Comments on: An Alternative to Discounting http://newschooljournal.com/2009/06/an-alternative-to-discounting/ A student run economics journal and open blog Sun, 06 May 2012 03:18:21 -0400 hourly 1 http://wordpress.org/?v=3.1.3 By: Benjamin http://newschooljournal.com/2009/06/an-alternative-to-discounting/comment-page-1/#comment-3074 Benjamin Wed, 24 Jun 2009 16:18:53 +0000 http://newschooljournal.com/?p=803#comment-3074 It's not really the same, although they have these big simulated computational models, the consumers in their model do calculate their utility over an infinite time-span, but they discount that utility with respect to time. Kydland in his Nobel lecture outlines a simple model where the utility function maximizes utility over an infinite horizon with a discount factor 'Beta' "The parameter 'Beta' is a number slightly less than 1 and can be calibrated from knowledge of the long-run real interest. It simply describes the degree of people’s impatience" noted Kydland (2005: 343). They seems to have gotten the nobel for big (monte carlo type?) simulations with a lot of agents and a lot of firms responding to policy decisions which are built into the model. At least that's how I am reading Kydland's acceptance speech and lecture. Kydland, Finn. 2005. "Quantitative Aggregate Theory." Nobel Prize Lecture 8 December 2004: Web: http://nobelprize.org/nobel_prizes/economics/laureates/2004/kydland-lecture.pdf It’s not really the same, although they have these big simulated computational models, the consumers in their model do calculate their utility over an infinite time-span, but they discount that utility with respect to time.

Kydland in his Nobel lecture outlines a simple model where the utility function maximizes utility over an infinite horizon with a discount factor ‘Beta’ “The parameter ‘Beta’ is a number slightly less than 1 and can be calibrated from knowledge of the long-run real interest. It simply describes the degree of people’s impatience” noted Kydland (2005: 343).

They seems to have gotten the nobel for big (monte carlo type?) simulations with a lot of agents and a lot of firms responding to policy decisions which are built into the model. At least that’s how I am reading Kydland’s acceptance speech and lecture.

Kydland, Finn. 2005. “Quantitative Aggregate Theory.” Nobel Prize Lecture 8 December 2004: Web: http://nobelprize.org/nobel_prizes/economics/laureates/2004/kydland-lecture.pdf

]]> By: Brandt W. http://newschooljournal.com/2009/06/an-alternative-to-discounting/comment-page-1/#comment-2490 Brandt W. Tue, 23 Jun 2009 00:12:20 +0000 http://newschooljournal.com/?p=803#comment-2490 Is this the same method that Edward Prescott and Finn Kydland won the nobel for? Is this the same method that Edward Prescott and Finn Kydland won the nobel for?

]]> By: Benjamin http://newschooljournal.com/2009/06/an-alternative-to-discounting/comment-page-1/#comment-985 Benjamin Thu, 18 Jun 2009 08:32:36 +0000 http://newschooljournal.com/?p=803#comment-985 Fair enough, I think the whole thing got a bit buried under text there. My (admittedly un-original) alternative was simply to not discount the input side of things. So instead of looking to maximize the total benefit to us, as seen from today with a discount factor and expected returns (on some infinite or finite time horizon), the alternative is to apply no discount factor and maximize the total benefit over an infinite time-horizon. That way you have to focus on creating the highest average output each time period, as this will maximize the benefit, and this means aiming for sustainable output. If ever we deplete a resource in this scheme it will give less benefit than even an infinitesimally small return each period. Of course a higher output is better than less, so we would be aiming to get the highest sustainable output. A counter point might be to say that non-renewable resources should then be taken out all at once as they will yield the same benefit regardless of the infinite time as they have only a finite output. This is fair, but that is the conclusion under discounting anyway... What do you reckon? Fair enough, I think the whole thing got a bit buried under text there. My (admittedly un-original) alternative was simply to not discount the input side of things.

So instead of looking to maximize the total benefit to us, as seen from today with a discount factor and expected returns (on some infinite or finite time horizon), the alternative is to apply no discount factor and maximize the total benefit over an infinite time-horizon.

That way you have to focus on creating the highest average output each time period, as this will maximize the benefit, and this means aiming for sustainable output. If ever we deplete a resource in this scheme it will give less benefit than even an infinitesimally small return each period. Of course a higher output is better than less, so we would be aiming to get the highest sustainable output.

A counter point might be to say that non-renewable resources should then be taken out all at once as they will yield the same benefit regardless of the infinite time as they have only a finite output. This is fair, but that is the conclusion under discounting anyway…

What do you reckon?

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