#13 how to count the future

Counting The Future

Hello!

This month, in the run up to COP26, The Makers is focused on ways you can try and make sense of the climate crisis through a long term lens. It includes some deeper than usual takes on some key components of how we consider and frame our discussion of climate change.

Before we look at this week’s main article, here are some of your thoughts on last week’s issue.

More on how we weigh the future ⚖️

Thank you to everyone who replied to my post last week: how can you weigh the future? Here is selection of your thoughts:

All we have is now – be compassionate by directing your actions at causes for future lives – “All we really have is the present moment, this is my thinking. If anything, the past, the present and the future are all held in the present moment – what cause we decide to make in that moment can determine what happens next (and can change your perspective on the past also). The compassionate thing is to make the best possible causes for future lives. To care for them as we (could?) care for ourselves.” – Jen, Copenhagen.

Avoid abstraction to more powerfully connect with the futures of those around you – “One thing I find quite powerful myself is say when thinking about the climate to think about individuals who I know today who will be alive long after me and who will face that climate in the future […] sometimes thinking about those issues without the level of abstraction that something like a million or a trillion human beings created is useful because it makes you actually visualise the suffering that might happen and how it might happen to people you know.” – Henry, London

1. How can you ‘count’ the future? 💶

With the UN Climate Conference some 20 days away, how can you count the future, compare its value to the present, and what does this mean for the action we take?

A little number that matters. A lot.

There’s a little number. It’s not very well known. It’s even less well understood. But it’s arguably the most important number that shapes how we as societies think and act on climate change.

It’s called: the discount rate.

So, (without getting too dry and technical) what is it, why is it important and why should you care?

What is it?

The discount rate is a way to count – or more accurately dis-count – the future. How high, or how low, you set this single number has profound consequences for how much of the future you consider and how muchthat piece of the future is ‘worth’ to you to try and preserve or protect.

Ultimately, it can play a deciding role in shaping whether you (and us, as societies) take action today for the future. Or not. 

So how does it work?

The lamp in the infinite hallway

Consider this rough analogy. 

Picture yourself standing in a dark, unlit hallway. A corridor stretches out ahead of you far into the gloom. Your only source of light comes from a single angle poise lamp; its beam directed ahead of you. 

The hallway represents time. The handful of steps ahead of you in the near ground is the near present. The floor ahead in the far ground is the far future.

If you heavily discount the future, it’s a bit like tilting that lamp towards you and the present. You only see what’s illuminated right in front of you. The rest of the hallway (i.e. the future) is plunged into darkness. It disappears out of sight, out of consideration. What you value is lit up around your toes, in the here and near-now.

If, on the other hand, you weakly discount the future, your lamp tilts outwards. Its beam is cast up the hallway, lighting up more of time to come. (That time might reflect the forthcoming lives of your children, nieces or nephews, grandchildren or even their children.) You now illuminate the things that you value over a longer timeframe.

Let’s stretch the analogy a little further. The light from your lamp can only penetrate the hallway’s gloom so far. It weakens with distance. As a result, the definition and detail of what you value – which might be clear and crisp in your foreground – lessen by the yard to become shadows and faint outlines. Perhaps, as a result, you value these farther off forms a little less. And those that are even more distant, a little less still?

So, what has an angle poise lamp (A.K.A. the discount rate) got to do with the climate crisis? 

Why is it important?

To answer this, let’s wind the clock back 15 years, to a watershed moment for the humble discount rate. 

The date is 30 October 2006. 

It’s a Monday morning in London, UK. The weather is typical for this time of year: blustery, with the odd finger of sunshine cutting through the cloud. 

Journalists pack themselves into an airless, wood-panelled room just off Whitehall, the heart of the governmental district. Some comment on the poor choice of venue. Perhaps the level of media interest had caught the meeting’s organisers by surprise?

The room’s hubbub fizzles away as three men in sombre charcoal-grey suits take to the stage. The first is the former World Bank chief economist, Sir Nicholas Stern. He’s flanked by two others: U.K Prime Minister, Tony Blair, and Chancellor, Gordon Brown.

The Prime Minister speaks of the “overwhelming scientific evidence” that climate change was taking place and that failing to act would be “disastrous.” He adds, “Should we fail to rise to this challenge I don’t believe we will be able to explain ourselves to future generations that we have let down.”

Numbers behind the numbers

These are stark soundbites. But the journalists in the room await the real headline – after all, they had been picking through embargoed copies of the 700-page report overnight and they knew the report’s dizzying key recommendation which was this: In order to avoid up to 20% of global GDP being wiped out by climate-related disruption, we should spend 1% of global GDP. Starting right now.

