Ramsey didn’t discount over time
by Benjamin on July 1, 2009
Frank Ramsey (1928) condemned the use of a discount factor to the utility of future generations. However, for postwar growth economists, who consider Ramsey to be one of their patron saints, the discount factor, applied either to individual‘s or to social planner‘s decision making, is a technical requirement of dynamic general equilibrium models.
That is part of the story told by Pedro G. Duarte (University of São Paulo, Economics Dept) at this weekends History of Economics Society conference, and it is a particularly poignant argument, seeing the discounting debates currently taking place in areas as diverse as ressource economics and microeconomics.
Ramsey “assumed that we do not discount later enjoyments in comparison to earlier ones, a practice which is ethically indefensible and arises merely from weakness of the imagination” (Ramsey 1928, 543). But he was still able to solve the micro model mathematically, through a method forgotten perhaps by todays modellers who find the discount factor essential… More details in the paper below.
Duarte, Pedro G. 2009. “A Path Through the Wilderness: Time Discounting in Growth Models.” Presented at History of Economics Society Annual Conference 2009: Denver, CO: http://hes-conference2009.com/papers/SAT1E-Duarte.pdf
Ramsey, F. P. 1928. A Mathematical Theory of Saving. Economic Journal 38.152:543-59.
Tags: Discounting, history of thought, microeconomics, Ramsey
So wait, does this conflict with our earlier discussion about the use of discounting?
I suspect that it complements our argument about discounting as Ramsey was opposed to its use for the purposes of economic modelling.
So we wouldn’t have the sort of issues we were discussing previously, at least on the benefit side of things if we had no discounting. The implications of a bliss point – which Ramsey employs – is a bit tricky in that sense, but I take it as a re-enforcement…