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Discounted utilitarianism and our imperfect posthumous obligation

CHOWDHURY IRAD AHMED SIDDIKY
***Among the preference patterns creating difficulties for theIdiscounted utility model, and perhaps the most important one, there is sensitivity to time delay. This is very clearly evident from the ongoing pressure on the government to export the natural gas of Bangladesh to India. This is also evident from the ongoing pressure on the government of Bangladesh to open-up Bangladeshi roads, bridges, and highways for transit and transshipment of Indian goods at a substantial cost of depreciation of Bangladeshi public utilities...***
IF the world does not come to its end at some predetermined date, it is an ethical imperative to take all future generations into consideration. In order to sustain any kind of
development, the state of our environment and natural resources forces us to consider longtime-horizons (period.) In the climate change area, a century is the minimum time-horizon to make sense. The same is true about species extinction and the extinction of fossil fuels such as natural gas and petroleum, in addition to the loss of bio-diversity. Such time-horizons are completely outside the normal range in economic decisionmaking. Even worse, such timehorizons are also beyond the domain of decisive political processes mired in the problems of information and incentives characterized by the separation of knowledge and power of the decisionmakers (information problem) and power and responsibility of the decision-makers (incentive problem.)
Private sector and governments normally look at most decades ahead, rather than centuries. This span of time is further reduced in case of the least developed countries.
Time-horizons of this type are not long enough to raise one of the most vital issues central to longterm environmental and natural resource problems, namely, equity between generations. For five to fifteen years in the context of business plans, the efficient use of money is the central issue. For a century more, when considering the planet's life support systems, equity and "sustainability" naturally come to the centre of the stage. So normal intertemporal economic problems and long-term environmental or natural resource problems involve different issues. It is natural that the methodology for one does not fit the other perfectly.
In the theory of economic growth, it is quite common to determine optimal growth programmes by means of discounted utilitarian criterion, where discounting future utilities such as natural gas, means that the costs and benefits of utilising that natural resource in the future is less important than costs and benefits of utilising the same resource today.
The neoclassical theory of optimal economic growth assumes that people have stationary time preferences in that they discount the future with a constant exponential rate. However, there are strong empirical evidences to suggest that people discount the future hyper-bolically, applying a larger annual rate to the near-term returns than returns in distant future. In resolving our long-term environmental issues and long-term natural resources issues, particularly the issue of utilizing the natural gas resources of Bangladesh, we want to achieve two aims: (1) To strike a fair balance between the present and future; (2) Use our limited economic resources, such as natural gas, efficiently.
The key resource here is some type of capital -- natural gas. How do we use this capital of natural gas efficiently? We let a market charge for its use, so make sure that it is allocated preferentially to those uses where its value is highest. This gives rise naturally to a cost of capital, which is one of the things economists sometimes think that they are capturing by discounting. Given the divergence between the international trade of Bangladeshi natural gas and the hegemonic geopolitics of Bangladeshi natural gas for international peace and political security, the actual item that could be internationally traded for our natural gas will be difficult to determine, least to evaluate the true value and cost of our capital of natural gas in neighboring countries, adjusted for politics. The choices that sovereign nationstates make as geo-political participants are different from those that they make as participants in the international trade of goods and services. Hegemonic bilateralism of bigger and more powerful nation-states thus calls for an intrusion of the markets for natural resources of weaker and smaller nation-states.
The widespread disjunction between the political and consumption choices of the big and powerful nation-states in their trade and political relations with their smaller and weaker neighboring countries lead to the view that the international market order and trade is inherently hegemonic and oppressive. For that reason, decisions made through the political process in any country on the possibility of trade in natural resources and environment are a preferable basis for social ordering, even if that political process is stricken with problems of incentive and information. Sustainability = Dynamic efficiency (optimality) + intergenerational equity
The controversy within economics over discounting arises from disagreements about what is a proper balance between the issues of intergenerational equity and efficient use of capital and a lack of clarity on how they interact. Our ultimate socio-economic objective is to use society's capital as productively as possible and for that reason, we do need a cost of capital for our natural gas to make sure that we are not wasting it. How do we strike a proper balance between present and future? This is a perennial question that is hard to answer. For sustainability, this is an ethical judgement, our imperfect posthumous obligation to our progeny and perhaps also to a higher supernatural authority (for those who believe in one.) In the end, there is no purely scientific definition of a "proper" balance between present and future.
