Cameron Hepburn

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Valuing the future: recent advances in social discounting

world economics

The perplexing issue of discounting Prescriptive economics requires that, unless there are very good reasons to the contrary, economic policy should be based on the principle that individuals’ preferences should count. Indeed, the entire body of ‘welfare economics’ centres round the formal identity of the statement “X prefers A to B ” and the statement “X has higher welfare in A rather than B”. This combination of a seemingly innocuous and democratic value judgement— preferences should count—and a formal definition about the meaning of welfare improvement involves many complications. The entire history of policy analysis focuses on those complications. Whose preferences should count? Over what time period? What constitutes a legitimate attenuation of the basic value judgement? One of the problem areas concerns timediscounting—the process whereby society places a lower value on a future gain or loss than on the same gain or loss occurring now. The rationale for time-discounting follows logically from the basic value judgement of welfare economics. If people’s preferences count and if people prefer now to the future, those preferences must be integrated into social policy formulation. Time-discounting is thus universal in economic analysis, but it remains, as it always has, controversial. The controversy has a parallel in another form of discounting—spatial discounting. When translated into economic terms, the ethical principle