Economic Growth, Technological Change, and Climate Change
October 9, 2018
The Nobel Committee selected two Americans this year for the economics prize, William Nordhaus (environment) and Paul Romer (growth theory).
The Committee report notes that
“Romer’s and Nordhaus’s findings regarding the possibilities for, and restrictions on, future long-run welfare each put the spotlight on a specific market failure.
“Both laureates thus point to fundamental externalities that – absent well-designed government intervention – will lead to sub-optimal outcomes.
“In Romer’s work these externalities are predominately positive through knowledge spillovers. New ideas can be used by others to produce new goods and other ideas.
"In Nordhaus’s work they are predominately negative through greenhouse gas emissions that adversely change the climate….”
Nordhaus encountered and dealt with ethical models in thinking about the future of the planet. One ethical issue is how to discount the outcomes of future generations relative to present generations. Should the well-being of future consumers matter, and if so, to what extent?
Too high a discount rate (e.g., 10%) makes the fate of future peoples irrelevant to our decision-making. Too low a discount rate (e.g., 1%) makes their fates nearly equal to ours in decision-making. Nordhaus says we should invoke Rawls (a Kantian), whose dictum is that inequality is okay, as long as it benefits the least well off generation.
If Romer is correct that productivity gains in the future are mainly about ideas, future generations will be richer than ours because of more people coming up with great ideas. This implies that the present generation is poorer than future generations will be; if so, we should not impoverish ourselves today to benefit future generations.
Nordhaus thus argued against The Stern Review climate report that used a discount rate near 0%. Nordhaus suggested a rate of about 6% would be better ethically in weighing future interests against present interests.
The zeitgeist of our time is certainly different from the positive spin painted by Romer, whose work on endogenous growth was mainly finished by the early 1990s. That is, many (perhaps most) Americans today feel like our children will be worse off economically than those of us in past generations. That may be myopia, or it may be real, especially if the economic effects of globalization prove dire.
The big issue is—how risk averse should we be when playing with the environment? My own view is that we have been far too cavalier to date, treating the earth as a trash bin. That may have been rational and even ethical at some point long ago when humanity struggled for mere survival. It makes no sense today.
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