There has been much debate among economists, and between economists and nearly everyone else regarding the meaning of the frequently employed concept of "sustainability." In 1987, the World Commission on Environment and Development (Brundtland Commission) placed sustainability on international political and scientific agenda with its report, "Our Common Future"(WECD, 1987.) The Commission proposed the widely embraced definition that " development is sustainable when it meets the needs of the present without compromising the ability of future generations to meet theirs." (WECD, 1987) In this note, I would like to suggest that a broadly accepted and normatively useful notion of sustainability could be better understood by breaking it into two components, both of which are well defined in economics. They are: (1) Dynamic efficiency, and (2) Intergenerational equity.
In this domain, there are sound reasons for economists to focus on policy criteria associated with the elements of dynamic efficiency for sustainability. Without the inclusion of dynamic efficiency, the notion of sustainability cannot be seen as a desirable policy goal. Without dynamic efficiency, constant zero welfare or consumption just at the subsistence level into perpetuity could be considered sustainable according to the WECD (1987) definition, yet such a welfare path can hardly be considered a desirable policy goal.
Considering that the concept of sustainability carries enormous weight as an ultimate goal of public policy decisions, some element of optimality or dynamic efficiency is necessary for any useful definition of sustainability. The word "efficiency" carries a distinct political interpretation and is often associated with cost-cutting strategies on the part of businesses. As Amartya K. Sen in his 1970 magnum opus, "Collective Choice and Social Welfare" has very accurately pointed out that a society may be efficient "even when some people are rolling in luxury and others are near starvation as long as the starvers cannot be made better off without cutting into the pleasures of the rich. In short, a society can be efficient and still be perfectly disgusting."
Such splendidly picturesque description of Pareto inefficiency by Amartya Sen is nothing but commonplace in Bangladesh.
Sustainability, on the other hand, represents an inherent notion of equity or "goodness," which is not present in the usual discussion on efficiency within economics. Firstly, however, dynamic efficiency is a necessary but not sufficient condition for sustainability; secondly, it represents no more than a formalisation of the more intuitive notion of "non-wastefulness." There is a general agreement across all disciplines that unnecessarily degrading resources or not utilising them to their full potential does not improve the potential of sustainability. Dynamic efficiency alone is not sufficient for sustainability. The 1972 Economics Nobel Laureate, Kenneth J Arrow, emphasized this recently in an exclusive interview with the "Weekly Holiday" in his visit to Bangladesh. According to Arrow, "Natural resources are performing economic functions that are not being recognised in the markets."
Conclusion
The debate on the issue of sustainability has become increasingly confusing as macroeconomic studies and their applications to trade, development and public policy continue to lack microeconomic foundations. The discounted utilitarian framework that can be found in action in Bangladesh imposes a temporal asymmetry between present and future generations and a spatial asymmetry between the countries of the region of South Asia. Society is worried about issues such as the depletion of our natural gas reserves in Bangladesh, desertification of the North Bengal from reduced flow of water in the Ganges caused by indiscriminate wastage of water further upstream, loosing the ecological balance created by the Sunderbans, deforestation and species extinction, flooding in Bangladesh caused by rapidly melting glaciers in the Himalayas, global warming and other long run phenomena, whose consequences may be felt only in the long term future. This concern about the future is not captured by discounted utilitarianism. In many circumstances, observed preference patterns run counter to predictions of the discounted utility framework.
Among the preference patterns creating difficulties for the discounted utility model, and perhaps the most important one, there is sensitivity to time delay. This is very clearly evident from the ongoing pressure on the government to export the natural gas of Bangladesh to India. This is also evident from the ongoing pressure on the government of Bangladesh to open-up Bangladeshi roads, bridges, and highways for transit and transshipment of Indian goods at a substantial cost of depreciation of Bangladeshi public utilities and at the potential cost of degradation of the environment.
Chowdhury Irad Ahmed Siddiky is a young academic and political economist visiting Bangladesh.