Friday, February 15, 2008

Does the Fact that Individuals Discount Entail the Existence of a Social Discount Rate?

In my last post, I discussed the idea of discounting as it relates to cost-benefit analysis. I reached the conclusion that discounting treats future people's interests as if they were less significant than our own, and that if cost-benefit analysis aims to make people the best off, then this seems like a bad practice. I received a reply from a fellow with the handle of TokyoTom, which said the following:
Donny, I don't think that you've at all demonstrated that we don't discount - viz., that we try to make decisions on the basis that the preferences of people who do not exist today should weigh as much as our own.

I would disagree with that conclusion myself. Clearly individuals act on the basis of their own preferences, which preferences may take into consideration the supposed preferences of others, including future generations. These others simply don't have a vote on what my preferences are - and is the collective actions of billions of individuals alive today that similarly make decisions that bring about tomorrow.

Tom (at least I assume his name is Tom) is absolutely right to say that individuals clearly act as though value in the future is worth less than the equivalent value today. If I were trying to argue that people actually do make decisions as if future people matter just as much as they do, I would be easily refuted. In fact, I would be hard pressed to believe even that people behave as though future people matter very much at all, never mind as though their interests were equal to their own.

But I never argued that individuals don't discount (in fact, I specifically acknowledged that they do), or that individuals consider future individuals to be just as important as themselves. Rather, I argued that discounting future damage in cost-benefit analysis is unjust. What's the difference? I'll try to illustrate with a series of examples.

Let's say that we're trying to decide whether to put a garbage dump in a neighborhood populated exclusively by an ethnic minority (say, Hmong folks). We perform a cost-benefit analysis to see what we should do. In the first scenario, let's say the Hmong folks in the neighborhood would prefer not to have the garbage dump in their neighborhood, and the folks who live outside of the neighborhood would prefer to have it there (not because of any malice, but rather because they would gain use from it). If (once we equalize for different valuation of money and all that) the cost-benefit analysis shows that the outsiders would be willing to pay more to have the dump than the Hmong folks would to not have it, then we'd say that there's a net benefit to putting the dump in; it's worth doing. And as far as we ignore all the problems with cost-benefit analysis (that is, we don't care what we do to the Hmong people as long as it represents a net gain, and we're okay with treating a single metric as properly representing the wellbeing of these people), then that's all there is to it. The cost-benefit analysis has worked exactly as advertised.

But now let's say that the outsiders didn't want the garbage dump because they would benefit from it, but rather because they're evil hillbillies and they despise the Hmong people. The benefit to them is not a self-interested benefit, but rather a benefit derived from the cost to others. Perhaps if we give this kind of benefit equal standing, the garbage dump goes in. But that seems like the wrong conclusion. We might say the same if the garbage dump doesn't go in because the Hmong people don't want the outsiders to get any benefit, even though they wouldn't really mind the dump being there. That's why most people who advocate cost-benefit analysis try really hard to ensure that the costs and benefits they're measuring reflect only the costs and benefits to the individuals they're surveying.

Accordingly, we wouldn't want to say that the importance of future individuals' wellbeing can be accounted for in cost-benefit analysis by seeing how present people value their wellbeing. What matters is how much they value their wellbeing. Once we recognize this, then it becomes clear what we do when we discount their costs and benefits compared to current people's costs and benefits. What we do is to say that their costs and benefits are less significant than those of present people. And it is this practice which I claim to be unjust.

1 comment:

Dmitry Chernikov said...

A garbage dump way be "worth it" if the Hmong (say, collectively) will agree to host the dump for a price, and the price to the buyers is acceptable. Then both groups benefit. It's similar to the famous Coase solution to pollution and like problems: the parties negotiate and one of four things happens: (1) the factory pays for and installs filters; (2) the factory pays the victim to shut up; (3) the victim pays the factory to install filters; (4) the victim endures the pollution, whatever is cheaper.

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