The Stern Review on the Economics of Climate Change wasn’t the first report to marry economic analysis with climate predictions to arrive at a ‘price’ of mitigating climate change. The reason it attracted front page news around the world was because the price it put on the future – spend 1% of global GDP, every year – was much higher than previous estimates. 

(Just two years later, Stern revised this figure up to 2% of GDP as evidence showed that climate change was happening faster than previously thought.) 

Naturally, people wanted to know, why were Stern’s figures so much higher?

Well, it came down to the discount rate that Stern and his team applied. (Or more specifically, the “social rate of time discount” – a figure that shoulders the task of comparing the well-being of future generations to those alive today.)

A New York Times article at the time noted:“The choice of an appropriate social time discount rate has long been debated. Some very intelligent people have argued that giving future generations less weight than the current generation is “ethically indefensible.” Other equally intelligent people have argued that weighting generations equally leads to paradoxical and even nonsensical results.”

Stern sided with the view that the future should only be discounted at a low rate (1.4%). His reasoning? The only ethical reason to mark down the future is to reflect the possibility that those people never come into existence in the first place – they could be, after all, wiped out by a meteorite tomorrow. The numbers should reflect that they are possible people.

Other prominent economists disagreed. Most notably Yale economist, William Nordhaus. Nordhaus used largely the same climate data as Stern, but because he applied a higher discount rate (3%; although in places it’s quoted as 5.5%), ended up with a very different policy prescription for climate change to that of Stern. Nordhaus took a much more ‘gradualist’ view in contrast with Stern’s calls for aggressive, immediate action. 

The real disagreement

Stern and Nordhaus didn’t gripe over whether climate change is happening. What they do disagree over, however, is how much we should value damage to people in the future, and therefore how much we should stump up right now to avoid or limit those damages.

If this all still feels a little abstract (or a lot), let’s put it another way. As Astronomer Royal, Martin Rees notes in his primer on the prospects for humanity, On The Future, if you apply a standard discount rate (around 3.5%) you are, in effect, “writing off what happens beyond 2050.”

Public philosopher, Roman Krznaric, in his book The Good Ancestor, goes even further describing discounting as, “a weapon of intergenerational oppression disguised as a rational economic methodology.”

At the risk of over-simplifying things, the level at which you set the discount rate is where, in effect, you draw a line in the sand of time and say, “up until this date is of my concern, but no further”. (This takes us back to our lamp analogy.)

So what should the discount rate be?

If you were to apply a rate of 100%, the future completely vanishes. Apply it at 0% and the future – at any point in the near or far future – holds parity with the present. As the rate rises, your eyes are increasingly drawn to the horizon. And towards your toes as the level falls.

But, it’s not just a simple case of picking a higher or lower number. There are reasons why people arrive at very different rates.

In the ‘high rate’ corner…

Those that tack towards higher rates (say, around 3.5%) believe we should peg our value of the future to other economic proxies, such as what market behaviour tells us about people’s preference for the future (i.e. interest rates). 

Their reasoning is that this approach offers a more ‘rational’ methodology, and one that goes some way to account for the uncertainty that seeps into predictions of the further future. What’s more, it quietly closes the door on any unwanted moral judgements trying to creep their way into economics. 

Another cornerstone assumption of high-raters is that future people will be richer and therefore have more resources to handle future climate-related problems and perils.

Critics will argue that it’s fair to question how useful an individual’s market behaviour is as a measure to reflect the way society wishes things in the future to be valued. They will also debate whether people living in a future with increasing climate-related disruption will really be richer – or at least sufficiently richer to handle what our current actions are inflicting on the planet they’ll inhabit. 

A further complication of using market rates is that richer societies tend to value the environment more (p.444). For them a clean, healthy environment holds even greater value than for us in the (comparatively poorer) present.

And, in the ‘low rate’ corner…

Those that argue for lower rates tend to start from first principles. They argue we have an ethical obligation towards those that come next. And fewer examples spell this obligation out more clearly than climate change. 

Climate change is ramping up the risks of terrible harm for future generations. Cost-benefit analysis through the prism of a high-discount rate, however, suggests that only modest amounts should be spent in the present to assuage those huge risks. This is because a market rate of return quickly erodes future value, making the risks appear smaller and so justifying less investment now – sums that pale in comparison to the risks climatic data are suggesting are actually brewing. 

