Dani Rodrik writes:
Dani Rodrik's weblog: The American economist's vice: Mark Thoma points us to an excellent review by Angus Deaton of the controversy surrounding the Stern climate report. Much of the discussion on the report has revolved around Stern's use of a very small discount rate, on the ethical assumption that we have no reason to value the wellbeing of a future generation less than we value our own. American critics have objected on the ground that people do not really behave like this, and that the discount rates implicit in market outcomes suggest a much higher discount rate.
Deaton frames this as a conflict between British and American economists, with the former more at ease with making ethical assumptions and the latter preferring to defer to markets. Deaton leaves no doubt which he thinks preferable--he is definitely not on the side of the country he lives in.
Whatever it is that is generating market behaviour, it is not the outcome of an infinitely lived and infinitely far-sighted representative agent whose market and moral behaviours are perfectly aligned, and who we can use as some sort of infallible guide to our own decisions and policies. The optimal savings and growth models that used to be taught in development courses as tools of central planning, along with careful explanations of why their solutions cannot not be decentralized by the market--remember the transversality conditions?--are now routinely taught in macroeconomics courses as descriptively accurate accounts of the economy. According to some stories, the government does better, correcting our collective missteps, but is it really possible to seriously imagine that an administration that dismissed global warming without economic analysis is nevertheless making optimal provision for future generations? Zero pure time preference, if it is a vice, is surely a minor one. Relying on markets to teach us ethics is very much worse.