every large nation has some form of polycentric governance, and super-nations like the European Union or the United Nations are exercises in polycentric governance.

Obviously, these national and international structures differ widely in how the powers are distributed among levels; success is in the details. Still, these are the best models we know for national and global governance; the challenge for sustainability is to encourage nations to cede some of their own immediate priorities for the longer-term collective good. This will require not only advances in the theory of international agreements and the design of effective mechanisms, but also the creation of other layers of cooperation at levels in between individual nations and the global society. When nations are the agents in the search for international cooperation, with all the attendant asymmetries, it remains difficult if not impossible to get agreements on issues like climate change and biodiversity loss. Some new dimensions are needed.

Ultimately, we need new institutions and enforceable agreements that not only work today, but also are robust in a changing environment. Despite the unique challenges, and occasional glitches, international agreements have been effective for more than 60 years in combating nuclear proliferation and the use of nuclear weapons, although the robustness of the Nuclear Non-Proliferation Treaty is facing severe challenge today. Thus we have examples of successes, but even in these successes we must recognize risks and the need to be adaptive.

One step in this direction is to create a modular structure to meet global challenges, in which parts can be changed as needed without leading to systemic collapse.²⁵ For management, modularity means creating firebreaks to impede the contagious spread of disturbance: for example, many diseases spread rapidly within risk groups, like drug users or particular schools, but can then be contained because of the reduced probability of transmission among groups. Indeed, the first line of defense in dealing with an emerging epidemic, from foot-and-mouth to SARS, is to slow down travel, whether cattle or humans, to reduce the rate of spread. The loss of modularity is widely believed to have been a major factor in the catastrophic financial collapse of 2008—the system was too overconnected.²⁶ Any successful scheme must be adaptive: one can design schemes to deal with today’s threats, but flexibility and adaptability are essential for adjusting to the unforeseen challenges ahead.

Accounting for future generations is perhaps an even greater challenge, because they do not have negotiators at the bargaining table. We in the present must care about future generations, decide how to discount and how to evaluate their utility functions, and develop a framework for protecting their interests. The “Brundtland Report”² recommends a basis for commitment; what we need now is a way to quantify what the limits on present consumption must be to achieve that goal.

Arrow and colleagues^10,27 provide a first proposal in that direction, allowing for corrections for technological growth, population growth, and other confounding factors, though significant ethical and technical challenges remain. Their key argument is that “sustainable development requires sustained well-being,” mandating that “each generation … bequeath to its successor at least as large a productive base, relative to its population, as it had itself inherited.”²⁷ This is the essence of sustainability and the only pathway to the future.

The challenge of sustainability confronts us all. It requires cooperation among individuals and nations in making the sacrifices that are in our enlightened self-interest. Beyond that, however, it also requires cooperation among disciplines and among academic, corporate, governmental, and nongovernmental entities in finding solutions that can be maintained. The prospects are daunting at a time when we are seeing increasing political polarization within and among nations; but there is no acceptable alternative to finding solutions.

Acknowledgments

I am pleased to acknowledge the helpful comments of Paul Ehrlich, Jack Fairweather, Carole Levin, and Joshua Ramo. This material is based on work supported by the National Science Foundation under Grant No. 0955699.

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