If you hold seriously the view that one generation should be treated the same as another irrespective of where they fall in time (sometimes called “intergenerational neutrality”), cost-benefit analysis fails this test. This is because a high discount rate treats future generations significantly less favourably. It is therefore, unjustifiable.

The critics of this say don’t waste money today on projects that deliver poor future benefits compared to those present day costs. That is denying future generations wealth that would expect us to protect and pass on to them.

So where does this leave us? 

First, if you are still reading, well done. One author of an article on this subject (or their editor) felt the only way to hold their readers was by including pictures of otters. 

So, apologies for the lack of otters, although if you’re still reading, they clearly aren’t always necessary.

‘Positivists’ vs ‘ethicists’

The way in which we count (and discount) the future matters. Hugely. Tweaking this number, even by minuscule amounts, can be the difference between governments taking action or not.

It’s therefore worth being curious about how different commentators, economists, politicians treat discounting. As David Weisbach and Cass Sustein suggest, into which of the two camps do they fall? Are they ‘positivitists’, who “generally defend discounting at the market rate of return”? Or “ethicists” who believe the positivist pathway is “morally indefensible and unjust, because it grossly undervalues the future in violation of a principle of intergenerational neutrality.” 

Weisbach and Sustein believe that the quarrel of these two camps is founded on confusion: “the two sides are addressing essentially different [and separate] issues.” The two authors argue that while ethicists are interested in how well-being and resources are shared across generations, positivists are interested in what a generation pays out, but not what they receive.

So, loosely speaking: advocates of higher rates of discounting (the ‘positivists’) want to avoid investments that leave future generations poorer; ethicists want to avoid passing on problems to future generations that money can’t fix.

What this means for the climate crisis

Emissions, even if stopped, will continue to ramp up in concentration in decades to come. Turn off the tap today and you don’t turn off the problem in the present. There’s a significant lag between the (cost of) action and the benefit – possibly generations. Therefore, what we are leaving future generations is a problem from our time that money alone can’t fix in their time.

In other words, being wealthy in the future isn’t enough to solve the problem.

Weisbach and Sustein suggest that, by all means, don’t invest poorly in projects that will waste wealth that could be passed on to future generations because of a poor rate of return. But when we are asked to pay up to avoid future generations inheriting problems from our time that money can’t solve in their time, a lower discount rate is only the right thing to do.

Both methods supposedly want to avoid our policies of the present from impoverishing generations of the future. But, if current policies threaten to deplete and diminish life for future generations so severely, we shouldn’t permit a methodology (discounting based on the market-rate) that allows that to happen.

If you wish to read more – and there is a LOT more you can read on discounting, Weisbach and Sustein’s paper linked above, although dated, is worth a read for how it handles the Stern/Nordhaus debate. This account of the Social Discount Rate dissects the technical elements quite nicely. And this article is a useful primer (and features otters).

Final reader thoughts

Foreshadowing this issue’s focus on discount rates, one reader of this newsletter, Henry from London, in his response to last week’s post replied with this interesting observation that I think applies to last week’s, this week’s and (even!) next week’s issues:“The precision of … calculations [about the future] really worry me too – that’s the critique of people like Nordhaus I know – but I think in some ways that mathematics creates the illusion of a knowledge that we do not have – an illusion that we can calculate the future. One way to react to that is obviously to weigh the future at zero – we can’t calculate it so we should do nothing. Another is to say actually that we should use some kind of precautionary principle – the issue there is how and when?” (Henry, London.)

Next week I’ll talk about two principles we can apply to these questions. And yes, Henry has guessed one already!

2. This week’s introduction 📽️ 

New video series: What a long term lens reveals about life

I’ve been busy shooting a new video exploring what happens if you apply a long term lens to exercise

Perhaps you’ll never look at exercising the way same again?

You can watch it here.

3. Future jam today 😋

This week’s recommendation is in close keeping with this month’s climate theme: The Global Tiller newsletter. This newsletter looks at global trends emerging since the Covid-19 pandemic and asks critical questions about what the future could look like. Read the latest issue on water scarcity here.

Thanks 🙏

Thanks for reading, watching, subscribing and being a Maker. I really appreciate it.

If you’ve enjoyed this edition of The Makers, you’d be doing me a kind and generous favour by sharing it with someone who might enjoy it also. 

And if you have questions or comments, do hit reply. 

Until next time…

Best wishes,

James

Leave a Comment

CONNECT

SUBSCRIBE

Join the ‘Makers!

My weekly newsletter that helps you to think and do long-term. You can sign up below to join a growing community of curious, conscientious readers (like you).