Arnold Kling  

Comment of the Week, 2003-09-24

Executive Compensation... California Reality...

On the subject of the environment and technology, D-squared writes,

Future generations cannot make contracts with us, so their preferences about the rate of extraction don't figure in the market price.

Suppose that the desire for ivory threatens to make elephants extinct. Economists think that part of the problem is that nobody owns the elephants. An owner would have an incentive to maintain the herd.

However, would the owner of an elephant herd still extract too much ivory from the perspective of later generations of consumers?

UPDATE: this is not exactly an issue that has never been thought about. See, for example, Portney and Weyant.

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COMMENTS (21 to date)
Eric Krieg writes:

How could you possibly know the will of people who don't even exist? It isn't a rational excercise, and it has overtones of totalitarianism. After all, what better way to subvert the will of people currently living than by claiming to speak for those who do not yet exist.

Boonton writes:

People do this all the time. Look at your 401K account. A 20 year old puts money into it because he or she thinks that people will want to buy their shares when they turn 65 allowing them to cash out their 401K to fund a nice (or otherwise) retirement.

The 20 year old has 45 years to go before he turns 65. This means that he is betting that people who haven't even been born yet will want to buy the shares he is buying and holding today. People do this all the time with collectibles, real estate etc.

Like anything in the market, you always have a risk that you evaluation of the situation may be wrong.

David Thomson writes:

I simply fail to even slightly comprehend D-Square's peculiar point concerning future generations. This seems like an abstract point going nowhere. How many angels fit on the head of a pin? Gosh, I can see it now:

“We shouldn’t vote on thw new nuclear reactor proposal. After all, those people who don’t even yet exist can’t vote during this election.”

We always have the duty not to overlook our great-grand children in our current deliberations. However, making a big deal about not knowing the will of future generations seems to lead to intellectual impotence. I’m sorry but the real question remains: what constitutes a reasonable risk? How do we distinguish between prudent concerns and hysterical junk science premised upon Ludditism and a contempt for free societies?

David Thomson writes:

"How do we distinguish between prudent concerns and hysterical junk science premised upon Ludditism and a contempt for free societies? "

Let's try this again:

How do we distinguish between prudent concerns and those premised merely upon Ludditism and junk sceince?

Tom Dougherty writes:

“Future generations cannot make contracts with us, so their preferences about the rate of extraction don't figure in the market price.”

The market price does include the preferences of future generations. If I own land, why would I plant trees today that will not be available for harvest until after I am dead and usable only for future generations? The reason why I plant trees today is because the market price of the land will increase today by the amount of the discounted future value of the trees. This concept is known as capitalization.

Someone may own a house for only the next five years, so why would he concern himself about putting on a new roof today that will last twenty. Is it because of his altruistic concern about the future generations that will own his house? Maybe, but a more likely reason would be that the market value of his house five years from today will be higher, because the value of the house will include the discounted future value of the roof.

Markets do take into consideration future generations. You may think that for a given resource the market price does not adequately take into consideration future generations valuation of that resource. That is what being an entrepreneur is all about. An entrepreneur makes a forecast about the value of a resource. If they feel that this resource is undervalued then they will purchase that resource in order to sell it at a profit. As in Arnold’s example, if you feel that the price of ivory is undervalued, then you and other investors who feel the same way should purchase undervalued elephants from their current owners in order to sell the ivory at a higher price in the future.

Eric Krieg writes:

>>The market price does include the preferences of future generations.

More like our forcast of those expectations. That is hardly the same thing.

Boonton writes:

All prices are forecasts that are constantly revised. The 'pure market price' is an idealization....let's be honest we have a tough time predicting many of *our own* preferences more than a few days or weeks ahead of time (question: how many people would commit to preordering their groceries, tv shows, movies etc. a month ahead of time?)

David Thomson writes:

“The market price does include the preferences of future generations.”

