The Ministry for the Future

32

Mary: Dick, what are you and your team doing to make current economics more helpful to the people of the future?

Dick: We’ve been looking at discount rates. We’re studying what India is doing to their discount rate, it’s very interesting.

Mary: How does that relate to future people?

Dick: It’s very central. We discount the future generations. It works by analogy to how we treat money. With money, a euro you own now is worth somewhat more than the promise of a euro that will come to you a year from now.

Mary: How come?

Dick: If you have it now, you can spend it now. Or you can bank it and earn interest on it. Like that.

Mary: So how much is the discount? How does it work?

Dick: The rate varies. It works like this: if you would take ninety euros now rather than the promise of a hundred euros a year from now, that discount rate is point nine (0.9) a year. Applying that rate, a hundred euros coming to you in twenty years is worth the same as about twelve euros today. If you go out fifty years, that hundred euros you would get then is worth about half a euro today.

Mary: That seems like a steep rate!

Dick: It is, I’m just using it to make it clear to you. But steep rates are pretty common. Someone once won the pseudo-Nobel in economics for suggesting a four percent discount rate on the future. That’s still quite high. All the different rates and time intervals get traded, of course. People bet on whether the value will go up or down relative to what got predicted. The time value of money, it’s called.

Mary: But this gets applied to other things?

Dick: Oh yes. That’s economics. Since everything can be converted to its money value, when you need to rate the future value of an action, to decide whether to pay to do it now or not, you speak of that value using a discount rate.

Mary: But those future people will be just as real as you and I. Why discount them in the same way you do money?

Dick: It’s partly to help decide what to do. See, if you rate all future humans as having equal value to us alive now, they become a kind of infinity, whereas we’re a finite. If we don’t go extinct, there will eventually have been quite a lot of humans—I’ve read eight hundred billion, or even several quadrillion—it depends on how long you think we’ll go on before going extinct or evolving into something else. Whether we can outlast the death of the sun and so on. Even if you take a lower estimate, you get so many future people that we don’t rate against them. If we were working for them as well as ourselves, then really we should be doing everything for them. Every good project we can think of would be rated as infinitely good, thus equal to all the other good projects. And every bad thing we do to them is infinitely bad and to be avoided. But since we’re in the present, and trying to decide which projects to fund, with limited resources, you have to have a finer instrument than infinity when calculating costs and benefits. Assuming you’re going to only be able to afford a few things, and you want to know which of them get you the most benefits for the least cost.

Mary: Which is what economics is for.

Dick: Exactly. Best distribution of scarce resources and so on.

Mary: So given that, how do you pick a discount rate?

Dick: Out of a hat.

Mary: What?

Dick: There’s nothing scientific about it. You just pick one. It might be a function of the current interest rate, but that shifts all the time. So really you just choose.

Mary: So the higher the discount rate, the less we spend on future people?

Dick: That’s right.

Mary: And right now everyone chooses a high rate.

Dick: Yes.

Mary: How does that get justified?

Dick: The assumption is that future people will be richer and more powerful than we are, so they’ll deal with any problems we create for them.

Mary: But now that’s not true.

Dick: Not even close to true. But if we don’t discount the future, we can’t quantify costs and benefits.

Mary: But if the numbers lie?

Dick: They do lie. Which allows us to ignore any costs or benefits that will occur more than a few decades down the line. Say someone asks for ten million to enact a policy that will save a billion people in two hundred years. A billion people are worth a huge number of dollars, if you take a rough average of the insurance companies’ monetary valuations for a human life. But using the point nine discount rate, that huge number might equal only five million dollars today. So do we spend ten million now to save what is calculated as being worth five million after the discount rate is applied? No, of course not.

Mary: Because of the discount rate!

Dick: Right. Happens all the time. Regulators go to government budget office to get a mitigation project approved. Budget office uses the discount rate and says, absolutely no. Doesn’t pencil out.

Mary: All because of the discount rate.

Dick: Yes. It’s a number put on an ethical decision.

Mary: A number which can’t be justified on its merits.

Dick: Right. This often gets admitted. No one denies future people are going to be just as real as us. So there isn’t any moral justification for the discounting, it’s just for our own convenience. Plenty of economists acknowledged this. Robert Solow said we ought to act as if the discount rate were zero. Roy Harrod said the discount rate was a polite expression for rapacity. Frank Ramsey called it ethically indefensible. He said it came about because of a weakness of the imagination.

Mary: But we do it anyway.

Dick: We kick their ass.

Mary: Easy to do, when they’re not here to defend themselves!

Dick: True. I like to think of it as a rugby match, with present-day people as the New Zealand All Blacks, playing against a team of three-year-olds, who represent the people of the future. We kick their ass. It’s one of the few games we’re good at winning.

Mary: I can’t believe it.

Dick: Yes you can.

Mary: But what do we do?

Dick: We’re the Ministry for the Future. So we step in and play for the three-year-olds. We substitute for them.

Mary: We play rugby against the All Blacks!

Dick: Yes. They’re pretty good.

Mary: So they’ll kick our asses too.

Dick: Unless we get as good as they are.

Mary: But can we do that?

Dick: We may be sticking with this analogy a little too far here, but let’s do that for the fun of it. So now I’m thinking about that movie about the South African football team, when the World Cup was held in South Africa. They were a beginner team, but they ended up winning it all.

Mary: How did they do that?

Dick: You should watch the movie. Basically, they were playing for more than the game. The other teams were playing because that’s what they did. It was their profession. But those South Africans, they were playing for Mandela. They were playing for their lives.

Mary: So… is there a way we can make the calculations better?

Dick: This is where India comes into it. Since the heat wave, they’ve been leading the way in terms of re-examining everything. So regarding this issue, you could just set a low discount rate, of course. But Badim tells me that in India it was traditional to talk about the seven generations before and after you as being your equals. You work for the seven generations. Now they’re using that idea to alter their economics. Their idea is to shape the discount rate like a bell curve, with the present always at the top of the bell. So from that position, the discount rate is nearly nothing for the next seven generations, then it shifts higher at a steepening rate. Although they’re also modeling the reverse of that, in which you have a high discount rate but only for a few generations, after which it goes to zero. Either way you remove the infinities from the calculation, and give a higher value to future generations.

Mary: Good idea.

Dick: We’ve been running modeling exercises to see how various curves play out in the creation of new cost-benefit equations. It’s pretty interesting.

Mary: I want to see that. Run with that.

Dick: The All Blacks will be trying to tackle us, I warn you. They tackle to hurt. They’ll be trying to get us to cough up the pill.

Mary: When you get hit, pass the ball to me. I’ll be on the inside to receive I will.

Dick: Good on ya mate.