In this post I shall summarize the three most original ideas or premises that my friend and colleague Tyler Cowen (George Mason University) presented during his thought-provoking Kenneth Arrow lecture on economics and ethics last month:
- According to Professor Cowen, the social discount rate (SDV) should be zero. That is just a fancy way of saying that the well-being and happiness of future generations should count just as much as the well-being of current generations. (A formal statement of SDV is pictured below.)
- At the same time, Cowen concedes that the optimal discount rate depends on one’s time horizon. The longer your time horizon is, the lower the discount rate should be, and conversely, the shorter your time horizon is, the higher the discount rate should be. (For example, if the world were to end tomorrow, we should throw a big party and enjoy ourselves today.)
- As a result, for Cowen the key question in economics and ethics is the same: what is the relevant time horizon? To me, the most original idea in Cowen’s lecture was this statement: “The application of your moral argument is time dependent.” In other words, what is moral or ethical depends on your time horizon!
In addition, Cowen spent most of his lecture identifying the shortcomings or problems with his approach to economics and ethics. I will summarize these problems in my next blog post.