Cameron Hepburn

21 October 2011

A better way to price the future takes hold

SHORT-TERM thinking is a criticism often levelled at corporations and banks by anti-capitalist protesters, and they may well be right. A lack of concern for the future is built mathematically into economic theory, and this carries through to the behaviour of companies and governments. But a different way of putting a financial value on the future is changing that.

Economists assume that society will gradually get richer, typically by about 3 per cent a year – occasional crashes notwithstanding. To account for this, they “discount” future events: models might value a resource at $100 if it’s immediately available, but only $97 if it is only available in a year’s time.

Economists remain sceptical about hyperbolic discounting. It is inherently inconsistent, so could lead to inconsistent policies, argues Cameron Hepburnof the London School of Economics. He has shown that using hyperbolic discounting to manage a fishery could well lead to its collapse (Environmental and Resource Economics, DOI: 10.1007/s10640-010-9354-9).