How do you value the future?

 This is a current subject of much debate, not between politicians, not between engineers, not between individual citizens, but between environmental economists. Valuing the future has created texts devoted directly to deciding what is right or wrong, but who knows best? Before we can begin discussing the facts behind how, why, and when we should be valuing the future different from the present, we must first define some key terms that are imperative towards understanding exactly what “valuing the future” means.

Pareto Optimality: An efficient allocation is one that best satisfies individual wants weighted by the individual’s ability to pay -- that is, by their income and wealth.

Intertemporal Allocation: The apportionment of resources across different stages in the lifetimes of basically the same set of people (same generation).

Intertemporal Distribution: The apportionment of resources across different generations (different people).

Lorenz Curve: A curve plotting the cumulative percentage of the population against the cumulative percentage of total income held by that percentage of the population, which illustrates the degree of equality or inequality in the distribution of income.

Gini Coefficient: A measure of the inequality of the distribution of wealth or income across a population. A Gini coefficient of one implies perfect inequality (one person owns everything), and a coefficient of zero indicates a perfectly equal distribution.

Intertemporal Discounting: The process of systematically weighting future costs and benefits as less valuable than present ones.

 Now that we have defined some key terms that are imperative towards understanding how, why, and when we should be valuing the future as more or less than present day, we can now begin to figure out just what exactly environmental economists are debating about.

 The topic of renewable and non-renewable resources brings up debate when discussing intertemporal distribution, because each is treated differently when being considered for reasonable distribution across generations. Renewable resources are considered finite, so when considered for distribution across generations the renewable resources are given a higher future value based on intertemporal discounting, because the supply is finite even as demand increases exponentially. On the other end non-renewable resources are considered (income specifically) more important, and when being considered for distribution across generations non-renewables are valued less in future values as the intertemporal discounting interest rate increases to make it seem as though non-renewable resources are more cost effective to exploit presently for economic gain, then to preserve them for any future exploitation.

 This difference in renewable and non-renewable resources in relation to intertemporal distribution provides a stark contrast that is expressed best in intertemporal discounting, and the value of natural capital. Personally when considering this economic valuation of present and future values I find that I value the present and future as not more or less, but as the same. What I mean is that living in the present is VERY important, making decisions in the present that affect the future deserve the utmost logic, but those same decisions that affect the present and future should be taken into account for any future valuation, which is why I value the present and future as the same. This concept is reflected in economics much differently than I reflect it. In economics most economists use intertemporal discounting to create values for future amounts, the problem is that it is all based on our current money-market economy that creates a necessity for economic gain in the shortest span of time, which is present value. So when this happens economists use high interest rates (upwards of 3, 4, or 5 per cent) to include in intertemporal discounting creating a future value that is only a percentage of the present value amounts. A great example of this market failure is the idea of valuing a human life. Currently a human life is estimated to be worth around $10 million, but if we apply a three (3) percent discount rate to this it means that a human life five hundred years from now is only worth $3.81 in today’s valuation.

 So which human life would you like to occupy? The life you currently live, worth $10 million, or that of future humans five hundred years from now worth a TOTAL of $3.81. No wonder we currently exploit resources like there is no tomorrow, because according to intertemporal distribution and discounting from the world’s leading economists, the value of tomorrow will be so little it will nor be worth to live that long. Luckily for humanity, present and future, environmental economists are attempting to change the intertemporal discounting rate from the usual 3, 4, or 5 per cent interest, to a more reasonable rate of 0.5, 1, or 1.5 per cent interest that would value the future and its resources almost as valuable as present values.

 Let’s just hope the day comes soon enough to slow down our suicidal growth rates before all is lost.

P.S.
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Onward,

Hayden van Andel