And so India is coming into its own. We are the new force. People around the world have begun to take notice. This too is new— no one elsewhere has been used to thinking of India as anything but a place of poverty, a victim of history and geography. But now they are looking at us with a little bit of confusion and wonder. What is this? A sixth of humanity on one big triangular patch of land, caught under the blazing sun, cut off by a mighty range of mountains: who are these people? A democracy, a polyglot coalition— wait, can it be? And what can it be? Do we make the Chinese, who so decisively stepped onto the world stage at the start of this century, look dictatorial, monolithic, brittle, afraid? Is India now the bold new leader of the world?
We think maybe so.
32
Mary: Dick, what are you and your team doing to make current economics more helpful to the people of the future?
Dick: We’ve been looking at discount rates. We’re studying what India is doing to their discount rate, it’s very interesting.
Mary: How does that relate to future people?
Dick: It’s very central. We discount the future generations. It works by analogy to how we treat money. With money, a euro you own now is worth somewhat more than the promise of a euro that will come to you a year from now.
Mary: How come?
Dick: If you have it now, you can spend it now. Or you can bank it and earn interest on it. Like that.
Mary: So how much is the discount? How does it work?
Dick: The rate varies. It works like this: if you would take ninety euros now rather than the promise of a hundred euros a year from now, that discount rate is point nine (0.9) a year. Applying that rate, a hundred euros coming to you in twenty years is worth the same as about twelve euros today. If you go out fifty years, that hundred euros you would get then is worth about half a euro today.
Mary: That seems like a steep rate!
Dick: It is, I’m just using it to make it clear to you. But steep rates are pretty common. Someone once won the pseudo-Nobel in economics for suggesting a four percent discount rate on the future. That’s still quite high. All the different rates and time intervals get traded, of course. People bet on whether the value will go up or down relative to what got predicted. The time value of money, it’s called.
Mary: But this gets applied to other things?
Dick: Oh yes. That’s economics. Since everything can be converted to its money value, when you need to rate the future value of an action, to decide whether to pay to do it now or not, you speak of that value using a discount rate.
Mary: But those future people will be just as real as you and I. Why discount them in the same way you do money?
Dick: It’s partly to help decide what to do. See, if you rate all future humans as having equal value to us alive now, they become a kind of infinity, whereas we’re a finite. If we don’t go extinct, there will eventually have been quite a lot of humans— I’ve read eight hundred billion, or even several quadrillion— it depends on how long you think we’ll go on before going extinct or evolving into something else. Whether we can outlast the death of the sun and so on. Even if you take a lower estimate, you get so many future people that we don’t rate against them. If we were working for them as well as ourselves, then really we should be doing everything for them. Every good project we can think of would be rated as infinitely good, thus equal to all the other good projects. And every bad thing we do to them is infinitely bad and to be avoided. But since we’re in the present, and trying to decide which projects to fund, with limited resources, you have to have a finer instrument than infinity when calculating costs and benefits. Assuming you’re going to only be able to afford a few things, and you want to know which of them get you the most benefits for the least cost.
Mary: Which is what economics is for.
Dick: Exactly. Best distribution of scarce resources and so on.
Mary: So given that, how do you pick a discount rate?
Dick: Out of a hat.
Mary: What?
Dick: There’s nothing scientific about it. You just pick one. It might be a function of the current interest rate, but that shifts all the time. So really you just choose.
Mary: So the higher the discount rate, the less we spend on future people?
Dick: That’s right.
Mary: And right now everyone chooses a high rate.
Dick: Yes.
Mary: How does that get justified?
Dick: The assumption is that future people will be richer and more powerful than we are, so they’ll deal with any problems we create for them.
Mary: But now that’s not true.
Dick: Not even close to true. But if we don’t discount the future, we can’t quantify costs and benefits.
Mary: But if the numbers lie?
Dick: They do lie. Which allows us to ignore any costs or benefits that will occur more than a few decades down the line. Say someone asks for ten million to enact a policy that will save a billion people in two hundred years. A billion people are worth a huge number of dollars, if you take a rough average of the insurance companies’ monetary valuations for a human life. But using the
