Re: Market failure to sufficently weigh the future

Date: Wed Nov 01 2000 - 14:17:18 MST

Robin writes, quoting Hal:
> >But isn't it relevant that changing society's discount rates may be
> >harmful? Or is that simply off topic for this paper?
> Harmful in what sense? Making people choose actions that are less adaptive
> means making them choose actions that lead to fewer descendants. The paper
> is about what actions better satisfy the preferences of the people involved,
> whether that leads to more or fewer descendants.

All an evolutionary argument tells us is that changes in the discount
rate would ultimate lead to less survival and, yes, fewer descendants.
This may be due to increases in the death rate or decreases in the birth
rate. Do we want to ignore the fact that a policy prescription may lead
to increases in the death rate? Even if it acted through decrease in
birth rate, that may be due to poorer health.

I keep asking the same question, which is, why is it OK for the paper
to ignore these effects?

> >What if someone wrote a paper proposing to change prices. Let's lower
> >the price of gasoline to 10 cents a gallon. That would improve social
> >welfare because there are more consumers than producers. Is it reasonable
> >to neglect the impact of that change on the supply of gasoline, and to
> >look only at how this satisfies our preferences?
> As economists usually define social welfare, this would not improve social
> welfare. Even if a few consumers gain, many more consumers would lose, as
> would producers. All these gains and losses are from the point of view
> of the preferences of the people involved.

Yes, there would be losses, but only when you analyze the full impact
of the changes. A superficial analysis which only looks at the direct
effect of the price change will show that the majority of people gain
while a minority loses, because most people prefer to pay less for goods.

It seems to me that the discount rate paper is providing a similarly
superficial analysis. They are not looking at the full effect of the
changes they propose. They are only looking at how much these changes
would directly affect people's satisfaction. They are not considering
the larger impact these changes would have.

Isn't it reasonable that changes in the discount rate will have long term
effects on society which could greatly change its economic structure?
The authors propose subsidies to capital accumulation and increases in
investment and saving. These will tend to increase economic growth.
At the same time they recommend conservation of natural resources.
This will increase costs which may tend to limit growth.

What happens when you rev up the economic growth engine, while at the
same time choking back the flow of raw materials which would normally
fuel that growth? You could see a squeeze on substitute materials,
localized price increases, and general economic disruption.

Isn't it possible that the society which results from making all these
changes, even though they are intended to satisfy people's preferences,
is one in which people are less happy than they would have been without
them? Just as lowering gas prices ends up making people less happy,
even if it is done in order to satisfy people's preferences?

Am I off base in making this analogy?


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