Economic Growth Theory: Discounting the Future

In [William Nordhaus’] model, the welfare of future generations is given less weight than the current generation’s welfare […] given that future generations will be much richer than those now living.

Hal Varian, 2006[1]

[W]e must then ask whether we can candidly acknowledge that general affluence simply cannot last in the face of a carrying capacity deficit. That fact is perhaps only a trifle less repugnant than the idea that the buried remains of the Carboniferous period must not be taken as fuels.

William Catton, 1980[2]

The goal of perpetual economic growth would be seen as nonsensical, partly because the finite material base cannot sustain it, partly because human fulfillment does not demand it.

Dana Meadows, 1998[3]

In late 2018, Yale Professor William Nordhaus won the Nobel Prize in Economics for addressing “the question of how we can achieve sustained and sustainable global economic growth” in his four-decade career on the economics of climate change.[4] His Dynamic Integrated model of Climate and the Economy (DICE) model, which “views climate change in the framework of economic growth theory,” pivots on the question of time discount rates, asking if it’s wiser to spend now, or later, to combat climate change.[5]

Figure 1: William Nordhaus, 2018[7] [emphasis added]

Don’t let anyone distract you from the work at hand, which is economic growth.[13]

At the press conference about the Prize later that day, Yale President Peter Salovey lauded Nordhaus for “inspiring every one of us to realize Yale’s mission, which is to improve the world today and for future generations through outstanding research and scholarship, education, preservation, and practice.”[14]

If humanity wishes to preserve a planet similar to that on which civilization developed and to which life on Earth is adapted, paleoclimate evidence and ongoing climate change suggest that CO2 will need to be reduced from its current 385 ppm to at most 350 ppm, but likely less than that.[15]

How does 350 ppm (parts per million atmospheric carbon dioxide concentration) compare with Prof. Nordhaus’ “optimal” 3.5°C warming scenario? A 2017 publication from the Yale School of Forestry & Environmental Studies (where Dr. Nordhaus holds a professorship) has this to say:

At the current rate of growth in CO2, levels will hit 500 ppm within 50 years, putting us on track to reach temperature boosts of perhaps more than 3 degrees C (5.4°F) — a level that climate scientists say would cause bouts of extreme weather and sea level rise that would endanger global food supplies, cause disruptive mass migrations, and even destroy the Amazon rainforest through drought and fire.[16]

The Nordhaus “optimal” 3.5°C model may project preservation of economic growth, but at the expense of preserving “a planet similar to that on which civilization developed and to which life on earth is adapted.” This conflict is not lost on keen observers, such as Jason Hickel of the London School of Economic, who notes that

Nordhaus reasons that the sectors most vulnerable to global warming — agricultural, forestry, and fishing — contribute relatively little to global GDP, only about 4 percent. So even if the entire global agricultural system were to collapse in the future, the costs, in terms of world GDP, would be minimal.

These arguments obviously offend common sense. And indeed, scientists have been quick to critique them. It’s absurd to believe that the global economy would just keep chugging along despite a collapse in the world’s food supply. And mass extinction of species poses a very real threat to the web of life itself, on which all of human civilization depends. Plus, Nordhaus doesn’t factor in the possibility of feedback loops that could kick in — Arctic methane release, ice-albedo feedback, and others we can’t yet predict — pushing us way beyond 3.5 degrees. No amount of wealth would be enough to help future generations navigate such a total system collapse.[17]

This last point is fundamentally important — neoclassical economics, and economic growth theory in particular, are based on linear assumptions, and therefore do not take into account non-linear possibilities that are nonetheless abundant in living systems. As Center for Applied Cultural Evolution Executive Director Joe Brewer points out: “economics, as a scientific endeavor, got its beginning by studying dead matter — not living matter.”

In the late eighteen-hundreds, the best science available was statistical physics or thermodynamics, the study of the state of a piece of some matter like a liquid or a gas where you can have mathematical tools to tell you things like temperature, pressure, and density, all of which are bulk measures of the statistical properties for trillions and trillions of atoms or molecules. The mathematics they had back then required them to add up the average values for these different molecules assuming that they were at equilibrium because they didn’t have any way of doing the calculations in any other way at the time.[18]

Despite developments in non-equilibrium thermodynamics, evolutionary biology, systems science, and complexity science (among many other disciplines), economics remains stuck in equilibrium (or linear) mathematics, and thus is unable to account for complex adaptive systems, which exhibit non-linear developments when stressed past tipping points. As pointed out earlier, such non-linear developments include civilization collapses, climate catastrophe, and existential risk of human extinction (to accompany the unprecedented species extinction unfolding currently).

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