Economic Growth Theory: Discounting the Future
By Bill Baue, Senior Director, r3.0
Part 6 of a series on r3.0’s Whitepaper From Monocapitalism to Multicapitalism — 21st Century System Value Creation.
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
[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
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
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. 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.
His answer? Later.
In his Nobel lecture, he presents an “optimal” scenario that employs a discount rate of about 3 percent, which would stabilize global temperature at about 3.5 degrees Celsius above pre-Industrial levels (or 3.5°C) to achieve the “ideal” balance of economic impacts against climate change impacts (see Figure 1).
Global scientific and political consensus consider 1.5C to be the “safe limit” of global temperature rise, with an outer limit of 2C, suggesting a radically different interpretation of the term “optimal” from that of Prof. Nordhaus.
Interestingly, Sir Nicolas Stern, who at the behest of the UK Treasury Department authored the 2006 Stern Review of the Economics of Climate Change — widely considered the most comprehensive review of the economics of climate change — did not receive a Nobel Prize. Lord Stern proposed a discount rate of 0.1 percent, “implying almost equal weight to all generations,” according to Berkeley Economist Hal Varian in a New York Times comparison of the Stern and Nordhaus approaches.
By contrast, in 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,” Prof. Varian explains. The “fact” that future generations will necessarily be richer than current generations is taken as axiomatic — the notion that future generations might not be richer is not a possibility considered by economic growth theory. Prof. Nordhaus underlined this point to his Yale students on the day he learned of Nobel Prize:
Don’t let anyone distract you from the work at hand, which is economic growth.
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.”
But does Prof. Nordhaus’ work (and economic growth theory more generally) actually “improve the world today and for future generations through … preservation”? The assumption underlying Nordhaus’ work (and of the Nobel Prize in Economics) is that economic growth “today and for future generations” improves the world more than climate change deteriorates the world. This is a questionable claim, given that a healthy climatic system underpins the ability to generate economic value, much less growth — and that resources and pollution sinks are not “illimitable,” in Boulding’s words.
And what about “preservation”? Climate scientist James Hansen and colleagues had this to say about it in a famous 2008 paper:
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.
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.
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.
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.
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).
In this sense, Prof. Nordhaus’ 3 percent discount rate (tied to an “optimal” 3.5°C scenario) amounts to systemic infanticide. Locking in catastrophic climate change in the present, on the presumption of future economic growth that would ostensibly better “afford” the cleanup costs, essentially guarantees mass mortality for future generations (given that climate change is already causing thousands of premature deaths at its present level of severity). When individuals postpone solving their own problems, assuming they can better afford to do so in an undetermined future, we call them irrational; when global leaders advocate such decisions that seal the fate of untold numbers of our descendants, the more appropriate term is intergenerational genocide.
 Hal Varian, “Recalculating the Costs of Global Climate Change,” New York Times, 14 December 2006. https://www.nytimes.com/2006/12/14/business/14scene.html
 William Catton, Overshoot: The Ecological Basis of Revolutionary Change, University of Illinois Press, 1980
 Donella Meadows, Indicators and Information Systems for Sustainable Development, Sustainability Institute, 1998. http://donellameadows.org/wp-content/userfiles/IndicatorsInformation.pdf
 The Prize in Economic Sciences 2018, The Royal Swedish Academy of Sciences, 8 October 2018. https://www.nobelprize.org/prizes/economic-sciences/2018/press-release/
 William Nordhaus, “Revisiting the social cost of carbon,” PNAS 114 (7) 1518–1523, 14 February 2017. https://www.pnas.org/content/114/7/1518
 William Nordhaus, “Climate Change: The Ultimate Challenge for Economics,” Nobel Lecture in Economic Sciences, Stockholm University, 8 December 2018. https://www.nobelprize.org/uploads/2018/10/nordhaus-slides.pdf
 Intergovernmental Panel on Climate Change (IPCC), Global Warming of 1.5°C (SR15), 2018. https://www.ipcc.ch/sr15/; IPCC, Fifth Assessment Report — AR5 Synthesis Report, 2014. https://www.ipcc.ch/report/ar5/syr/
 United Nations Framework Convention on Climate Change (UNFCCC), The Paris Agreement, 2015. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
 Ironically, the “idea of two degrees as the safe threshold for warming evolved over a number of years from the first recorded mention by economist William Nordhaus in 1975.” Matt McGrath, “What does 1.5C mean in a warming world?” BBC, 2 October 2018. https://www.bbc.com/news/science-environment-45678338
 Nicolas Stern, The Economics of Climate Change: The Stern Review, HM Treasury, UK, 30 October 2006. https://webarchive.nationalarchives.gov.uk/20100407172811/http://www.hm-treasury.gov.uk/stern_review_report.htm
 Hal Varian, op cit.
 Mike Cummings, “Cheers and roses from undergrads for Yale’s latest Nobel laureate,” Yale News, 8 October 2018. https://news.yale.edu/2018/10/08/cheers-and-roses-undergrads-yales-latest-nobel-laureate
 Press Conference, Yale School of Management, New Haven, CT, 8 October 2018. https://youtu.be/zQw-TJxfl-Q?t=1764; Yale University, Mission Statement. https://www.yale.edu/about-yale/mission-statement
 James Hansen et al, “Target atmospheric CO2: Where should humanity aim?” Open Atmospheric Science Journal, vol. 2, pp. 217–231, 5 October 2008. https://arxiv.org/abs/0804.1126
 Nicola Jones, “How the World Passed a Carbon Threshold and Why It Matters,” Yale Environment360, 26 January 2017. https://e360.yale.edu/features/how-the-world-passed-a-carbon-threshold-400ppm-and-why-it-matters
 Jason Hickel, “The Nobel Prize for Climate Catastrophe,” Foreign Policy, 6 December 2018. https://foreignpolicy.com/2018/12/06/the-nobel-prize-for-climate-catastrophe/
 Joe Brewer, “The Cultural Evolution of Economics — how can we know so much and still be structurally stupid?” Medium, 7 August 2019. https://medium.com/@r3dot0/the-cultural-evolution-of-economics-how-can-we-know-so-much-and-still-be-structurally-stupid-5d1c809b0a97
 Tedros Adhanom Ghebreyesus, “Climate Change Is Already Killing Us: How Our Warmer and Wetter Planet Is Getting Sicker and Deadlier by the Day,” Foreign Policy, 23 September 2019. https://www.foreignaffairs.com/articles/2019-09-23/climate-change-already-killing-us
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