This is only half accurate. Aren’t we overlooking the selfishness of those retires who don’t seem to hesitate burdening the children of tomorrow? What about the so-called “long run?” John Maynard Keynes reminded us that someday we are all going to be dead. Most of today’s decisions regard the here and now of our own lives.

I may be taking D-Square out of context (and I doubt this very much) but he seems to be at least implying that we should be reticent concerning voting on issues like nuclear reactors because future generations aren’t yet born. If so, this line of argumentation leads to societal paralysis.

Eric Krieg writes:

>>Department of Engineering–Economic Systems

Whoa! That sounds cool.

Mats writes:

"Future generations cannot make contracts with us" - this is spot on pointing to the fundamental problem of modern liberal market-based societies: future generations may not exist even though they would strongly prefer to do so. They cannot pay us to give them birth and raise them. Agricultural societies didn't have this problem, we have it and we need to solve it.

mcwop writes:

Mats, not sure I understand your post. Are you saying capitalism (liberal market-based societies) is bad for future generations, but agricultural economies are/were good for future generations?

If so, then I totally disagree. For example, market based societies have brought about medical innovations (and spent a lot of capital) that lower child mortality rates compared to agricultural societies. That is a nice benefit to unborn generations. Agricultural societies simply meant future generations slaved away on the farm. Where's the opportunity or fun in that?

Eric Krieg writes:

I know one thing. Agricultural societies had and have fertility rates at more than replacement levels. Modern societies do not. It is an open question as to whether modern societies have what it takes to survive past, say, 2100.

For example, at current projections, the Japanese will have 50% less population in 2050 than they do now. That's a staggering prediction, one that should strike fear in the hearts of Japanese leaders. It should bother us as well, being that Japan is the second largest economy on earth. A portion of economic growth can be attributted to population growth, so a shrinking population does no bode well for economic vitality.

Environmentalists, misanthropes one and all, welcome declining population. Just one more reason to discount their views as misguided.

Mats writes:

>Mats, not sure I understand your post
No, sorry, it was a bit short with no introduction to put it in context. See for instance my post:
or simply Eric's comment avbove.

Mcwop writes:

Eric, remember while birth rates decline in more advanced societies immigration may offset those declines.

Matt Young writes:

Cow herds survived.

Mcwop writes:

Sorry my previous post flubbed somehow.--

Mats, reviewed your site for context, and I am still confused. If one is to conclude that capitalism is bad, or the U.S. can't support future generations as evidenced by our infant mortality rate versus other countries, then further analysis should be conducted. While the U.S. has a higher infant mortality rate per 1000 than some other industrialized countries, the U.S. has a higher Birthrate per 1000 (14.14 - OECD rank of 7th), and it has a high fertility rate (2.07 - OECD rank tied for 2nd). In those cases, it ranks above almost all European countries by a solid margin. Of course, more births can mean more infant deaths. The U.S. also ranks #1 in teenage births.

Next, the U.S. population is growing with an OECD rank of 8th at 0.89% growth compared to say Sweden ranked 27th with a 0.2% population growth rate.

So maybe you see why I am confused.

Eric Krieg writes:

>>Eric, remember while birth rates decline in more advanced societies immigration may offset those declines.

That's certainly the US experience. Immigration is a great way to ensure that the population continues to rise.

But the Japanese, being the hard core racists that they are, don't allow immigration. The Europeans have pretty strict immigration policies too.

Mats writes:

Agree again - at least in this round of comments - to Erics point, now on the benefits of immigration.

Mcwop - I was referring to the post on "Completed Fertility" on which the link points, OECD population don't reproduce, there are fewer and fewer kids, except for US, that is still in balance.

dsquared writes:

Last time I looked, elephants were a renewable resource.

john s bolton writes:

Regarding the above; why would you call the Japanese hard-core racists for not wanting to bring in people who would mostly start at the bottom of their society, not knowing the language and so on, and thus fail to become net taxpayers? If only an ad hominem approach is possible, when disputing the restrictionist position in a welfare society, does this indicate that there is no rational argument for anti-merit immigration policies?

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